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Federal Reserve Struggling to Prevent US Economy from Slumping Like European Economy!

By Glenford S. Robinson

The United States Federal Reserve recently took steps to jump-start the US economy by cutting interest rates for the second time in the space of three months. The Fed cut interest rates this past week because the agency did not want the US economy to follow the current slow economic growth path as economies in the Eurozone. The big three Eurozone economies Germany, Britain, and France will be the countries of interest in our discussion today because these three countries play the largest role in the European economy.

Economic Calendar

Monday, September 23,2019 @315am EST
French Manufacturing PMI (Sep)   Act. 50.3 Forec. 51.2 Prev. 51.1

The French Manufacturing Purchasing Manager’s Index (PMI) measures activity levels of purchasing managers in the country’s manufacturing sector. A PMI reading above 50 indicates a period of expansion in the sector, while a reading below 50 indicates a period of contraction in the sector. Traders and investors watch the PMI survey because purchasing managers will be the first to know how well their companies are doing from knowledge of company performance data. Therefore, PMI data provides leading economic indicator information for performance of the overall economy. As a result of this very essential information, traders and investors put an extraordinary amount of importance in PMI data reports, such as pinning dates and times of PMI economic data releases on their calendars.

A reading that is higher than expected should be taken as a positive or bullish for the Euro, while a reading that is lower than expected reading, should be taken as negative or bearish for the Euro.

People don’t have to be traders or investors to find such information beneficial because if an American frequently goes on vacation to Europe, then it would be in that person’s best interest to want to know the exchange rate of the Euro against the USD, and what such rate could be when vacation time comes around in the future.

As we can see, these PMI data paint a grim picture for the current and future outlook of the Eurozone economy. PMI data shows a decrease from a previous reading of 51.1 a month ago to a current reading of 50.3. French economic activity as slowed down to a crawl because consumers are not buying manufactured products, so French companies are forced to cut back on the amount of product they produce, thereby causing the consequent layoffs of employees, as a result of not generating enough revenue to pay these employees.

This situation is an economically destructive force that has continued to plague Eurozone economies for quite some time now. This also explains why the current Eurozone interest rate is zero percent, causing a frantic and desperate attempt by the European Central Bank (ECB) to implement monetary policies, which includes government security by-backs and other monetary policy tools in the hope that the Eurozone economy will turn around.

The current uncertainty caused by Brexit, and the current US-China tariff scuffle, shed a very dim light on the outlook of the Eurozone in economic terms.

Economic Calendar of German Manufacturing PMI for September

Sept 23, 2019,
3:30am, EST

PMI (Sep)   

The German Manufacturing PMI like the French contracted dramatically from a whopping 43.5 in August to an anemic current reading of 41.4 in September. In fact, we all learned that any PMI reading of less than 50 presents a real problem for any economy suffering from such decline in manufacturing activities. So, from bad to worse shall we say for the German Manufacturing PMI and thus the German economy? Yes, indeed. Things look very bad, economically for Germany, who actually plays the largest role in the Eurozone economy.

Therefore, overall, the economic outlook in the Eurozone presents a very bleak picture, and with Britain fighting to leave the European Union (in Brexit), things look doubly worse. Britain, being one of the big three (Germany, Britain, and France) plays the second largest economic role in the Eurozone behind Germany who plays the largest role and with the advent of the British leaving the European Union, an economic collapse of epic proportion seems undoubtedly inevitable.

Economic Calendar of U.S. Manufacturing PMI for September

Monday, September 23,2019 09:45 am EST US Manufacturing PMI (Sep)    Act. 51.0 Forec. 50.3 Prev. 50.3

The US economy on the other hand, although not doing all that well either, presents a brighter outlook than the Eurozone’s economy. The US Manufacturing PMI data reported on Monday, September 23, 2019 at 9:45 am, EST, came in at 51.0, beating forecast of 50.3 and a previous reading of 50.3. The results confirmed that manufacturing activities in the U.S. increased from last month by 0.7, but such meager reading should not be perceived as an overly outstanding mark because an increase of just 0.7 still shows weakness in the economy, and such weak economic growth coupled with the slowed economic growth in Europe, Brexit, and the US-China trade war, things could spiral out of control very quickly if we are not careful.

This past week the Federal Reserve unleashed one of its monetary policy tools by cutting interest rates from 2.25% to 2.00%. Now we can see why the Fed cut interest rate. The Fed’s decision was questioned by many in the media, but as we can see from the PMI readings above, the interest rate cut this past week on Wednesday, September 18 was justified.

The CPI (inflation rate) numbers rose from 1.6% to 1.8% soon after the Federal Reserve cut interest rate for the first time in over a decade; so, if the inflation rate remains at 1.8% even after this recent rate cut for an extended period of time without increasing closer to 2%, then the Fed will cut interest rate again by another 25 basis points. In fact, the Fed will continue to cut interest rate until the inflation rate gets to 2%.

If it takes two more interest rate cuts for the inflation rate to get to 2%, then the Fed will cut rates two more times; if it takes three more interest rate cuts for the inflation rate to get to 2%, then the Fed will cut interest rates three more times. Whatever it takes for the Fed to increase the inflation rate to its target mark of 2%, the Federal Reserve will do it. The way things look economically, taking everything that we have spoken about so far into account, we can safely predict with a certain degree of accuracy that the Federal Reserve will cut interest rate again.

Economic Calendar of New Home Sales for August

September 25, 2019 10:00 am ET US New Home
Sales (Aug)
Actual 713K Forec. 660K Prev. 666K

New home sales for August unexpectedly beat forecast, posting a whopping count of 713 thousand (K) new homes sold, demolishing forecast of 660K and beating out previous readings of 666K new homes sold. No one expected this because the previous reading wasn’t very strong, and the economy hasn’t been the strongest lately either, which has caused the Federal Reserve to unleash economic stimulus tactics, such as cutting interest rates in order to gin up the economy.

The New Home Sales report shows the number of new single-family homes sold during the previous month. New Home Sales data released a head of Existing Home Sales data tend to have more significance and therefore more impact because the reports tightly correlate with each other.

A higher than expected reading presents a positive outlook for the US economy and therefore the US dollar, while a lower than expected reading presents a negative or bleak outlook for the US economy and the US dollar. A 47 thousand New Home Sales increase is better than nothing but still isn’t all that impressive.

A positive New Home Sales report tells us that US consumers feel good about the economy, so they are willing to assume new mortgages. The positive New Home Sales report also tells us that banks are willing to give consumers loans in the form of mortgages to pay for these newly built homes. A lower interest rate makes it possible for banks to lend more and makes it easier for consumers to get loans from banks. This positive relationship between low interest rates, banks, and consumers increase the flow of money into the economy, thus increasing economic activity.

With the purchase of new homes, the sale of durable goods will also increase because new home owners need to buy durable items such as refrigerators, washing machines, furniture, stoves, and any other long-lasting items for their new homes. So, we would expect that Core Durable Goods Orders for August to increase.

Economic Calendar of Core Durable Goods Orders for August

September 27,
2019, 08:30 am EST
  US Core Durable
Goods Orders (MoM) (Aug)
Actual 0.5% Forec. 0.2% Prev.

Well, it did; the Core Durable Goods Orders report for August increased as a result of positive New Homes Sales numbers, increasing from previous readings in July of -0.5% to an anemic current reading of 0.5% for August, beating out a measly forecasted 0.2% increase.

Core Durable Goods Orders data shows the change in the total value of new orders for long-lasting manufactured goods from the previous month, excluding transportation items, and a higher than expected reading indicates a marked increase in manufacturing activity, which is excellent for the economy and the USD.  A tiny increase from -0.5% to 0.5% is, yet again, not a very large, enough increase for us to feel happy about.

Economic Calendar of real GDP for 2nd Quarter

September 26,
2019, 08:30 am EST
US GDP (Q2) Act. 2.0% Forec.

Gross Domestic Product (GDP) shows change in the inflation-adjusted value of all goods and services produced by the economy for the period of time measured. The indicator provides the broadest measure of economic activity and is the primary indicator gauging the economy’s health. An actual reading greater than forecast present a positive or bullish outlook for the USD and the US economy.

The GDP report displays measured data on a monthly basis. The indicator consists of three versions, the advance release, second release, and Final release. Economists tag both the advance release and the second release as preliminary in the Economic Calendar.  

If we take a look at the current GDP reading, we will see that the current reading of 2.0% hasn’t changed from the previous reading of 2.0%. In fact, even the forecasted reading of 2.0% came in on target. Now, what is this telling us?

This data is simply telling us that the United States economy has not improved from the previous reading. This should be a cause for concern because the GDP is the barometer that measures the health of the economy. Therefore, if GDP data hasn’t changed from previous readings, then the economy has not improved from last month and is pretty much the same as it was from the last reading.

Wow, we have yet again, come across another confirmed reason why the Federal Reserve cut interest rates, and will cut interest rates again in the near future, possibly at its next major meeting. May we say the Federal Reserve has no other choice, but to unleash all its arsenal of monetary policy tools to prevent the US economy from running aground like the European economy? Yes, Yes, indeed…The Feds have no other choice.

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