The U.S. government shut down on October 1 because Congress failed to pass a funding bill. Amongst many things, the shutdown impacts the release of economic data from government agencies. This includes important data on inflation, unemployment, retail sales, construction spending, housing starts, building permits, and import prices; essentially everything that points to the state of the U.S. economy.
What’s Going on with the U.S. Economy?
Republicans have been downplaying the impact of a what a global trade war is doing to the U.S economy. With that said, some previously released U.S economic data show that the American economy is struggling.
In the second quarter, U.S. household debt reached a record $18.39 trillion. Consumer finances in the lower to middle income ranges are showing signs of distress. Other types of debt, such as student loans and home equity lines of credit (HELOC), are also on the rise. Auto loans debt is up, and vehicle repossessions are at their highest level since the 2008/09 Great Recession.
U.S. consumer sentiment is down, with 33% of American households saying they are in worse financial shape today than they were a year ago. A solid 20% of younger Americans don’t think they will have enough money to cover their debts over the next three months. These are the worst numbers since the pandemic.
All of this, of course, is taking place at a time when the stock market is at record levels. In fact, higher-income Americans continue to do well thanks to a surging stock market.
Canadian Consumer Pessimism on the Rise
The worsening U.S. economic data don’t just impact Americans; they also have a direct impact on Canada, because a strong U.S. economy and consumer spending help fuel our growth as well.
And we’re beginning to see this sentiment trickle down to Canadian consumers. Because of the trade war, more and more Canadians have become increasingly pessimistic about the Canadian economy.
More than half of Canadians believe the Canadian economy will be worse in the next six months; 27% say they don’t expect to see any change. Just 13.5% think the economy will get stronger. Overall, consumer confidence is at a five-month low.
This comes at a time when the Canadian economy contracted 1.6% in the second quarter on an annualized basis, the first quarterly decline since the third quarter of 2023.
Will the Federal Reserve Cut Interest Rates in October?
For Canadian and U.S. consumers, there is some light at the end of the tunnel, with Wall Street all but saying that an October interest rate cut by the U.S. Federal Reserve is a virtual guarantee. The Fed will make its next interest rate announcement on Wednesday, October 29.
It is expected to announce a quarter of a percentage cut in its key lending rate, to a target range of 3.75%–4.0%. This should help bolster U.S. jobs and make borrowing less expensive. It could also be a boon for the stock market.
The bigger question is: what will the Federal Reserve do when it announces its interest rate decision on December 8–9?
Should the U.S. federal government reopen in time, it would result in a wave of fresh economic data. Indications of a prolonged economic slowdown would likely point to another interest rate cut. However, higher inflation could mean that the Fed keeps its interest rates pat.
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