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A Mixed Outlook for the US Economy

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Business economists have grown a little less optimistic about the outlook for the U.S. economy as a result of U.S. trade policies. The National Association of Business Economists reports that its survey of 45 professional economic forecasters now projects a median 2.8% growth in real GDP from Q4 2017 to Q4 2018, down from 2.9% three months ago.

More striking is the reversal in the upside and downside risks to the group’s outlook. In the latest survey, 31% of forecasters see more risk to the upside versus 75% in the previous survey released in March, and 57% of forecasters currently see more risk to the downside.

The March survey was focused on tax cuts and near-term fiscal policy; the latest survey includes an assessment of U.S. trade tariffs, which were just a threat when the survey took place between May 9 and May 16, according to the NABE. Now those tariffs are official policy.

The U.S. government imposed tariffs of 25% on steel imports and 10% on aluminum imports from the European Union, Canada and Mexico, which triggered retaliation from those major trading partners.

Canadian Prime Minister Justin Trudeau said his government would levy a 25% tariff on steel imports from the U.S. and a 10% tariff on aluminum and other U.S. goods starting July 1 if the tariffs still stand after two weeks of talks with the U.S. Mexico’s Economy Ministry said it, too, would target a number of U.S. goods starting June 20. And the EU also filed a case against U.S. trade tariffs at the World Trade Organization on Friday.

U.S. “growth prospects appear to be related to federal fiscal policies,” said Steven Cochrane, NABE survey analyst and a managing director at Moody’s Analytics, in a press release. While NABE expects fiscal policy changes, primarily tax costs, will increase growth — by 0.4 percentage points in 2018 and 0.3 percentage points in 2019 — more than three-quarters of those surveyed “believe that current trade policies will have a negative effect,” said Cochrane.

The U.S. has yet to levy trade tariffs on imports from China but appears to be headed in that direction since talks between Chinese officials and US. Commerce Secretary Wilbur Ross have concluded with no apparent resolution of trade disputes. China is threatening to retaliate if the U.S. does imposes tariffs on up to $50 billion of Chinese imports, which it has threatened to do before those talks commenced.

NABE survey respondents also forecast a faster rise in inflation this year, to 2.1% from the fourth quarter of 2017 to the fourth quarter of 2018 — up from 1.9% in the previous survey, with a slightly higher year-end outlook for the federal funds target rate of 2.210%, up slightly from 2.125% in the previous survey, and year-end 2019 of 2.875%, indicating five more Fed rate hikes through December 2019.

In line with the expectation for slightly higher inflation, NABE economists also raised their outlook for the 10-year Treasury yield to 3.20% by year end, from up 3.16% forecast in March.

Half of the NABE respondents expect the next recession will start sometime between the fourth quarter of 2018 and second quarter of 2020.

The NABE is not the only economic group to become slightly more bearish on growth prospects. The economic outlook from the American Institute of CPAs’ survey of corporate CEOs, CFOs, controllers and other CPAs in senior management accounting positions showed that 74% were optimistic about economic growth over the next 12 months, down from 79% in the previous survey. Trade policies and political uncertainty were cited as reasons for the slight change.

The Commerce Department recently downgraded U.S. GDP growth in the first quarter to 2.2% from 2.3% reported previously. Second-quarter growth is expected to be much stronger. The Conference Board projects 3.1% growth in the second quarter and the Federal Reserve Bank of Atlanta is forecasting a whopping 4.8% jump in its GDPNow report released last week, citing stronger consumer spending and improved business fixed investment.

“The biggest risk to the U.S. economy is overheating, and that’s now a major concern — despite uncertainty over trade policies, high consumer debt and the dreary economic climate in the U.S. farm belt,” writes Greg Valliere, chief global strategist for Horizon Investments, in his latest Capitol Notes.

— Check out Investors Look for Ways to Protect Savings From Volatility on ThinkAdvisor.


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