Economic Take

This week’s main event is the Friday release of second-quarter GDP data. While this news will certainly garner many reactions, GDP doesn’t really tell us much unless you know the underlying potential growth. Other measurements—such as jobless claims and the unemployment rate—can help paint a clearer picture of the economy.

After months of market pressure, the Fed appears ready to cut rates at the end of July. This begs the question: Does the Fed conduct the markets’ tune or is it the other way around? And will the benefits of pushing the economy with a stimulus outweigh the potential costs of creating financial imbalances?

Federal Reserve Chair Jerome Powell is heading to Congress this week to testify on the state of the economy and monetary policy issues. What’s at stake? Reassuring everyone that US monetary policy is about the economy and not political pressure.

Although it’s impossible to predict how trade negotiations will progress, this weekend’s meeting between President Trump and China’s President Xi Jinping resulted in a truce between the US and China, a development that could calm broader fears over trade issues disrupting global expansion. Also this week: fresh insights into the state of the US economy.

At its meeting last week, the Fed changed its approach to future rate hikes—it will now be monitoring the economy closely to determine the best actions to sustain the expansion. In the coming weeks, certain developments will be crucial to understanding the Fed’s next move, including: jobless claims and the June jobs report, the result of the G-20 gathering in Japan, and the evolution of trade disputes between the US and China.

Interest rate markets are anticipating several rate cuts this year, likely bolstered by fears that recent tariff threats could hurt the economy. These concerns are making this week’s Fed policy meeting more important than usual—but it’s a little early to know whether these risks are as real as people imagine.

Market turbulence led to interest rates falling half a point in recent weeks, supported by the idea that the Federal Reserve will have to cut rates later this year. Although the Mexico tariff threats were suspended and the stock market rebounded, interest rate markets aren’t backing down from anticipation of cuts from the Fed.

The markets shuddered last week following the announcement of potential tariffs—starting at 5 percent and increasing to 25 percent—on Mexican imports to the US as soon as June 10. These tariffs would cost US businesses billions annually, disrupt trade with Mexico and could delay the passage of USMCA. Because the economic damage would be so devastating, the administration seems unlikely to follow through with the threat—particularly if this week’s discussions with Mexico go well.

Rumors of an impending US-China trade war are getting louder, but are they true? This week, we provide context on trade negotiations between the US and China, what leverage China holds and why the latest tariffs are unlikely to have a visible impact on the US economy.

There’s a large and growing difference between the Federal Reserve’s outlook for interest rates and the market’s view of them, which can be perplexing. But the Fed’s interest rate forecasts are conceptually quite different from the market’s thought process—essentially, it’s the difference between the expected outcome and the most likely outcome.

Many economic observers thought the US and China were getting close to an agreement until President Trump changed course, announcing a new round of tariffs on Chinese exports—leading to renewed worries of an impending trade war that could impact US consumers and the economy. But this round of tariffs will likely play out much like last year’s, getting lost in the shuffle of other, more important factors impacting the economy today.

Fluctuations in official unemployment metrics can be caused by a number of things, from seasonal distortions like holidays and bad weather to changing outlooks among today’s workers. April’s jobless claims were slightly elevated—but this could actually be seen as a positive. People are entering the job market as they see more opportunities open up, but finding and starting a new position takes time.

Despite last week’s economic report that showed a solid 3.2 percent growth in GDP, futures rates dropped almost 10 basis points. What gives? A closer look at jobless claims, inventory surges and PCE inflation reveal how the market may have mistakenly judged a book by its cover.  

Later this week, the government will release its first estimate of first-quarter GDP growth, following forecasts that have been inconsistent over the last few months. Even though GDP tends to get the most attention and dominate opinions about the economy, there are other factors that can help tell a more complete story—such as weekly jobless claims, recent consumer data, demographic gaps and the future of productivity-enhancing technology.

The minutes from last week’s Federal Open Market Committee meeting provide a glimpse into the Fed’s decision to hold rates steady this year. But are critics right to call this policy too tight? Some indicators, such as the flat yield curve, may have validated these concerns in the past, but the strength of the economy and the stock market substantiate the Fed’s patience today.