American economy trouble? This week the financial world is waiting with bated breath for the Federal Reserve’s interest rate statement on Wednesday. However, according to a September 15 Moody’s Analytics Capital Markets Report, rate hikes should be the last of the worries for market participants.
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Moody’s claims that the economic data released over the past few months brings into question whether 2016 will be home to even a single rate hike. This argument is based on US corporate sales or rather the lack of US corporate sales growth. Moody’s argues that corporate America is experiencing slowdown and this slowdown will weigh on the Fed’s decision of whether or not to hike interest rates. Slowing sales growth or even worse, no sales growth at all, will prove to be a drag on inflation, which will give the Fed more scope to hold rates lower for longer.
Don’t worry about the Fed, worry about the American economy
Underlying business sales figures do not support the equity markets upbeat outlook for quarterly corporate revenues. Wall Street analysts are predicting that the annual per-share sales growth rate of the S&P 500 non-energy companies will tick up from 2.8% in the second quarter to 4.8% in the fourth quarter. However, Moody’s argues that Q2- 2016’s 6.6% increase by the per share sales for the S&P 500’s discretionary consumer spending companies has been endangered by July-August 2016’s -1.6% yearly drop by unit sales of light motor vehicles and by July’s -2.2% yearly retreat for an index of pending home sales. In addition, state-level economic data shows retail sales fell by -0.3% monthly in August, with or without gas station sales.
Before seasonal adjustment of the year-on-year growth of retail sales excluding gas station sales has slowed from the 4.9% of the span ended August 2015 to the 3.7% of the span ended August 2016.
The outlook for consumer spending, corporate revenue growth, inflation and US economic growth looks even more abysmal from a management perspective.
Moody’s cites the results of the Business Roundtable’s third-quarter survey of CEOs, which painted a very downbeat picture of the US consumer. Only 59% of the CEOs surveyed expect their companies to report sales growth during the next six months; that’s down from the average of 64% for the year ended Q3-2016. Only 27% of the respondents plan to increase hiring over the next six months, bringing the moving year-long average down to 30% (Moody’s note here that August 2016’s unexpectedly few 126,000 new private-sector jobs may be the sign of things to come.)
Finally, the CEO business outlook index fell from Q2-2016’s 73.5 to Q3-2016’s 69.6, which lowered its moving year-long average to 70.0. The moving yearlong average of the business outlook survey last fell to 70.0 or lower during the span-ended Q4-2008, which completely overlapped the Great Recession.
So overall, it really does look as if rate hikes will be the least of the market worries for the rest of the year.