The Federal Reserve recently lowered its benchmark interest rate by 25 basis points, marking the second cut since its first reduction in September after a 4.5-year hiatus. This move signals a shift in focus from combating inflation to stimulating the economy. However, reviving economic growth remains challenging due to past monetary policy mistakes.
Despite the decline in the U.S. inflation rate to a three-year low, inflation persists as a concern, with the consumer price index (CPI) rising 2.4% in September, slightly above expectations. Core CPI, excluding food and energy, increased by 3.3%, surpassing forecasts. Many Americans remain frustrated with high costs for housing, cars, childcare, and insurance, despite improved inflation data.
Economic tensions are evident as more Americans opt for cheaper goods. Surveys show widespread discontent, with many feeling that living costs outpace income growth. Additionally, 44% of respondents report worsening personal finances due to high prices, nearly matching levels seen when inflation peaked in 2022.
Manufacturing struggles further exacerbate economic woes. The recent ISM report showed manufacturing PMI at 46.5%, marking six consecutive months below the growth threshold. The Federal Reserve's Beige Book also noted declining manufacturing activity across most regions since early September.
Several indicators suggest economic weakening, including slowed GDP growth, deteriorating household finances, high credit costs, a sluggish labor market, and persistent rental prices. Economist David Rosenberg and investor Jim Rogers have highlighted signs of an impending recession, with a considerable likelihood of a downturn between this November and next November.
The U.S. economy, driven by affluent consumers and large corporations' profits, presents a distorted view of growth. Oxford Economics highlights the widening spending gap between the wealthiest and poorest Americans, with the lowest 40% now accounting for just 20% of total consumption. The top 10 companies represent an unprecedented 36% of total U.S. stock market value, while smaller businesses face dwindling confidence.
Public debt has ballooned, doubling the federal deficit over the past decade and reaching over 6% of GDP. Both political parties have shown indifference towards this growing deficit. Despite the U.S. benefiting from dollar hegemony, excessive debt poses long-term risks, as history shows no nation relying indefinitely on debt can evade repercussions.
