• A fresh batch of weaker-than-expected economic releases this week reignited investors’ long-running recession fears and likely paved the way for a third rate cut at the Fed’s October meeting.
  • U.S. economic growth indeed slowed in Q2 and is expected to maintain its slow pace in Q3. The NY Fed’s Nowcast sees GDP growth of 2.1% for Q3 2019 while the Atlanta Fed’s GDPNow projects just 1.8%. Each of these two quarters would represent slower growth than in eight of the previous nine quarters.
  • Despite the recent slowdown, it’s important to keep in mind that GDP growth has spent most of the past two years running well above its long-term potential, fueled by tax cuts and fiscal stimulus measures.
  • According to researchers at the San Francisco Fed, the normal (long-term) pace for GDP growth today sits somewhere between 1.5% and 1.75% compared to 3% or higher from 1987–2007.1 They attribute the deceleration to a mix of slow labor force growth in the U.S. along with a significant decline in labor productivity.1
  • Against this backdrop, a move toward lower economic growth doesn’t necessarily represent a decline into recession. Instead, it could simply reflect economic growth settling into a slower but more sustainable growth rate. However, investors may still need to reconsider where they will find sources of income and growth within such an environment.

1 Federal Reserve Bank of San Francisco, June 24, 2019, http://bit.ly/2Oi48vW.

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