Jen​ée Tibshraeny talks to S&P's US Chief Economist about the US being strong enough to weather a trade war, but vulnerable to fiscal stimulus creating more inflation than productivity

The US may be facing a trade war with China and sky-rocketing government debt, but S&P Global Ratings’ US Chief Economist isn’t losing sleep over the state of the superpower’s economy.

Speaking to interest.co.nz in a Double Shot Interview, Beth Ann Bovino says the economy’s fundamentals are strong.

At 200,000, average monthly job gains are 50,000 to 75,000 above trend. Workers are receiving decent pay cheques and annual gross domestic product (GDP) growth is holding up at 3%.

“Top that off with a little bit of a tax cut from Uncle Sam - people are feeling pretty happy. And you’re seeing that in confidence readings and also at shopping malls,” Bovino says.

As for the fallout from the tariffs on goods imported from China and the Trump Administration’s protectionist policies more generally, Bovino says this is only showing through business confidence readings, not through actual performance.

“We’re starting to see businesses getting worried about what to expect. Should they invest? Should they plan for a stronger economy or slow back and shut their pocket books?”

Bovino says businesses have upped investment in anticipation of costs increasing as tariffs kick in; the US’s strong second quarter GDP growth being evidence of this.  

But the tariffs haven’t affected inflation.

Bovino recognises that for the businesses that choose to absorb higher input costs to keep their customers, they’ll be asking themselves how long the US’s trade spats will last for.

“If businesses think it’ll only last for a month or two months, they might want to eat it because they want to keep that public relations with their consumers still strong.”

Yet for the businesses that pass on the costs - that will push up inflation.

“I don’t think that’s going to make the Fed move in terms of raising rates faster. I think again, the Fed sees this as something that’s temporary and will pass through… in a few months. But that also remains to be seen.”

Overall, Bovino maintains the effect of the trade war will be absorbed by the US’s large and domestically-driven economy.

The tariffs will hit, but it’ll be a “small hit”.

Fears fiscal stimulus could cause the Fed to hike faster

As for the US’s high sovereign debt levels, Bovino is concerned by these.

Total public debt as a percentage of GDP is at 105% of GPD. Meanwhile at 77%, federal debt held by the public is at its highest level since shortly after World War II.

Bovino says that by 2020, the US’s fiscal deficit will breach US$1 trillion.

She points out the spending focus is on entitlements for retirees - Medicare and society security.

“Right now no policymaker wants to touch that. And that is one of the reasons why we see the large US Government debt growing so rapidly.”

Yet Bovino worries the fiscal stimulus from tax cuts and the Government’s budget will start to filter out of the system in 2019 and 2020, with GDP growth expected to slow to 2.5% next year.

“The Trump Administration had argued that this [fiscal stimulus] was going to have a productivity generating boost to growth going out many, many years. At S&P Global we’re a bit sceptical on that.

“Hopefully we’re wrong, but if it doesn’t have that productivity generating boost, but it creates more inflation instead, the Fed’s going to have to move even faster and that’s a worry for the expansion going forward.”

Bovino also recognises the Republicans might not get the support they need in the mid-terms to push through the fiscal stimulus they’re after.

“The pollsters say that the Senate will likely stay with Republicans and the House may flip to the Democrats. That means a gridlock Congress. The question of getting something through after that becomes even more difficult.

“I know the Trump Administration talked about getting a little bit more stimulus through another tax cut close to the 2020 elections. It seems if we do have a gridlock Congress it’s going to be even harder to push that through.”

Nonetheless, Bovino isn’t too perturbed by this scenario, which could technically shave some of the US’s economic growth, noting the private sector is strong and the US is used to having a Congress in gridlock.

A silver lining to the trade war for NZ

Coming back to the trade war situation, Bovino recognises the worry for New Zealand stems from China.

She maintains a slow-down in Chinese GDP could reduce Chinese demand for New Zealand goods.

But there are a few upsides for New Zealand, like the weak New Zealand dollar relative to the US dollar.

“The US strong dollar might make those lovely [New Zealand] Sauvignon Blancs even more attractive with the cheaper price tag.”

Furthermore, tariffs hitting US agriculture will make agricultural products from New Zealand more attractive to the Chinese. 

“You can always find the bright side and that might be one way of looking at it.”

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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7 Comments

A surprisingly upbeat commentary. Not what you hear from the media at all. Basically, most people in the US are reasonably happy and have a job. Who would have thought?

It's not really what you hear from Americans online either, generally. Jobs growth has for many meant the taking on of multiple "gigs" (e.g. Uber) just to try to make ends meet.

Three sides to every story, presumably.

You are right but the rise of this low-skilled service economy in some Western countries (NZ included) is a by-product of poor policy settings and years of underinvestment in education, skill development and infrastructure.

If Trump shuts down trade with China, American companies will begin producing their goods on the cheap elsewhere mainly due to the culture of corporatism and structural inefficiencies in the United States.

Yes, it seems the People Who Know Best have done a great job of putting the interests of the financiers and militarists first. Is that what they intended, I wonder, or were they just being useful idiots, as Stalin would say?

No one seems to mention what became of the venerable Takahashi Korekiyo, other than that he was Ben Bernanke's inspiration. 'Tis a sad tale.
https://en.wikipedia.org/wiki/Takahashi_Korekiyo

Interesting link, thanks!

To bend Tom Wolfe's quote (Back to Blood):

"Yo no creo en el [insert your fave MSM publication here]"

The shedding of blood is both symbolic and a very functional way to live. If you want to grow again, then bleed, learn and move forward. There is nothing worthwhile without the shedding of blood. It is a key part of the cycle of this life. OK, sure, nobody likes doing it, but that doesn't mean it's not necessary.
Just look at what we celebrate today. ANZAC is the ultimate day in this land. It is the only day that brings us together as a nation. April 25 is the day that this nation shed more blood than just about any other. Right?