US Macro: A tale of two economies – Activity data for June painted a broadly solid, if unspectacular, picture of the US economy. Retail sales expanded 0.4% mom, the same growth rate as the downwardly-revised May reading. Excluding volatile autos and gasoline components, underlying retail sales looked stronger, rising 0.7% mom. This suggests the consumer is back on track after a soft Q1, with 3m/3m annualised growth at 6.9%, up from 2.1% in Q1 (note that these are nominal figures, i.e. growth was essentially flat in Q1 when adjusting for inflation). Meanwhile, industrial production looked weak on the surface at 0.0% mom, but manufacturing production expanded a much healthier 0.4%, with the weakness in headline production explained by a fall in utility output due to cooler weather reducing demand for air conditioning. Momentum in manufacturing was still negative at -2.1% 3m/3m annualised, but looks to be bottoming out.
Despite the apparently solid underlying readings in both production and consumption sides of the economy, we are much more optimistic about the prospects for the consumer than we are for the manufacturing sector. The fundamentals underpinning consumption remain strong in the US – jobs and wages continue to grow at a decent pace, albeit decelerating from 2018, while consumer confidence remains relatively elevated. By contrast, manufacturing looks notably weaker, with uncertainty over the trade war acting as a brake on business investment. This is visible in the ISM manufacturing new orders index – a highly reliable leading indicator for investment in the US – which fell to a 3.5 year low of 50.0 in June, suggesting flat to mildly negative fixed investment growth in the coming quarters. All told, while the strength in consumption gives us confidence the US will avoid a recession on our forecast horizon (to end 2020), we expect the weakness in manufacturing to keep growth below trend for the next few quarters. This, combined with the lack of inflationary pressure, should keep the Fed on track for rate cuts – the first 25bp of which we expect at the 30-31 July FOMC. (Bill Diviney)