Slowing global growth and ongoing trade policy uncertainties pushed interest rates lower last week, with yields on 10-year Treasury bonds falling to 2.13 percent on Friday, the lowest rate since August 2017. Moreover, it is a full percentage point lower than seven months ago. Similarly, the average 30-year fixed mortgage rate fell to 3.99 percent last week, the first sub-4 percent reading since January 2018.
Much has also been made of the inversion of several yield curves, including the spread between the 10-year Treasury bond and the three-month Treasury bill. Yet, the spread between 10-year and two-year Treasury bonds remains (slightly) positive, and it has only been a predictor of a downturn when negative. It is important to keep in mind that yield curves might not have the same predictive power as in the past, and while they can be an important signal of financial market perceptions, I continue to feel that the economy is slowing, not receding, at least not yet.
In fact, despite a multitude of challenges–slowing global growth, the partial government shutdown, trade policy uncertainties, a strong U.S. dollar–the U.S. economy grew a solid 3.1 percent at the annual rate in the first quarter. This was off slightly from the previous estimate of 3.2 percent growth, and it remained the strongest first quarter of growth since 2015.
Moving forward, the U.S. economy is expected to expand by around 2.2 percent in the second quarter, slowing from the pace at the beginning of the year. The current estimate is for 2.5 percent growth for 2019.
Manufacturing surveys from the Dallas and Richmond Federal Reserve Banks continued to indicate expansions in their districts, even as sentiment dipped into negative territory in the Texas report. Hiring and capital spending were encouraging in both releases, and as with other regional Federal Reserve surveys, respondents remained positive in their outlook.
Consumer sentiment was stronger in May and solid overall, according to the University of Michigan and Thomson Reuters, but dipped from preliminary estimates due to tariff concerns.
Personal consumption expenditures rose 0.3 percent in April, slowing after jumping 1.1 percent in March. Over the past 12 months, personal spending has risen 4.3 percent, and Americans have continued to open their pocketbooks, especially relative to the softer spending pace at year’s end. The saving rate declined from 7.4 percent in December to 6.2 percent in April. Meanwhile, personal income increased strongly, up 0.5 percent in April and 3.9 percent year-over-year.
The PCE deflator rose 0.3 percent in April, buoyed by higher energy costs. At the same time, the core PCE deflator, which excludes food and energy prices, rose 0.2 percent in April. Over the past 12 months, the PCE deflator has risen 1.5 percent. In general, core inflation has moderated substantially from last year, with the core PCE deflator up 2.4 percent year-over-year in July 2018. In addition, this measure remains well below the Federal Reserve’s stated goal of 2 percent core inflation.
As such, the pricing data should provide some comfort to the Federal Open Market Committee, as it allows participants the luxury of being more “dovish” in setting monetary policy over the coming months.