Data points to slower economic activity in Q3

September retail sales were disappointing and industrial production continued sliding in the United States. Inflation also remained under pressure, with falling consumer and producer prices.

Confidence remained generally supportive of future activity, with improvements in small business and preliminary October consumer confidence from the University of Michigan. Data appears to be pointing to slower economic activity in the third quarter relative to the fast pace of the second quarter.

Manufacturing activity continues to contract, with the impact from the collapse in mining activity, compounded by the impact from a strong U.S. dollar. The recent stabilization in commodity prices and a weaker U.S. dollar may stabilize U.S. manufacturing activity.

Consumer spending may begin to benefit from sustained low energy prices, which typically occurs about 12 months after the initial decline in prices. Consumer confidence and employment remain positives, which could help consumers unlock their recent increase in savings. Near-term risks to consumer confidence are in the political arena, with the debt ceiling and government spending being key issues before year-end.

Our best case is that both issues are resolved without much market turmoil, but the path to such resolution is not clear at this time.



Global prices continue to remain under pressure, with inflation measures slipping in both China and Europe. For Europe, the news was somewhat more positive, with year-over-year inflation flat when compared to August. Industrial production has slowed, along with global manufacturing, but the economy may benefit from quantitative easing (QE) and a weaker currency.

For China, soft inflation is going hand-in-hand with slowing growth as year-over-year gross domestic product (GDP) slowed 0.1% to 6.9% in the third quarter. The economy continues to rebalance toward consumption from investment-driven growth. However, the recent stock market volatility has likely undermined confidence in the government’s crisis capabilities.

Next week’s annual central committee meetings should provide some indication of future direction and perhaps even some hints as to near-term actions regarding economic activity. Our view is that economic activity in China will continue to slow modestly as the government pursues efforts to improve confidence of economic factors and encourage policies that open the economy.

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Robert L. Haworth, CFA, is a senior investment strategist and Darrell Behnke is the Madison market leader for the Private Client Reserve of U.S. Bank.

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