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Yo-Yo Economy

December 8, 2018

Trying to forecast in an environment that resembles a yo-yo in terms of economic data and policy is becoming an extreme challenge. What are the fundamental drivers pushing the economic growth and sales? We are seeing that the traditional methodology of forecasting is becoming unreliable. Perhaps we should focus more on White House tweets, which appear to determine short-term economic factors whether they are true or not.

 

Interest rates were on the rise recently, suggesting that the Federal Reserve was inclined to slow down economic activity, then a few tweets later the Fed indicated that no more increases were in the pipeline for the moment. Tariff discussions between Presidents Trump and Xi of China suggested a temporary agreement had been reached, according to White House tweets, but this was not supported by China’s silence on the matter. Were both at the same meeting? The stock market initially rose on news of the agreement, then tanked after Trump tweeted “I am a tariff man” the next day.

 

U.S. industrial production remains high, at levels last seen in late 2014 and previously in late 2007. The Purchasing Manager’s Index from IHS/Markit was down marginally in October but new orders rose the most since May and job creation was also stronger. On the other hand, business confidence was the lowest since September 2017.

 

Expect fourth-quarter gross domestic product to be strong thanks to the pre-tariff rush of imports, which contribute around two-thirds to GDP. The consumer has helped the economy, with retail purchases well up. Yet there are warning signs. Externally, Chinese production and exports are declining and domestically, short-term bonds have seen higher yields than long-term bonds. Historically that phenomenon has been a leading indicator of slowdowns in the economy. The only reliable thing is that the stock market is a totally unreliable indicator of the economy.

 

Our models remain in line. When taking into account economic activity overseas that impacts the United States, we see a significant slowdown in import growth in 2019 as the market adjusts to higher prices due to the Trump tariffs and the impact on consumer and industry confidence going forward. We project that imports at our monitored ports will have grown significantly in 2018, but that there will be no import growth in the first half of 2019 compared with the same period of 2018.

 

In the meantime, carriers continue to put the squeeze on their capacity, causing freight rates to remain high on the Transpacific inbound trade route. For a change, they have not yet resorted to market-share strategies.

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