Better first quarter growth and low inflation may make it seem like now is a good time for the U.S. economy to weather a trade war, but Don Rissmiller, chief economist at Strategas Research, says there are six factors he’s identified that show it’s not really a good time at all.
1. While U.S. GDP growth came in at 3.2% in the first quarter, a big chunk of that, 0.7 percentage points, was due to inventories, or goods and materials held by businesses.
“It’s good, but if you look at the sub-components, it’s not as good as the headline. Inventories aren’t the best way to be growing,” Rissmiller said. “We’re going to pay some of that back.”
2. Market reaction to a trade war could mean a tightening of financial conditions, but the Fed is not in easing mode. It is taking a “pause” from raising interest rates, and that pause is just starting to have a positive impact on the economy. Rissmiller says the Fed could ultimately cut, but it would not do so preemptively, just because of concern that markets could be spooked or the economy hit by a trade war.
3. Inflation may be low, but “there are still signs it is not dead,” Rissmiller notes. He said rising capacity utilization, rising wages, slowing supplier deliver times are all signs inflation could make a comeback. The bond market, meanwhile, has not provided much “cushion” against inflation, with the 10-year yield below 2.5%.
“Tariffs, when you think about them boosting prices, can be somewhat inflationary in the short run,” he said. “I think the Fed will look through that, but I don’t think they would want to cut rates if inflation is rising.”
4. U.S. bank lending standards, albeit still expansionary, do not appear to be all that easy. Rissmiller notes lending standards are a leading indicator for payroll employment.
5. Manufacturing employment is slowing, and manufacturing is weaker. The U.S. manufacturing Purchasing Managers Index, a measure of manufacturing sentiment, is in a downtrend, following on global weakness.
6. Finally, the U.S. budget deficit looms large. Rissmiller said the intention of tax cuts and stimulus, which ballooned the defict, was to encourage corporate spending. However, if trade issues are unresolved, that could have the opposite impact, and CEOs and CFOs would be reluctant to spend in an environment of uncertainty.
“That’s the big bet we’re making on the economy through the tax code,” he said.