It almost seems like the Fed is almost looking for excuses to hold off on raising interest rates anymore. This has a lot to do with their ongoing private concerns about continuing problems in the world economy as shown in the aftermath of the Brexit vote and with peripheral European banks still looking shaky. Italian banks seem particularly troublesome these days. These were all reasons enough to keep the Fed on hold last month. The latest excuses which they are leaning on this time around are based on lower oil prices helping to keep inflation down and more importantly weaker U.S. economic data.
Low Inflation and Falling Oil Prices Another Excuse for the Fed
One thing that stays the Fed’s hand is tame inflation. If inflation is low, the pressure for them to raise the rates drops significantly. Oil prices have been slipping into dangerously low territory for the producers again, helping to keep inflation down. The data Tuesday showed that inflation is even lower than expected. Tuesday also saw the release of data demonstrating weakening business investment on top of the already low economic growth rate for the second quarter. Economists have suggested that taken together, these three reasons are enough to keep the Fed on hold at present low interest rate levels for several months. These reasons all feed on and into each other as you will see.
Oil Overproduction and Supply Glut Continues to Pressure Prices
Old worries are plaguing the oil markets once again. An increase in production by OPEC nations, domestically in America, and Russia all at once and at the same time that demand for the crude product is down have caused both overproduction and a glut in supplies that has built up in storage tanks. Traders have become increasingly concerned about this and have bid oil down to a close of less than $40 per barrel on Monday of this week. This is the first time the West Texas Intermediate benchmark has managed this feat since April. As oil prices drop, stock markets decline with them and the fear continues to spread. The last thing the Federal Reserve wants to do is raise rates when the markets are unsettled. It also helps to explain gold’s resiliency over $1,350 per ounce.
U.S. GDP Grows at Less Than Half the Rate Expected for Second Quarter
Another reason that oil prices are down is because demand is down. Oil demand typically drops when economic activity is less robust than the Fed desires. On Friday, economists and Fed watchers alike felt the jolt when their hopes for a second quarter GDP increase of 2.6% were dashed. In fact they and Wall Street were all off substantially, as growth came in at less than half the expected number at 1.2% for the second quarter. To make matters worse, the first quarter GDP took a revision down to a mere .8% growth.
These numbers are still expansionary, unless you take the point of view that the one economist who had expected worse numbers did. Chief U.S. economist at Deutsche Bank Joseph LaVorgna claims that these numbers were really worse than they looked on the surface. By another measure he explained, the economy is on the brink of recession. The majority of the growth came from consumer spending that commonly comprises about 70% of the U.S. economy. In the last few quarters, it has managed a bigger impact. LaVorgna stated that if you take out the gains in personal expenditures from the past four quarters, then growth in the U.S. economy drops to -.2%. Because of the danger that consumers may be starting to wobble, he sees an increased chance of recession. LaVorgna and Deutsche Bank estimate that the odds of such a recession are actually one out of three now.
Again all of this information feeds through to other data. The fact that business investment is also declining at the same time as oil prices are dropping, inflation is coming in significantly below its normal trend, and the economic growth is slowing substantially points to the very real possibility of a slowdown if not an actual recession. This is all enough to give the Fed pause for thought this month regarding interest rates.
Disappointing Auto Sales Raise Concerns
A last worrisome bit of information that bears on the level of consumer spending comes in the form of the July auto sales. July was expected to be a strong month for car sales because they have two extra selling days and increased incentives on a variety of models, per a statement by Kelly Blue Book Senior Analyst Karl Brauer. Yet after months of significant growth, auto sales disappointed significantly for the month. Ford suffered an unanticipated 3% decline in its overall July sales made worse by the 9.3% decline in its car sales. GM similarly suffered a July sales decline. Fiat Chrysler reported that it experienced weak growth of .3% when economists were predicting a 2.2% increase for them in the month.
These auto sales could be a sign of more trouble to come. If the consumer goes down for the count, then the Fed will have plenty of reason to be worried about the state of the economy. Whatever happens to the future growth of the U.S. economy, gold will still be a good place to hedge your other investments and protect the value of your retirement portfolio.
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