Home   Logon   Mobile Site   Research and Commentary   About Us   Call 1.800.621.1675 or Email Us       Follow Us: 

Search by Ticker, Keyword or CUSIP       
 
 

Blog Home
   Brian Wesbury
Chief Economist
 
Click for Bio
Follow Brian on Twitter Follow Brian on LinkedIn View Videos on YouTube
   Bob Stein
Deputy Chief Economist
Click for Bio
Follow Bob on Twitter Follow Bob on LinkedIn View Videos on YouTube
 
  The Plow Horse Returns?
Posted Under: GDP • Monday Morning Outlook • Trade

We haven't been worried about a trade conflict with China, which has a long track record of pirating intellectual property and is a potential military rival in the (not too distant) future.  The US has enormous leverage with China, given our trade deficit with the country and the ability of firms to shift supply chains toward alternatives, like Vietnam, Mexico, and India. 

However, we are more concerned about President Trump's recent tariff threat toward Mexico if they don't cooperate to stem the flow of migrants from Central America.  Using tariffs to achieve policy goals outside of foreign trade makes it much more difficult for international companies to plan ahead. 

If the President imposes these tariffs, who knows what's next?  Could he use tariffs to persuade NATO allies to spend more on their militaries?  Could a future president use tariffs to try to get other countries to comply with stricter CO2 emissions standards?  The range of outcomes quickly widens, which means businesses will have to allocate capital according to political calculations, which means less efficiently.

Before the most recent threat, we thought the odds a recession in the next year were about 10%.  Now, we think they're more like 15 - 20%; still low, but higher enough to warrant some extra concern.  As a result, we will be watching the data flow over the next couple of months even more closely than usual for signs of broad economic weakness.  The economy grew 2.5% in 2017 and 3.0% in 2018 because of a combination of deregulation and tax cuts.  Protectionism and added uncertainty could offset those positives. 

So far, we don't see signs of weakness; the economy keeps humming along.  No deal with China and higher tariffs on Mexico (and perhaps others), doesn't mean recession, but instead a return to roughly 2.0% Plow Horse growth.  We estimate that the impact of the tariffs net of the benefits of tax cuts and deregulation roughly equal the negative effects of President Obama's tax hikes and regulation.

Some are calling for the Federal Reserve to cut interest rates to offset this damage, but we don't think rates need to be lower to boost growth.  Does anyone seriously think there are firms that are not investing because the Fed has lifted short-term rates to 2.375%?  In addition, there are still $1.4 trillion in excess bank reserves.

We understand the fear of a wider trade war but don't think it will happen.  We continue to believe markets will push policymakers in the right direction.  However, a return to the Plow Horse economy is still possible.  Remember, though, even then stocks rose substantially.  Investors who stay calm while others panic will continue to be rewarded.

Brian S. Wesbury - Chief Economist
Robert Stein, CFA – Deputy Chief Economist                

Click here for PDF version

Posted on Monday, June 3, 2019 @ 11:37 AM • Post Link Share: 
Print this post Printer Friendly

These posts were prepared by First Trust Advisors L. P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
 
The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. By providing this information, First Trust is not undertaking to give advice in any fiduciary capacity within the meaning of ERISA, the Internal Revenue Code or any other regulatory framework. Financial advisors are responsible for evaluating investment risks independently and for exercising independent judgment in determining whether investments are appropriate for their clients.
First Trust Portfolios L.P.  Member SIPC and FINRA.
First Trust Advisors L.P.
Home |  Important Legal Information |  Privacy Policy |  Business Continuity Plan |  FINRA BrokerCheck
Copyright © 2019 All rights reserved.