July 12, 2018By: Harris L. Kempner, Jr.
Rarely in our experiences have we seen such collision potential as currently between a very strong U.S. economy and major pitfalls that await it. We still think the core strength at present, as will soon be indicated by a strong 2nd quarter of near 4% growth, is enough to push the economy to 2 ½% growth for all of 2018. However there are clear cut, potential obstacles to growth growing in the economic path – obstacles which could make the 2 ½% growth projection optimistic.
The base concerns are the problems presented by the developing trade war with China, Europe, Mexico, Canada, etc. The administration’s main tactic is tariffs – applied or threatened in each of the above cases. These have already begun to have a negative effect. Where applied in the U.S., they have caused overnight price increases. One example is washing machines, which increased by 10% overnight as specific tariffs were applied. We have also seen surges in lumber and steel prices. If the Administration takes the next step and proceeds with the present threats of over $200 billion in tariffs to China alone, much less those threatened against other countries, the estimates are that a huge range of consumer products will have instant price increases just as the previous example of the washing machine. Think TVs, telephones, foods, etc. This will increase inflation pressure on the Federal Reserve to raise rates, and negatively impact consumer spending on goods and services.
Above all, this effect on the American consumer is the key to economic prospects. Consumer activity is 70% of all U.S. economic activity – twice as much as business and government spending combined. Wages are growing slowly, and savings rates are historically low. We believe that if the tariffs on large numbers of goods and services and their cost impacts take place later this year, consumer spending will rapidly stagnate and thus the economy will as well.
Further there has been rapid increase in business uncertainty due to potential tariffs. Already there have been well publicized pull-backs in business investment plans, and threats by businesses such as Harley-Davidson and General Motors to move production elsewhere to avoid tariffs, all of which is obviously economically negative for the U.S. economic growth. This will be a much larger factor if tariffs become widespread.
And all of this is compounded by the fact that the Administration’s goals are so unclear. There’s no way at present of knowing when they’ll declare a success, and therefore for business and consumers to be able to plan for any end to the trade war process. Confusion creates uncertainty, which can create economic pull-back.
So the present strong growth of the U.S. economy in jobs, investments, and consumer and business confidence may well be vulnerable to shocks caused by the Administration’s trade policy as the year progresses. Shocks that can cause higher prices overnight, reductions in investments by corporations, and stress on consumers’ spending. Still, the economy is presently strong enough to make us believe that we will have about 2 ½% economic growth in 2018, even if the tariffs are expanded later in the year. The view into 2019 however, will be based substantially on whether the monkey wrench is actually thrown into the washing machinery.
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