An easing in economic momentum is underway, reports Vince Malanga, president of LaSalle Economics and longtime LandOwner economic consultant. He says economic momentum in the U.S. eased during the past three months and is beginning to lag overseas, as well. He finds three developments particularly concerning:
- The loss of premium in deferred oil futures has eliminated opportunities to lock in future oil production at a substantial premium to the spot price, Malanga notes. The decline results from a loss of confidence that OPEC will be able to control supplies. The loss of that premium could result in a reduction in U.S. oil production, which had been a “major prop” to business investment. “With business decisions generally on hold pending clarity on tax policy, a rollover in the energy patch would hurt overall business investment and aggregate economic activity,” he states.
- Domestic vehicle sales have eased for the past three months, despite aggressive sales incentives. “Production is now being selectively adjusted to control inventory, and this will weigh on overall production activity and employment,” Malanga observes. Meanwhile, there are no signs consumers are shifting their spending from vehicles to other goods and services and “brick-and-mortar retail remains challenged, and price discounting remains rampant,” he says.
- Homebuilding shows no signs of surging despite mortgage levels resting at their lows of the year. He notes first-time buyers are moving into the market, but they are buying smaller homes with fewer frills—paying a lower price as a result.
The Federal Reserve boosted short-term interest rates at its June meeting in the face of these developing headwinds. The market barely responded, and Malanga sees the bond market reacting only modestly going forward “because inflation is drifting further from inflation targets, and this will very likely continue in coming months.” In its announcement, the Fed recognized the easing in inflation and revised down its target for inflation.
The Fed also softened its forward guidance. It indicated it is looking for possibly one more boost in short-term interest rates before year’s end, rather than the two increases it had projected earlier. It also unveiled plans for how it will unwind its hefty holdings of mortgage-related debt, securities and government bonds of its $4.5 trillion of debt holdings—its balance sheet.
Although the Fed did not give a specific timeline, it indicated it would begin selling off those financial instruments sometime later this year in a slow manner by selling small allotments initially in order to judge how the bond market reacts. The Fed aims to increase the amount of debt sold at a later date.
These actions would, theoretically, put upward pressure on bonds and lift interest rates. But if done in an environment of low inflation, the sales could be absorbed by the bond market without a reactionary boost in interest rates. How this could all play out remains to be seen.
Meanwhile, Malanga thinks the key to keeping the economy from slipping is the speed at which regulatory and tax reform, along with infrastructure spending, occur.
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