July 26, 2019 / 4:23 PM / 23 days ago

Column: Twin-speed U.S. economy poses dilemma for the Fed

LONDON (Reuters) - The U.S. economy is currently split between a fast-growing consumer sector and a much slower-growing business sector, with the contrasting speeds confirmed by the latest figures for second quarter gross domestic product.

FILE PHOTO: Federal Reserve Board building on Constitution Avenue is pictured in Washington, U.S., March 19, 2019. REUTERS/Leah Millis/File Photo

Personal consumer expenditures adjusted for inflation increased at an annualised rate of 4.3% in the three months from April to July, according to advance estimates published by the Bureau of Economic Analysis on Friday.

Real consumer spending growth accelerated from just 1.1% in the previous three months and was the fastest since the end of 2017, with a broad-based pick-up in spending on durables, non-durables and services.

By contrast, business investment in new structures, equipment and intellectual property shrank at an annualised rate of 0.6%, the worst performance since the first quarter of 2016.

Final sales to private domestic purchasers, which excludes short-term volatility from foreign trade, inventories and government spending, and is the best measure of underlying momentum, accelerated to 3.2% from 1.6% in the first three months of the year.

High levels of employment, wage growth, consumer confidence and rising share prices are supporting very brisk increases in consumer spending.

But the trade conflict with China and concern about a future slowdown in growth, or even a recession, are holding back business investment.

The gross domestic product estimates are consistent with a broad range of other indicators that show a twin-speed economy.

(Chartbook: tmsnrt.rs/2MiFGcP)

Passenger transportation numbers have accelerated since the start of the year even as freight volumes have come close to stalling.

Retail sales show strong and quickening growth while manufacturing output is stalling, purchasing managers’ surveys point to the most sluggish conditions since 2016, and construction activity is falling.

The Federal Reserve’s policymaking Federal Open Market Committee is widely expected to reduce short-term interest rates when it meets next week.

The case for an interest rate cut rests on the need to create a firebreak to prevent the current weakness in the business sector, manufacturing and construction from spreading to the much larger consumer sector and services.

Early and aggressive cuts in interest rates could help the economy avert a business cycle recession as they did in 1998.

But with so much momentum on the consumer side of the economy already, they risk igniting an unsustainable increase in consumer and business borrowing that could contribute to a subsequent downturn.

John Kemp is a Reuters market analyst. The views expressed are his own.

Related columns:

- Fed will try to create firebreak to contain downturn (Reuters, July 19)

- Fed likely to cut interest rates if U.S. manufacturing continues to slow (Reuters, May 2)

- Oil and equities prepare to party like it's 1999 (Reuters, March 19)

Editing by Frances Kerry

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