As noted in Wednesday’s commentary, the decline in BEA profit margins will inevitably raise questions around the outlook for equities. Some sectors of the economy will nevertheless stand to benefit from lower interest rates. In the short run at least – this needs to be set against any adverse impact of a trade fight and margin compression.
Banks could open the spigots: consumer credit is accelerating, particularly for auto loans. The large upward revision to the personal savings rate in the US may have reduced some of the risks from increased leverage too. The rise in consumer credit will help to underpin consumption in H2, as will the fall in mortgage rates.
Indeed, demand for all categories of residential mortgages spiked in Q2, according to the Federal Reserve’s Senior Loan Officer Survey. The Fannie Mae home purchase sentiment index also hit a survey high in July.
It is possible to envisage a scenario where the economy really takes off from here, boosted by consumer credit, the housing market and bank lending. That could pose quite a challenge for the Fed. Until now, it has been able to rely on the tight grip of Dodd Frank, to ensure personal sector debt continued to fall as a share of GDP. The pick-up in lending will bear close scrutiny in the coming months.
