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Confidence in American Economy drops in August

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Consumers might be more hesitant to shop and spend if they grow more worried about the economy. A survey of consumer sentiment fell in August to the lowest level of the year.

American Economy: A measure of consumer confidence fell in August to the lowest level since the start of the year, reflecting fresh worries about trade tensions with China and the possibility of a looming recession.

The consumer sentiment survey fell to 92.1 this month from 98.4 in July, according to a preliminary reading from the University Michigan. Economists surveyed by MarketWatch had forecast a reading of 96.8.

Just a year and a half ago, the index touched 101.4 to mark the highest level since 2004.

What happened: A gauge that measures what consumers think about their own financial situation and the current health of the economy fell to 107.4 from 110.7, leaving it at a nearly two-year low.

Another measure that asks about expectations for the next six months declined to 82.3 from 90.5 — also a two-year bottom.

The Trump administration’s decision to apply tariffs to more Chinese imports and the Federal Reserve’s move to cut interest rates over worries about the economy made consumers more anxious, said Richard Curtin, chief economist of the survey.

Big picture: By many measures the U.S. economy still appears quite stable, but the worsening trade fight with China has hurt manufacturers and exporters, unnerved investors and put central bankers on edge. The Fed cut interest rates last month as an “insurance” policy against recession and it’s likely to do so again in September.

That hasn’t been enough to soothe investors, who dumped stocks this week and drove down the yield on U.S. Treasurys to stunningly low levels.

So far consumers haven’t cut back spending even as their worries grow. But waning confidence could cause them to do so in the months ahead, potentially weakening the economy. Consumer spending represents about 70% of U.S. economic activity.

What they are saying? “The main takeaway for consumers from the first cut in interest rates in a decade was to increase apprehensions about a possible recession,’ Curtin said.

Market reaction: The Dow Jones Industrial Average

DJIA, +1.12%

and S&P 500 index

SPX, +1.43%

rose in Friday trading. The 10-year Treasury yield

TMUBMUSD10Y, +2.09%

edged up to 1.55%.

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German economy grows slightly in 3Q

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BERLIN — Germany’s gross domestic product returned to modest growth in the third quarter, the Federal Statistical Office reported Thursday, staving off a widely-feared recession in Europe’s largest economy.

The Wiesbaden-based agency said the economy grew 0.1% in the July-September period over the previous quarter, largely driven by public and private consumption. Exports rose as well, while imports remained roughly at the second quarter level, the agency reported.

It said, however, that the second quarter contraction was greater than preliminary figures had shown, with the economy shrinking in the April-June period by 0.2% compared to the 0.1% originally reported.

Two straight quarters of declining output is considered a technical recession, which many economists had predicted that Germany had entered in the third quarter.

A week ago, the German government’s independent panel of economic advisers reported that a 0.1% third-quarter contraction was likely.

Though they said there were no signs of a “broad, deep recession,” the panel also said there was no sign of a “strong revival” in the fourth quarter. The five-member panel cut its economic forecast to growth of 0.5% this year and 0.9% in 2020, compared with its forecast in March of 0.8% this year and 1.7% next year.

And even though the recession has been averted, the numbers show Germany is in a de facto stagnation, and its export-driven economy still faces headwinds due to international uncertainty.

Services companies and the jobs market have held up well in Germany, but the industrial sector, led by automobiles and factory machinery, has seen declines amid trade tensions.

Among other things, the dispute between U.S. President Donald Trump and the Chinese leadership over China’s trade surplus with the U.S. has dampened trade and industrial output by raising uncertainty about whether and where more tariffs might be imposed. Another negative is uncertainty about the date and terms of Britain’s departure from the European Union.

In their report, the government economists cautioned that a no-deal Brexit could yet chop 0.3 percentage points off next year’s German growth, reducing it to 0.6%.

Britain is currently scheduled to leave the European Union by the end of January, but whether, how and when it leaves will depend on the outcome of an election next month.

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China economy grinds lower as October indicators miss forecasts

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By Gabriel Crossley and Huizhong Wu

BEIJING (Reuters) – China’s industrial output grew significantly slower than expected in October, as weakness in global and domestic demand and the drawn-out Sino-U.S. trade war weighed on activity in the world‘s second-largest economy.

Industrial production rose 4.7% year-on-year in October, data from the National Bureau of Statistics released on Thursday showed, below the median forecast of 5.4% growth in a Reuters poll.

Indicators showed other sectors also slowing significantly and missing forecasts with retail sales growth back near a 16-year trough and fixed asset investment growth the weakest on record.

The disappointing economic data adds to the case for Beijing to roll out fresh support for the economy after China’s economic growth slowed to its weakest pace in almost three decades in the third quarter as the bruising U.S. trade war hit factory production.

Broad activity in China’s manufacturing sector remains weak with data on the weekend showing factory gate prices falling at their fastest pace in more than three years in October.

China’s official Purchasing Managers’ Index (PMI) also showed activity in the factory sector remained in contraction for a sixth straight month in the month.

“Admittedly, optimism surrounding a phase-one U.S.-China trade deal could provide a boost to corporate investment in the near term,” Capital Economics China Economist Martin Lynge Rasmussen said.

“But even if a minor deal is agreed upon in the coming months, this would merely allow the focus to shift to the more intractable issues that we think will eventually lead the trade talks to break down. The case for further monetary easing remains intact.”

Other data on Thursday showed China’s property investment growth in the first 10 months of the 2019 slowing year-on-year.

The tariff war between China and the United States has hit global demand, disrupted supply chains and upended financial markets.

While some signs of recent progress in trade negotiations between the superpowers have cheered investors, officials from both sides have so far avoided any firm commitments to end their dispute.

That uncertainty has continued to weigh on manufacturers and their order books.

Thursday’s data also showed fixed asset investment, a key driver of economic growth, grew 5.2% from January-October, against expected growth of 5.4%. The January-October growth was the lowest since Reuters record began in 1996.

Private sector fixed-asset investment, which accounts for 60% of the country’s total investment, grew 4.4% in January-October.

On Wednesday, China’s State Council said Beijing would lower the minimum capital ratio requirement for some infrastructure investment projects.

Retail sales rose 7.2% year-on-year in October, missing expected growth of 7.9% and matching the more than 16 year low hit in April.

Consumers have been hit with higher food prices over the past few months, as pork and other meat prices soared.

At the same time, consumers have been reluctant to make big purchases with auto sales falling for the 16th straight month in October, data showed on Monday.

(Writing by Stella Qiu; Editing by Sam Holmes)

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Why Corporate America Is Bullish on the Economy – Investopedia

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Corporate executives are surprisingly bullish about the U.S. economic outlook for 2020, judging from an extensive analysis of management commentary in Q3 2019 earnings conference calls, as conducted by Goldman Sachs. Among the companies making particularly optimistic comments are Marriott International Inc. (MAR), Procter & Gamble Co. (PG), Republic Services Inc. (RSG), Harley-Davidson Inc. (HOG), and Allegion PLC (ALLE).

“Despite high levels of uncertainty, executives remained upbeat on the 2020 economic outlook. Corporate managers were optimistic about recent economic data, particularly consumer data,” Goldman writes in the current edition of their quarterly S&P Beige Book publication, released on Friday. “However, uncertainty remains high and executives expect to be dealing with US-China trade tensions for the foreseeable future. Consequently, inventories have declined and dealer demand has dropped,” they add.

Key Takeaways

  • U.S. corporate executives are upbeat about the economy in 2020.
  • This is based on analysis of Q3 2019 earnings calls.
  • However, other surveys of CEOs and CFOs indicate growing gloom.
  • The OECD, IMF, and Conference Board see lower U.S. growth in 2020.

Significance For Investors

Hotel operator Marriott calls the U.S. economy “robust” overall, and notes that its industry has low unemployment and high occupancy. Consumer products company Procter & Gamble sees “no signs of weakness.” Waste hauling company Republic says “the underlying economy is pretty strong…our view now and our view for 2020 is the economy is in pretty good shape.” Motorcycle manufacturer Harley-Davidson does not see any more uncertainty than 6 months ago, and noted that its own industry enjoyed a Q3 “pick up,” calling this “an encouraging sign.”

Security products and services company Allegion says “we are solid, positive, upbeat on the economy.” They find that the key indicators for their business are encouraging, including consumer confidence, low unemployment, high tax revenues for state and local governments, low interest rates, and a tight housing market. In conclusion, they “don’t know how you could not be positive about the view going forward.”

However, the bullish views observed by Goldman in Q3 conference calls conflict with recent surveys that show declining confidence among senior executives. CEOs are more gloomy about the future than at any previous time since the global financial crisis of 2008, according to a survey conducted by the Conference Board that was cited in a previous Goldman report. Meanwhile, “More than half (53%) of US CFOs believe that the US will be in recession by the 3rd quarter of 2020 and 67% believe that a recession will have begun by the end of 2020,” per the latest Duke University CFO Global Business Outlook survey.

Other key trends discussed in Goldman’s Beige Book relate to spending plans and the upcoming 2020 U.S. national elections. “S&P 500 cash spending plummeted in 2Q driven by a ten-year low in CEO confidence, but has stabilized in 3Q. Many executives highlighted deferring capital expenditures as they approached investments with increased caution,” the report noted. “Firms also outlined plans to divert cash from capital projects and [stock] buybacks in favor of strengthening the balance sheet,” the authors added.

Regarding the 2020 elections, many companies indicated that they are planning for multiple outcomes. Others preferred to discuss their long-term plans, while avoiding comments on politics. Some noted that there often is a big difference between what politicians advocate as candidates, and what they they actually do once elected.

Looking Ahead

In contrast to the bullish notes on the economy that Goldman finds in earnings commentary, Q3 2019 profits for the S&P 500 are on track to be down on a year-over-year (YOY) basis for the third consecutive quarter. However, while aggregate S&P 500 Q3 earnings are down by about 1% YOY so far, the median S&P 500 stock actually has a 5% increase, per Goldman’s current US Weekly Kickstart report.

Real GDP growth in the U.S. will slow from average rates of 2.9% in 2018 and 2.3% in 2019 to its long-term trend of 2.0% in 2020, per The Conference Board. However, this will represent a slight increase from annualized rates of 1.9% in Q3 and Q4 2019. The OECD calls for 2.28% U.S. real GDP growth in 2020, while the IMF projects U.S. economic growth to be 2.1% in 2020, down from their estimate of 2.4% for 2019.

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