There are several reasons experts presently warn of potential economic downturn. China’s growth has been slowing, despite recent positive reports, as the trade war wages on and geopolitical tensions increase. Among others, countries like Singapore and South Korea, who export manufactured goods to China, are slowing.
Positive economic signs do persist, with consumption remaining steady at 2%, and private residential investment increasing in the third quarter of 2019. (though this has steadily declined since the end of 2017). Despite this, business investment has begun to fall.
Large companies have cut back capital expenditures, citing policy uncertainty and the trade war as harbingers. With declining investment in business, wages will likely decline, leading to weaker demand and slower hiring.
Certain financial markets have shown signs of slowing. The collateralized loan obligation market has seen falling standards in the value of the products. This market is comprised of risky loans that have increasingly been substituted for junk bonds in the U.S.
The Federal Reserve has intervened in the repo market, suggesting liquidity issues, as reported by Bloomberg. Beyond that, government policy won’t provide much economic support, as interest rates have already been low (below 2%) and the Fed likely won’t implement quantitative easing unless an economic crisis breaks out.
The signs of economic downturn don’t stop there. The Institute for Supply Management (ISM) released data supporting more evidence that U.S. industry has slowed in the last six months.
U.S. industrial companies are not placing new orders for equipment, leading to lower production. Lower productions leads to fewer jobs. ISM®’s New Orders Index were 47.2 percent in November,
a 1.9 percentage point decrease against 49.1 percent reported in October. New orders contracted for a fourth straight month, leading to a decline in stocks of approximately 350 points.
The U.S. could benefit from global weakness, as capital flows could be sent to the U.S. amid political unrest elsewhere. China weakness and slow downs in Germany and South Korea, as well as protests in Hong Kong, Spain, Latin America, the Middle East, and elsewhere, could see a flight to the calmer shores of the U.S.
The weak overarching economic data, including the poor manufacturing data, kept gold prices steady.
As reported by CNBC, gold remained “little changed at $1,464.20 per ounce. U.S. gold futures settled down 0.3% at $1469.2.” The manufacturing data will likely support gold throughout trading today.
“Market started the day on a risk-on tone, but got caught off guard when the ISM data was a bit weaker-than-expected. We saw equities, yields and the dollar all correct, which has helped gold a bit,” said Ryan McKay, a commodity strategist at TD Securities.
Though some experts remain pessimistic that further rate cuts will five the economy a shot in the arm, others say further rate cutting remains on the table.
“The notion is that the U.S. Federal Reserve is done cutting (interest rates) for now and we’ll need to see a trend in weaker data through early 2020 to convince the market that we’re going to get more cuts. Until then, there’s no real impetus to see gold rally,” McKay added.