In retrospect, those were halcyon days for economic forecasters prior to last fall’s election for U.S. president.
Inflation was being wrestled to the ground, interest rates were on a downward slide, was continuing at an unprecedentedly fast pace, consumer confidence was solid, and money for major public projects was forthcoming from various government financing programs. There was little reason to be anything but upbeat about economic prospects.
Now, a mere four months later, nearly everything has been turned topsy turvy and the task of assessing what the future might hold has been made exponentially harder.
At first, Donald Trump’s victory at the polls was greeted, most notably by stock market investors, with fervid enthusiasm. His truly remarkable and historic comeback was promising to bring reversals and curtailments of regulatory roadblocks, an extension or maybe a further lowering of the corporate tax cuts that had been enacted at the start of 2018, and a shift away from “green” energy initiatives in favour of a return to full-throated fossil fuel development.
Coincident with those essentially dollars and cents matters would be steps to expel illegal immigrants from the country and thoughts, at least, of disentanglement from foreign hot-spot geopolitical matters.
Much of this was music to the ears of the business community.
Lately, though, reality has been overtaking wishful thinking.
First among the potential speedbumps on the road to continuing economic growth has been the heightened action taken against Canada, Mexico, and China. Speculation as to how the additional funds flowing to government might be used centre on their counterbalancing aspect vis a vis domestic tax cuts in other areas, and/or how they might contribute to a new sovereign wealth fund initiated by executive order.
There has been an immediate consequence, however, in the form of retaliatory tariffs by the affected nations, sparking what is being dramatically, and not exaggeratedly, referred to as a tariff war.
Many major and influential U.S. organizations and companies, including the National Association of Home Builders, the , the National Council of Textile Organizations, and Alcoa, have issued statements or interviews saying that, given the deeply embedded and advantageous supply lines that have been built up over many years, this is not what they want.
Carmakers are particularly leery and unhappy. The components going into a finished vehicle can go back and forth across borders several times, such that extra trade duties will severely raise costs.
That is where the rub lies. There is near universal acceptance that the newly initiated tariffs will increase costs, which also means price hikes. The incipient success in taming inflation is under threat of dissipation, which has unfortunate implications for relief from what are currently relatively high interest rates.
It is not just the tariff scenario that is jacking up the inflation concern. Expelling vast numbers of generally lower-paid undocumented individuals will also force many providers in the agribusiness and construction sectors to deliver their output at a premium.
Meanwhile, the Department of Government Efficiency under Elon Musk has been laying off public sector workers at an unexpectedly rapid rate. The figure being quoted with respect to employment downsizing in government service work so far is 70,000 jobs. That will take a big chunk out of upcoming jobs market numbers appearing in the monthly from the Bureau of Labor Statistics.
Signalling more trouble on the horizon has been the sharp climb in the weekly initial jobless claims figure, reaching 242,000 for the week ended February 22, although that is still not at the excessive-worry stage. Furrow your brow, though, if the number climbs above 300,000.
Gains in U.S. are highly dependent on consumers maintaining their already exuberant levels of spending on all manner of goods and services. The latest consumer confidence readings have been taking a hit. The Conference Board’s measure fell 7.0 points in February to 98.3, with its short-term expectations index receding 9.3 points to 72.9.
The three major stock market indices – Dow Jones, S&P 500, and NASDAQ – all retreated in February, with the latter down the most, -4.0 per cent.
Optimism concerning the is no longer as assured as it seemed to be last fall. As some headlines have been asserting, the dreaded “R” word, recession, has been re-entering conversational gambits.
During the previous Trump presidency, there was often the impression he was giving priority attention to how stock market prices were performing, with corollary knowledge that investors love low. The Federal Reserve, with an eye on both inflation and jobs growth, is not always sympathetic to that view.
In the previous GOP go-around, there was a sense that a difference of opinion about where interest rates should be positioned ‒ i.e., perhaps inordinately low versus more warily higher ‒ would lead to a bare-knuckles brawl between the Executive Branch and the Federal Reserve, with the fed’s independence hanging in the balance.
It will not be a shock to many economists if this issue soon comes to a head.
Recent Comments