Trade Skirmishes Make for a Restrained Federal Reserve in 2017

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Rajeev Dhawan of the Economic Forecasting Center at Georgia State University’s J. Mack Robinson College of Business questions the Federal Open Market Committee’s (FOMC) December dot chart in which the Federal Reserve calls for three rate hikes in 2017.

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Rajeev Dhawan of the Economic Forecasting Center at Georgia State University’s J. Mack Robinson College of Business questions the Federal Open Market Committee’s (FOMC) December dot chart in which the Federal Reserve calls for three rate hikes in 2017.

“Expect one rate increase this March before the trade ruckus breaks loose,” Dhawan wrote in his quarterly “Forecast of the Nation,” released today (Feb. 22). “The Fed will stand pat until the storm blows over. Then, they will resume their hikes. Growth numbers support this in 2018.”

President Donald Trump’s talks on trade are concerning to members of the Fed as well as to economists like Dhawan.

“President Trump has been sending a clear message to our trading partners, especially Mexico, China, and Germany, that running a trade surplus with us will cost you,” Dhawan said.

Trump’s tough talk on trade has contributed to the strengthening of the dollar which makes American goods more expensive and creates larger trade deficits with these countries. As a result, Dhawan expects the president to use his executive power to impose tariffs. The executive branch can impose tariffs for up to 150 days without congressional approval, and Dhawan expects the president to use this authority.

These actions also will have an impact on interest-rate-sensitive sectors.

“In a trade skirmish, other entities, especially foreign investors and Asian central banks, may decide to withhold buying treasuries,” Dhawan said. “As a result, interest-sensitive sectors such as housing starts and auto sales, as well as corporate investment, will experience subpar growth.”

Dhawan doesn’t see this lasting for long. He predicts that tariffs and trade restrictions will last for six months at most, with no serious reaction from China.

“We don’t have a substitute for Chinese-made products in the short run (or even the long run), and Mexico is extremely integrated into automakers’ supply chains,” said Dhawan. “Both sides will huff and puff but back off from a mutually injurious trade war.”

According to Dhawan, China is more concerned about keeping its factories running and people employed than hits from any potential short-term tariffs imposed by the U.S. A weakening Chinese yuan would make goods cheaper and keep Americans buying.

These trade skirmishes are expected to be over with by the end of the year, Dhawan said.

“The trade impediment not only gets reversed,” he said, “but also comes with a Christmas present for the general populace in the form of the long-delayed, promised personal income tax cut.”

This will boost overall GDP growth to 2.3 percent in 2018 and a better 2.5 percent in 2019.

Highlights from the Economic Forecasting Center’s National Report

  • Following GDP growth of 1.6 percent in 2016, the economy will expand at 2.2 percent in 2017, 2.3 percent in 2018 and 2.5 percent in 2019.
  • Business investment fell by 0.4 percent 2016. Expect positive growth of 3.8 percent in 2017, 4.3 percent in 2018 and 4.7 percent in 2019. Jobs will grow by a monthly rate of 157,000 in 2017, 150,000 in 2018 and 148,000 in 2019.
  • Housing starts will average 1.192 million units in 2017, rise to 1.222 in 2018 and 1.267 in 2019. Expect auto sales of 17 million units in 2017, 16.6 in 2018 and 16.3 in 2019.
  • The 10-year bond rate will rise to 2.9 percent in 2017, 3.4 percent in 2018 and 4.1 percent in 2019.

Small Business Growth Offsets Potential Trade Skirmish Losses in Georgia

As President Donald Trump talks tough on trade, any actions he takes with China and Mexico will directly affect the Georgia economy, according to Rajeev Dhawan of the Economic Forecasting Center at Georgia State University’s J. Mack Robinson College of Business.

“We expect President Trump’s trade skirmishes to bite into Georgia’s transportation, trade, manufacturing and hospitality sectors,” Dhawan wrote in his quarterly “Forecast of Georgia and Atlanta,” released today (Feb. 22). “Georgia’s large corporations with international ties will also feel the heat.”

However, other promised policies expected from the Trump administration will benefit small business growth, which will lift the state’s economy, Dhawan said.

“Going forward,” he said, “small business growth will remain buoyed in the wake of some of Trump’s administrative initiatives. This will trickle down and buoy employment growth in construction, financial activities and wholesale, into retail trade and hospitality sectors.”

The corporate sector was a strong source of job growth at the end of 2016, especially in the metro Atlanta area. However, Dhawan expects this job growth to moderate in 2017.

“Policies of the new Trump administration with regard to trade could have impacts,” he said. “A trade skirmish with Mexico (Georgia’s No. 2 trading partner) has already started. Germany (No. 5) is getting drawn into it, and China (No. 3) is next on the docket. Thus, globally connected large corporations in Atlanta, headquartered mostly in the Midtown to Sandy Springs quadrant, may not benefit as much as the small business sector, which draws exclusively on the domestic consumer market.”

Despite poor corporate news, the construction sector has benefitted from the building of new stadiums, hotels and office buildings in the metro area. This will begin to shift as major projects are completed in 2017. The hospitality sector will benefit from the completion of these hotels, but also will be negatively affected by the strengthening dollar from the president’s trade talks.

The manufacturing sector, which has the biggest impact outside the metro Atlanta area, also stands to suffer losses, Dhawan said. He cited three reasons for the decline in manufacturing jobs.

“First, overall investment was anemic,” he said. “Second, our strong dollar made U.S. goods relatively expensive and, third, demand is weaker due to the combination of a stalled Chinese economy and economic weakness in Europe. Going forward, trade skirmishes could have major impacts in Savannah, Gainesville, Dalton and Columbus.”

There is some good news on the local front. As home prices rose, government jobs increased with property tax collections.

Also, as Dhawan pointed out, “If the Trump administration comes through with its promise to ramp up infrastructure spending, it will boost job growth at state and local levels going forward.”

At this point, Dhawan expects the new president’s talk on trade to have a negative impact on major corporations in the metro area, but he expects small businesses to benefit from the domestic commitment from the Trump administration.

“Expect our small businesses to continue to do fairly well as consumers continue to demand their goods and services,” Dhawan said.

Highlights from the Economic Forecasting Center’s Report for Georgia and Atlanta

  • Georgia employment will gain 77,600 jobs (13,800 premium jobs) in calendar year 2017, 69,800 jobs (12,700 premium) in 2018 and 62,200 (11,900 premium) in 2019.
  • Nominal personal income will rise 4.7 percent in 2017, 5.4 percent in 2018 and 5.5 percent in 2019.
  • Atlanta will add 52,200 jobs (10,100 premium jobs) in calendar year 2017, 49,300 jobs (9,600 premium) in 2018 and 43,600 jobs (9,200 premium) in 2019.
  • Atlanta permitting activity in 2017 will decrease 5.4 percent, grow marginally by 0.4 percent in 2018 and increase 2.7 percent in 2019.

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Leah Seupersad
Georgia State University
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