Growth forecasts are rising and economy looks nowhere near as bad as bond market predicts

By many measures, the economic system is outshining the depressed image the bond market has been portray of development, and an enormous motive is the resilient American shopper.

The newest batch of U.S. financial information, launched Thursday, exhibits a powerful shopper and a combined image for manufacturing, however nonetheless higher than anticipated. Primarily based on the info, economists surveyed within the CNBC/Moody’s Analytics Fast Replace raised their forecasts for third quarter GDP by 0.2 to a median 2.1% tempo of development.

July’s retail gross sales, which take the heart beat of shopper spending, jumped a a lot stronger-than-expected 0.7%, and two key enterprise indexes for the New York and Philadelphia space confirmed continued enlargement in August. Productiveness within the second quarter grew at a better-than-expected tempo of two.3%, however industrial manufacturing was weaker, declining 0.2% in July after gaining a revised 0.2% in June.

“The U.S. is fairly sturdy truly. The markets are buying and selling extra off the headline danger, significantly round tariffs, than the precise fundamentals, at the very least from the U.S. information,” mentioned Tony Bedikian, head of worldwide markets at Residents Financial institution. “The jury continues to be out whether or not the market goes to be appropriate right here, and whether or not we’re going to see a slowdown. We’re not seeing that within the information. Broadly, we’ve seen some slower development, but it surely’s nonetheless development. It’s waning a bit but it surely’s nonetheless type of a Goldilocks state of affairs.”

Bedikian mentioned the Fed continues to be anticipated to chop rates of interest, which ought to assist the markets and economic system, despite the fact that the info exhibits a reasonably strong economic system.

One other piece of knowledge launched Thursday was homebuilders confidence, which rose as mortgage charges fell sharply this month. Builder confidence for single-family properties hit 66 in August, 1 level increased than in July, based on the newest Nationwide Affiliation of Dwelling Builders/Wells Fargo Housing Market Index. Something above 50 is taken into account optimistic.

Yield curve inversion

Markets have been spooked by the steep decline in bond yields because the Federal Reserve’s price reduce July 31, and most lately by the inversion of the 2-year and 10-year Treasury yields. Inversion means the yield on a shorter period safety, on this case the 2-year Treasury be aware, moved increased than the longer period be aware, or the 10-year Treasury. Whereas the unfold is now not inverted, it nonetheless might simply transfer that means once more. An inverted curve has been a really dependable sign of a recession.

In equity, U.S. yields have additionally been shifting decrease as buyers search higher yielding sovereign debt within the Treasury market. Yields transfer reverse worth, and the yields on some sovereign bonds in Japan and Europe are destructive. Bond yields have additionally been shifting decrease as international information from China and elsewhere has seemed weak, and strategists say the bond market is reflecting each a flight to security and concern the U.S. will fall into the weakening tendencies in Asia and Europe.

Chris Rupkey, MUFG’s chief monetary economist, mentioned the bond market shouldn’t be reflecting actuality however concern introduced on by the U.S.-China commerce wars.

“It’s actually overstated. In case you have a look at retail gross sales, one of many indicators of a recession is three consecutive month-to-month declines in retail gross sales, and we’re seeing simply the other,” mentioned Rupkey. He famous that retail gross sales experiences had been weak on the finish of final yr and starting of this yr earlier than recovering.

Michelle Meyer, head of U.S. economics at Financial institution of America Merrill Lynch, had anticipated the buyer to look sturdy in July, and her forecast for 0.6% acquire was almost double the gross sales improve anticipated within the consensus forecast. One of many huge drivers of the acquire was Amazon’s Prime Day, which triggered numerous promotional exercise at different retailers.

“The promotion season was so huge, and it was retailers outdoors of Amazon making an attempt to compete,” mentioned Meyer. She mentioned a weak shopper wouldn’t have been lured by promotions. “It exhibits the buyer was capable of spend.”

Economists say the buyer has been supported by a strong labor market, which is exhibiting some indicators of slowing however nonetheless including jobs at a strong tempo. Weekly jobless claims is a intently watched indicator as a result of it’s the freshest sign on employment, and one of many first items of knowledge to point out weak spot when the employment image adjustments.

The weekly jobless report on Thursday confirmed claims rose by 9,000 to 220,000 final week, however one economist famous the variety of new claims being filed has been locked in a slender vary between 207,000 to 222,000 in 13 of the final 14 weeks. “Companies are struggling a lot with a shortage of certified employees that it’s laborious to think about layoffs rising a lot any time quickly until the economic system falls off a cliff,” mentioned Stephen Stanley, chief U.S. economist at Pierpont Amherst.

The month-to-month employment report two weeks in the past confirmed the economic system added 164,000 nonfarm payrolls in July, almost as anticipated and concerning the common month-to-month acquire for the yr. That tempo is down from 2018′s sturdy common month-to-month job development of 223,000 payrolls, however economists see the extent as nonetheless strong, with an unemployment price at 3.7%.