US economic sentiment deteriorated slightly in October, according to Fathom’s US Economic Sentiment Index (US ESI), which dipped from 6.3% to 6.0%. Uncertainty ahead of the midterm elections and fears about the effects of the ongoing Sino-US trade war are possible explanations.
Nearly three-quarters of the constituent series posted lower readings than in the previous month and there was a divergence between business and consumer surveys: 12 out of 14 measures of business confidence decreased, compared with 5 out of the 9 measures of consumer confidence.
The breakdown highlights that the slowdown in overall sentiment was driven by businesses. As an example, the headline index of the ISM manufacturing survey (one of the indicators that is included in Fathom’s US ESI) fell from 59.8 to 57.7. Some of this was due to weaker external demand, highlighted by the sharp drop in the new export orders index of the same survey.
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The trade war may have started to weigh on business confidence, in the US and abroad, although tensions have been simmering for months with little apparent effect on consumer or business sentiment thus far. Factors unrelated to the trade war may well have resulted in weaker external demand. One possible explanation is the ongoing slowdown in the euro area. Meanwhile, the strong US dollar probably explains weaker demand for goods produced in the US more generally. Uncertainty ahead of November’s midterm elections may well have been a drag on business sentiment last month. However, some measures of consumer confidence painted a picture of resilient US demand. Indeed, the Conference Board’s consumer confidence index climbed to an 18-year high in October.
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It would be wrong to read too much into one month’s set of figures. The bigger picture is that, despite business confidence deteriorating slightly in October, the readings on all US ESI constituents were still higher than their long-run average. The US ESI may have signalled a small deceleration in economic activity in the first month of this quarter, but we still think that US GDP growth will exceed 3.0% annualised in Q4.
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