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GDP, jobs hold clues to Fed's next phase after likely third cut

Washington

WITH the Federal Reserve projected to lower borrowing costs for a third straight meeting, a slew of economic reports this week will play a key role in whether the central bank needs to keep cutting or can take a breather.

Figures due on Wednesday are projected to show gross domestic product in the July-September period expanded at 1.6 per cent annualised pace - the second-slowest quarter under President Donald Trump and about half the pace at the start of 2019 - as consumer spending pulled back from gangbusters growth.

Two days later, the October jobs report may indicate that the largest strike in more than a decade pushed nonfarm payroll gains below 100,000, though even excluding the General Motors walkout, employment gains likely remained tepid.

The key question is whether the economy is stumbling toward a recession or merely cooling off. Stocks at a record high, along with a yield curve that's turned positive again, have mitigated concern about a downturn.

But deteriorating global growth, Mr Trump's tariffs on Chinese goods and a weakened manufacturing sector have put the record-long expansion - and possibly the president's 2020 re-election prospects - on the backs of consumers who are increasingly in a tougher position.

"It has the potential to be a pretty ugly week," said Sarah House, senior economist at Wells Fargo. "We are far from out of the woods in terms of this slowdown and some of the headwinds that the economy is facing."

While GDP and payrolls will take much of the spotlight, the widely watched Institute for Supply Management manufacturing index due on Friday is expected to contract for another month in October, deepening concerns about fragile factories.

Meanwhile, the Conference Board is forecast to report on Tuesday that its consumer sentiment gauge remained elevated in October.

The employment cost index, a broad gauge monitored by the Fed, on Thursday could suggest companies remain hesitant to offer better wage gains and benefits. Consumers carried growth in the second quarter as businesses retrenched, and the picture will likely look remarkably similar in the GDP figures due hours before the Fed's interest-rate decision. Nonresidential investment may have posted back-to-back declines for only the second time during the expansion; a third straight drop, in the fourth quarter, would mark the longest slump since 2009.

"Until there's some clarity on trade, then it's hard to see any kind of a meaningful rebound in business investment," said Richard Moody, chief economist at Regions Financial Corp. Business spending on equipment and structures may hit bottom this quarter or continue to decline "and the two have very different implications for the course of the economy", he said. "Economic activity in the second half of the year is poised to decelerate markedly, as several drivers of growth fade and consumers are left dominating the outlook to an even greater degree than usual," Bloomberg economists Carl Riccadonna, Yelena Shulyatyeva, Andrew Husby and Eliza Winger said.

While there have been positive signs on trade, negotiations are far from over. Mr Trump said on Monday the US is ahead of schedule with finalising sections of the first phase of a trade deal with China that could be signed soon.

Residential investment, which has shrunk for six consecutive quarters, is poised to add to growth in the latest period as low mortgage rates helped boost sales. The problem is that the gain was likely too small to make a significant impact on GDP, so the onus remains on Americans to keep buying goods and services.

Enter Friday's employment report, the first on the state of the labour market in the fourth quarter.

The overall trend in payroll gains has slowed this year down to 161,000 new jobs a month versus 223,000 in 2018. While that's still more than enough to keep up with working-age population growth, a continued pullback could dent consumer spending.

"If you see more slowing in the labour market than is already expected, I think that is going to call into question whether the consumption story is going to hold up," said Brett Ryan, senior US economist at Deutsche Bank AG. "And that's the fear." BLOOMBERG

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