All Posts Tagged: fiscal policy

U.S. Outlook: I hope you like whitewater rafting

Scott Anderson
Chief Economist

If you closely follow the economy and the markets, you’re going to feel like you’re on a late summer whitewater rafting ride in the weeks and months ahead. In other words, brace yourself for choppy water. At this point, I can’t see any waterfall plunge ahead. But with many twists and turns on our route, no one can see very clearly what’s around the next bend in the river.

Beware: Sharp Rocks Below

For the third quarter, U.S. economic growth remains respectable. We are forecasting 2.0% annualized real GDP growth, which is close to economists’ estimates of the U.S. economy’s current potential growth rate. However, beneath the surface, sharp rocks are lurking. The bulk of our GDP growth is coming from a U.S. consumer that continues to spend like we are on a lazy river instead of a pulse-pounding whitewater rafting ride where we may not come out okay on the other end.

U.S. economic growth over the near-term will also be supported by a significant injection of additional federal government spending over the next two years. More federal spending will bolster the GDP growth numbers, all else being equal, but it comes with significant downsides. The bad news: the Congressional Budget Office (CBO) expects the federal deficit next year will reach $1.0 trillion, a full two years earlier than the CBO forecast made in May.

In a Bind

This action from Congress, along with the Tax Cuts and Jobs Act of 2017, puts U.S. fiscal policy in a bind that is very similar to the one faced by the Federal Reserve. Should the U.S. economy in the quarters ahead enter a recession, a large-scale war, or a sharp jump in interest rates, the arithmetic quickly becomes untenable. We risk a future credit downgrade of U.S. government debt, a collapse in the U.S. dollar as a global reserve currency, and an economic and financial calamity. Over the long-term, this is economic and financial mismanagement at the highest level.

As a side note, the CBO’s depressing deficit and debt projections become far worse should a U.S. recession occur in 2020 or 2021. Annual deficits of $2.0 trillion over several years are a very real possibility.

The Limits of Stimulus 

Fed Chair Jerome Powell at a conference in Jackson Hole, Wyoming, pledged to focus monetary policy on sustaining the economic expansion. However, he also said that there are limits as to how much monetary policy can offset the headwinds coming from the trade war. We still expect two quarter-point rate cuts from the FOMC over the next two meetings in September and October and two more rate cuts in the first half of 2020. Even so, all this extra monetary stimulus may not be enough to reverse a sharp economic slowdown that appears just ahead of us.

For more, see my full U.S. Outlook, delivered on August 23.

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U.S. Outlook: Putting Fed tightening cycles under the microscope

Scott Anderson
Chief Economist
Exterior of the Federal Reserve in winter, with bare trees with loads of branches slightly obscure the building.

Investors are working overtime to divine not only the Federal Reserve’s next move, but how many more rate hikes we are likely to see in this cycle.

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Markets face action-packed holiday season

Wade Balliet
Posted by Wade Balliet
Investment Strategy
Snowy streets scene with British cottages, with a red telephone booth covered some snow.

There are many risks to contend with — besides the two dominating the most recent news headlines.

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Investment Insights: China’s new Silk Road and a European Union makeover

Wade Balliet
Posted by Wade Balliet
Investment Strategy
View from harbor of Shanghai

The trade relationship between the U.S. and its largest trading partner is being reshaped.

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Investment Insights: 2016 in the rear-view mirror

Wade Balliet
Posted by Wade Balliet
Investment Strategy
Closeup of "2016" written in sand, with an incoming ripple of water about to wash over it.

Major asset classes posted stellar results for investors in 2016, with the vast majority ending in positive territory.

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