Is Disruption Around The Corner Despite Strong Macroeconomic Indicators?

By | 2018-11-12T09:29:15+00:00 November 9th, 2018|News|

The US economy witnessed a 4.2% annualized growth in the second quarter of 2018, while the unemployment rate stood at 3.8% in May and 4% in June 2018, which are the lowest in almost 50 years.

It is amazing what tax cuts can do and less regulations. We have not learned this lesson since the 80s – when a President understands the private sector and gets along with it, great things can happen for the middle class and America.

These record numbers do present a fairly robust picture for the economy. According to financial experts, the GDP growth rate is expected to remain between the ideal range of two and three percent – but it could be much higher when the ACA law goes away and more tax cuts are implemented. Unemployment is expected to continue to remain low.

There are no factors indicating sudden inflation or deflation. That’s exactly what they call a Goldilocks economy.

The government, for its part, has rightfully bragged about these numbers as a testimony to the success of its economic policies. While the situation remains rosy for now, there are a few key things that still worry astute economists and financial investors alike – trade conditions, monetary policy, and the international political climate.

Trade Conditions

The US government has embarked upon a serious trade war with China (though it has already been in one – just on the losing end). The government has imposed higher tariffs on goods coming from China, to which China responded in a similar manner.

The trade war seems to be hurting domestic farmers who produce soybeans and grains. The federal government has made a $12 billion bailout to the farmers as a temporary relief measure.

On top of that, the manufacturers are hiring casual and temporary workforce, instead of permanent ones due to the prevailing fear of escalating tariffs.

Although the US, Canada and Mexico have recently signed the new United States Mexico Canada Agreement (USMCA), some experts feel that it is not substantially different (but there are key differences befitting the times) from the North American Free Trade Agreement (NAFTA) that it replaced and is unlikely to create new incentives for US based businesses, with the notable exception of the dairy industry.

The future course of action remains to be seen. An escalating trade war can potentially slow down the growth in the short term, and even erase some of the economic gains made already.

Monetary Policy of the Fed

Since the beginning of this year, the US Dollar has appreciated considerably, especially against the currencies of the developing world. The Fed has promised further rate increases, which may cause additional appreciation of the dollar.

However, there is no reliable way to predict the future course of action that will be taken by the Fed. If the interest rate hikes turn out of be heavy handed, certain sectors like construction could be hit badly.

This is because the construction sector relies on the long term borrowings. If the monetary tightening continues relentlessly in 2018, as the Fed seems to indicate, economic growth could be hit.

International Political Climate

There is an ongoing disruption in the flow of petroleum in the world markets, leading to higher global rates of oil. The US has asked Saudi Arabia-led OPEC to increase their production, but the extent to which they may do so remains to be seen.

The government’s policies regarding migrants could affect the free flow of foreign hi-tech workers into the US. The recent changes in the H1B visa regulations have already made it harder for companies to employ foreign nationals. On top of it, the administration has now shifted its focus to the issue of birthright citizenship which should have been the target decades ago.

While these actions could create newer job opportunities for American workers, in the recent past they had to compete with lower-paid foreign workers, for employers the overall human resource costs could go up. It is hard to predict whether the benefits for the economy will outweigh the costs of these actions.

Clearly, some degree of economic disruption might be around the corner despite strong macroeconomic indicators prevailing at the present. Though with an administration that is pro-American – America is looking brighter now than it has ever been.

 

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