A sharp contraction in business spending is slowing the U.S. economy and could cause deeper pain going forward, but political leaders and policymakers are giving almost no signals about what they plan to do next.
The Commerce Department said Wednesday that the U.S. economy grew at a 1.9% annualized pace from July through September, far short of the 3% sustained clip that the White House promised would result from the 2017 tax cut law.
Several hours after the Commerce announcement, the Federal Reserve cut interest rates by a quarter percentage point in a bid to spur more growth. But the central bank also hinted that there might not be any more interest rate cuts on the horizon, as officials plan to monitor developments, despite constant pressure from President Donald Trump to do more.
"Weakness in global growth and trade developments have weighed on the economy and impose ongoing risks," Fed Chair Jerome Powell told reporters after the decision. But he added that the Fed's current stance is "likely to remain appropriate."
The Fed's new wait-and-see approach is one of many Washington decisions that is now up in the air, clouding the outlook.
Congress and the White House still have not passed legislation to fund most of the government after Nov. 21, and an impasse could lead to another shutdown. Trump has tried to secure a partial trade agreement with China, but planning was thrown into disarray last week when the Chilean summit where he hoped to finalize the agreement was canceled. And the outcome of the 2020 election could lead to markedly different trade, tax and regulatory policies, a prospect that can lead businesses to move more cautiously when it comes to spending and hiring.
A number of factors are weighing on the economy, but Powell pointed to the trade concerns and slowing global growth as worries at the top of the list. He also said, however, that there were signs that the trade skirmish with China could ease if Trump can broker a partial deal with Beijing this month, and Powell expressed confidence that consumer spending could remain strong. Helping matters, the unemployment rate remains at a half-century low, the stock market is at very high levels, and the housing market has recently shown signs of rebounding. The Commerce Department data show that consumer spending continues to power the economy, but business investment has contracted for six straight months, falling 3% in the third quarter, the biggest drop since the end of 2015. In recent announcements, a number of companies have said they are pulling back or pausing investment because of economic uncertainty, particularly related to Trump's trade war with China.
"We're still in the middle of really trying to understand where the trade talks are going to land and how that's going to impact the overall economy," GM Chief Executive Mary Barra said on an earnings call last week.
Spending on both structures and equipment was deeply negative from July through September, Commerce reported, and manufacturing is in a technical recession.
"In general, uncertainty still seems to kind of reign," said Robert Biesterfeld, chief executive of logistics company C.H. Robinson.
The U.S. economy amounts to more than $21 trillion in goods and services each year. It is driven largely by consumer, business and government spending, but its health can change based on external shocks, trade decisions and public policy, such as changes in the tax code.
Trump has made economic growth a defining issue of his presidency, but growth is now weakening. The economy grew 2.9% in 2018, but in the past six months it has appeared to have returned to the slower pace it notched during the final year of the Obama administration. Powell stressed, however, that he expects the economy to continue growing, and the Fed is not forecasting that a recession is near. Low unemployment, rising wages and high stock prices have helped fuel consumer spending. Higher federal government spending also provided some lift to growth, helping offset the business investment decline.
"The consumer is still the main engine of economic growth, plus federal government spending. The nation just capped off a year of a nearly trillion-dollar deficit. Not surprisingly, all this federal spending is showing up in the GDP numbers," said Stuart Hoffman, senior economic adviser at PNC Financial Services Group.
Trump's economic agenda has resulted in tax cuts, deregulation, trade fights, and spending increases. He and top aides have said this approach would lead to a major acceleration in economic growth, which had slowed markedly during President Barack Obama's last year in office. The unemployment rate has fallen since Trump's election from 4.7% to 3.5%, consumer confidence and spending are strong, and the stock market reached an all-time high last week.
Economists would typically expect that after businesses cut back on spending, they would start laying off workers to save costs, which would lead to decreased consumer spending. But as of yet consumers continue to prop up the expansion.
Trump has continued to celebrate any good economic news.
The U.S. economy is in the midst of its 11th straight year of growth, making this the longest expansion in the nation's history.