Eakinomics: Signal Versus Noise

Signal versus noise is the name of the game right now. Every day is filled with news (toward which I do not count presidential tweets) about policy developments — Bloomberg reports that “China, the world’s largest soybean buyer, has put purchases of American supplies on hold after the trade war between Washington and Beijing escalated, according to people familiar with the matter.” Soybean prices have slumped on the news, exacerbating the hit to the farm sector that is already dealing with losses due to extensive rain and flooding. On the USMCA front, the Washington Post reports that the vice president is in Ottawa “to build momentum for the swift passage of the deal through each country’s legislature. Trudeau’s Liberal government introduced legislation Wednesday to ratify the deal, but lawmakers need to move quickly to pass it before Parliament adjourns in June.” Trade peace with Canada would ameliorate the fallout of trade war with China. Unfortunately, talks with the European Union are faltering, and there remains the lingering threat of auto tariffs after the president’s 180-day delay.

And it is not just trade. CNBC reports that futures markets apparently anticipate two Fed rate cuts by next January, while Fed Vice Chair Richard Clarida argues that “Midway through the second quarter of 2019, the U.S. economy is in a good place.” He would argue to cut rates only if “the incoming data were to show a persistent shortfall in inflation below our 2 percent objective or were it to indicate that global economic and financial developments present a material downside risk to our baseline outlook.”

What’s the Fed going to do? What will happen on trade? Will there be a spending deal? When will they suspend the debt ceiling? And, most important, how is the economy actually doing? Yes, the Commerce Department announced that the revised estimate of 1^st quarter growth was a healthy 3.1 percent, but that number is deceptively strong, and recent data on orders for investment goods and housing sales disappointed. Surely that means a poor outlook. Maybe not, however, as consumer confidence has jumped noticeably.

The reality is that it is an incredibly difficult moment to discern the near-term outlook for policy and the economy. It is a recipe for bumpy financial markets and angst. The second quarter gross domestic product report is probably the most significant next firm read on the economy, and it will not arrive until July 26. Buckle up.