Week In Review
The U.S. GDP grew by 2.1% in the second quarter, down from 3.1% in Q1 but ahead of consensus expectations of 1.8% growth. Consumption increased 4.3% while government spending rose 5.0%. Business investment, residential investment, trade and inventories all weakened Q2 growth.
While the growth rate fell from first quarter levels, the Q2 report is arguably better than Q1’s. Two of the main drivers of Q1 growth were a surge in inventories and a drop in imports, while both consumer spending and business investment were weak. While business investment remained weak in Q2, the consumer came back in a big way. There is concern that pent-up demand from federal employees who received back pay after the Q1 government shutdown was a primary reason for increased consumer spending. Q3 GDP levels will depend in large part on whether consumers keep buying.
Boris Johnson won the contest for leadership of the Conservative party and was named Prime Minister on Wednesday. Johnson has pledged to take the UK out of the EU at the end of October either with or without a deal.
Johnson’s ascension to Prime Minister changes none of the electoral math that stymied Theresa May’s attempts to pass a Brexit deal. However, Johnson may be more likely to accept the consequences of a no-deal Brexit, and he may be willing to try to overcome any attempts by Parliament to prevent his government from doing so.
The ECB signaled that it will begin implementing broad monetary stimulus measures at its September meeting including negative rates and additional QE. Draghi cited manufacturing data that is getting “worse and worse” and inflation running below the ECB’s target as the reasons to aggressively act to support continued growth in the Eurozone.
Much like the Fed the ECB is acting in anticipation of economic weakness. It is unclear whether or not the ECB can significantly boost growth through monetary stimulus at this point, and the aggressive measures proposed are likely to have negative side effects over the longer term.
Moody’s lowered Alaska’s credit rating outlook from stable to negative this week. Moody’s cited “political paralysis” as one of the reasons for the change in outlook. Alaska’s Governor Mike Dunleavy vetoed $444 million from the state’s operating budget earlier this month. The proposed budget cuts led the University of Alaska to declare a financial emergency this week due to the proposed reduction in state funding.
Alaska has struggled financially in recent years since the drop in oil prices has led to decreased revenue for the state. Governor Dunleavy promised a higher Permanent Fund Dividend during the 2018 campaign. In order to avoid decreasing the dividend and raising taxes, budget cuts were necessary. Many Alaskan residents are upset about the budget cuts, which affect the university system and social services. Alaskans will be watching closely as Governor Dunleavy and lawmakers continue to work on next year’s state budget.
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