Is the U.S. economy approaching its speed limit?
Few are arguing that the economy is about to enter a tailspin, but there’s some evidence to suggest the rate of growth may be approaching its limit, if it’s not already there.
Thursday’s set of data on jobless claims, housing starts and the Philadelphia manufacturing index certainly raise the question of whether the U.S. economy is running as strong as it will.
The numbers are by no means bad. But particularly in housing, it looks like there are headwinds to further growth. Housing starts in July, for instance, were negative over the year for the second month.
A broader look at the main housing indicators shows slowing momentum.
And that slowing momentum comes with the market expecting that the Federal Reserve will raise interest rates three or four more times this cycle, cutting into affordability.
The Philadelphia Fed manufacturing index — while still in expansion territory — fell to a 21-month low. The new-orders components of not just the U.S. but euro area, Japanese and Chinese manufacturing purchasing managers indexes have each slowed.
It should be pointed out that those are what called “soft” indicators, based on opinions rather than hard numbers. And the hard numbers are still pretty good — manufacturing is output up 2.8% in the 12 months to July, and core capital-goods orders are up 7.8% in the 12 months ending in June.
What the difference may represent is the degree to which tariffs, real and threatened, are impacting the business. The prices-paid components of several surveys have been elevated, and a New York Fed report showed that 16% of manufacturers and 5% of service firms characterized the increase on input prices from tariffs as substantial.
The good news of course continues to be the jobs market. Initial jobless claims are near recovery-level lows, and the trend in hiring has picked up a little bit in the last few months, even with the unemployment rate plumbing new depths.
And while strong wage growth remains elusive, employer-side surveys do suggest that pay will increase from here. A net 22% of small businesses reported plans to increase worker compensation, according to a survey from the National Federation of Independent Business released this week.
With the labor market in the best situation it’s been in years, consumer confidence is near multi-decade highs. There are signs that consumers are showing that in their purchases — sales at restaurants and bars have spiked higher the last three months, growing 9.7% in the 12 months ending in July.
With that kind of backdrop, the U.S. consumer should be in solid shape for the near future. Walmart’s WMT, +9.33% impressive quarter is a demonstration that the consumer is in decent shape, as does data showing the household debt-to-income ratio at the lowest level in nearly 16 years.
But good doesn’t necessarily mean better. And the market seems to be saying something about global growth.
Copper HGU8, +1.82% — Dr. Copper, to his students, for his economic forecasting skills — has dropped 22% this year. National Economic Council Director Larry Kudlow may have overstated when he said at a cabinet meeting that the Chinese economy was looking “terrible,” but the growth rate on a host of their already dubiously collected statistics has slowed.
And with the dollar DXY, -0.10% firming, cracks in a number of emerging markets are showing, raising the specter of various crisis entangling banks, as the market’s turmoil over Turkey has shown.
Independent economists are forecasting a slowdown. IHS Markit says the U.S. economy will still grow at above 3% in the second half of the year, before slowing to 2.7% next year and all the way down to 1.9% in 2020 and 1.6% in 2021.
What was so powerful earlier this year was the combination of both U.S. and international growth. As strong as the U.S. consumer is, it will be a tall order for the U.S. economy to accelerate still further with other headwinds emerging.