Declines in the Manufacturing Sector Saw Growth in the US Economy Down by 2.2%

By Rahab Mbiriti / October 7, 2019



US Economy

The US economy grew at a decreasing rate in Q2’2019 having recorded a growth rate of 2 percent, which a 2.2 percentage point decline from the 4.2 percent recorded in Q2’2018.

According to Cytonn Investments’ Report, the slow down in growth was attributed to a decline in the manufacturing sector with industrial production growing by 0.4 percent in August 2019, the slowest pace since August 2017.

Analysts all over the world are of the opinion that the US economy will grow by 2.5 percent in 2019, slower than the 2.9 percent growth recorded in 2018.

This is foreseen on the account of being weighed down by reduced exports to major traditional partners such as China and the Eurozone, owing to uncertainty regarding the trade dispute between the US and China, and the fragile growth in the Eurozone.

The Federal Open Monetary Committee (FOMC) held 2 meetings during Q3’2019, and reduced the Federal Funds Rate by 25 bps at each meeting, to a range of 1.75 percent – 2.00 percent, from 2.25 percent-2.50 percent previously, citing:

  1. Weakened business investment and exports amid falling manufacturing as a result of slower global growth and trade policy tensions, and,
  2. Muted inflationary pressure with the current inflation rate of 1.7 percent, being below the government’s target of 2.0 percent

The US stock market has been on an upward trend, with the S&P 500 gaining by 1.2 percent in the quarter and 18.7 percent YTD.

The gain was largely supported by improved corporate earnings performance by a majority of counters in the financial services, oil and gas, consumer goods and technology sectors, and the easing stance adopted by the Federal Reserve.

Read Also: 5 Reasons Why The Global Economy Has Continued To Slow Down

US valuations are still higher than their long-term historical average with the Shiller Cyclically Adjusted P/E (CAPE) multiple currently at 29.6x, which is 77.2 percent above the historical average of 16.7x.

Eurozone

The Eurozone economy, on the other hand, grew by 0.2 percent in Q2’2019, a 0.1 percentage point decline from the 0.3 percent recorded in Q2’2018.

The slow growth is attributed to dampened sentiments in major economies such as Germany, which contracted by 0.3 percent during the quarter as a result of falling exports and could be on the path for a recession this year.

The slow growth is also attributed to a fall of 1.8 percent in industrial production as a result of the collapsing production of motor vehicles and capital goods. In addition, uncertainty over Britain’s exit from the European Union (“Brexit”) has also led to increased uncertainty in the Eurozone regarding its impact, and the type of exit deal to be adopted by the UK.

The European Central Bank (ECB) maintained the base lending rate at 0.0 percent, and the rates on the marginal lending facility at 0.25 percent, while it reduced its deposit rates by 10 bps to (0.5 percent) from (0.4 percent), and introduced a fresh stimulus package by restarting its bond purchases of EUR 20.0 bn a month from November.

The stimulus packages were in a bid to revive growth amid the fragile economic growth in the Eurozone, and the muted inflationary pressures, as the inflation rate for the region came in at 1.0 percent in September, lower than the ECB target of 2.0 percent.

The Stoxx 600 index rose by 2.2 percent in Q3’2019 and by 16.4 percent YTD. The P/E ratio currently at 16.0x, is 17.9 percent below the historical average of 19.5x, indicating markets are currently trading at relatively cheaper valuations.

Read Also: The Sub Saharan Currencies Vs The US Dollar: Who Stands Strong?



About Rahab Mbiriti

Rahab Mbiriti is an Experienced Research Specialist working for Sokodirectory with a passion for collecting data, breaking down data and analyzing it for easy consumption. Rahab also has a passion for writing Business and Economic oriented articles.

View other posts by Rahab Mbiriti


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