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Slower global economic growth and uncertainty over trade policy are making US business cautious. Companies are cutting back on buying equipment and making other capital expenditure. We have thus reduced our forecast of GDP growth this year but expect more interest rate cuts to try to boost the economy.

The trajectory for US investment spending remains one of the biggest question marks for the economic outlook.

Housing was one of the first components of GDP to weaken, in early 2018, with reduced building and sales. Sharply lower interest rates seem to have stabilised housing this year but have not prevented a slowdown in business fixed investment. Oil and gas drilling has levelled off since late last year and there has also been a deceleration in non-residential construction, including commercial buildings.

Spending on information-processing equipment has stayed solid as firms upgrade their computer and communication networks but real investment on industrial equipment – a proxy for how manufacturers perceive the economic outlook – was lower in the first half of 2019. Sluggish spending on transport, as well as agricultural and construction machinery, also suggests business caution.

However, firms are reluctant to reduce their workforces, probably fearing difficulties in re-hiring workers in the future. And as long as the labour market holds up, solid growth in consumer spending should help support GDP.

Households are regularly surveyed by the Conference Board, a US think tank, on the outlook for jobs over the next six months. The proportion anticipating fewer jobs has averaged less than 15 per cent this year – half the level seen during some previous periods of economic concern. Consumers appear not to judge the current risks to the economy to be as severe as in earlier episodes.

For several decades, each recession has seen a pronounced increase in workforce reductions and a deterioration in how consumers perceive the job market and it is hard to imagine the current economy falling into recession unless that occurs.

Real GDP growth averaged 2.6 per cent in the first half of 2019 and we expect 1.7 per cent in the second half with the quarterly trend remaining below 2 per cent during 2020. We’ve thus cut our 2019 forecast on a full-year average basis from 2.4 per cent to 2.3 per cent but still expect 1.7 per cent growth next year.

The US Federal Reserve cut its policy rate by a quarter of a percentage point in July. But with the central bank now warning about not only global slowdown and trade tensions but also geopolitical stresses in several countries, including the UK’s potential exit from the European Union, we think the Fed will want more insurance against a growing list of uncertainties.

Besides a quarter-point rate cut in September we now expect another in October, therefore. That would take the federal-funds target range down to 1.50-1.75 per cent and we expect it to remain there through 2020.

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