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October Economic Update

Market Summary

September brought an economic event that was widely expected: a quarter-point cut in short-term interest rates by the Federal Reserve. It also brought an attack on two of the world’s largest oil fields that threatened to dent global crude output and threats of impeachment proceedings by the House of Representatives. A resumption of U.S.-China trade talks was scheduled for October, and White House officials decided to delay some planned tariff increases.

Clear signals of an economic slowdown emerged from both the eurozone and China; some of the key U.S. economic indicators looked much better by comparison. While all these events transpired, the S&P 500 gained 1.72% for the month. (1)

China Trade Update

Trade representatives from the U.S. and China were scheduled to restart negotiations on October 10. At mid-month, White House officials said that a planned 5% increase in tariffs on certain Chinese imports would be postponed from October 1 to October 15 to honor a request made by Chinese Vice Premier Liu He. Late in the month, stocks fell on a rumor that the White House was considering limits on U.S. investment in Chinese companies. The volatility will almost certainly increase towards the middle of this month with these negotiations.

Domestic Economic Conditions

An important gauge of U.S. manufacturing, the Institute for Supply Management’s monthly Purchasing Managers Index (PMI), fell below 50 in August. That news broke early in September, and the number (49.1) was important because any reading below 50 signals sector contraction. Meanwhile, ISM’s Non-Manufacturing PMI came in at 56.4 in August, showing expansion in the U.S. service sector for the 115th straight month. That 56.4 was its best mark since May. (2)

The PMI is a key economic indicator as it is a measurement of manufacturing output. Historically speaking, when manufacturing output is rising, it's a fundamental sign that an economy is firing on all cylinders and growth will continue. While Wall Street is still digesting this news, it does not help gain the confidence of most economic analysts that growth will continue at the pace we have seen over the last decade.