The August Market Outlook: The economy is looking pretty good! Consumer spending is picking up and is likely to remain on a run. Inflation is moderate, in line with what we’d expect. And inventories are really beginning to “come off” as the trade deficit starts to narrow and economic growth picks up. So, all is well – or is it?
Not really. Right now, the trade deficit is dragging on its way, much more so than normal. That means we’re not getting the economies of scale from the increase in exports that we need. Which is really hurting us in our trade deficit.
Why Is This Happening? The answer is simple: inflation is low, but wages aren’t. This means consumers are paying less to businesses for products they can get cheaper elsewhere at a lower cost. Businesses are forced to pass the savings on, via higher pricing. Which, of course, means there’s no chance of the economy growing much at all this year.
What Can We Do About It? There are a number of things. One is a detailed study by the economists at the University of Chicago’s economics department. It suggests that the time until we start running out of resources to buy with a trade deficit of 4 percent above the baseline (which it did in the third quarter of this year) is sooner than many of us think. They further suggest that the sooner we begin to fix the trade deficit, the faster we can regain our footing economically.
So, what’s the remedy? The problem is obvious: we have to stop relying on exports and buy American. Yes, that’s the logical thing to do. But if we want to restore our economic health, it’s not enough to rely on American goods and services. That’s not the way to get there.
It might be more useful, economically, to start looking first at our own economy. Which means using the August report as a guide. If there’s an indication of consumer spending cuts and job losses in the manufacturing sector, for instance, that should be a red flag for us. If the report finds no increase in manufacturing, that should be a signal too. We can’t depend on other countries to help us if we’re cutting back on our own demand.
So, we need a plan. We need to take a good look at all the indicators and business data currently available. That means doing your homework and comparing what you find to the assumptions of the data is based on. You’ll then have a better idea of where to start and where to stop if you want to bring the economy back to life.
In short, let’s not get ahead of ourselves. The market is still recovering, but we need to tread carefully. And we can’t lose sight of how important our relationship with the rest of the world is. Our experts are an important part of our economic security, but we also rely on trade with the nations around us. When we step away from the table, we weaken our ability to protect our own economic interests and our own economic standing.
When I was preparing this article, I did some consulting with people in the business community and met many individuals whose livelihoods are tied to the health of the American economy. They were quite concerned about what the slowdown might mean for their own businesses and the broader economy. One individual told me that he was worried about the impact on the currency – he said he was working with several clients who import a lot of goods into the U.S., particularly products made in South Korea and Vietnam. Those products are high-priced and often sold in hard currency – he noted that if the trade deficit becomes a problem, the dollar will lose ground against the currencies of those countries, which could hurt not just their own businesses, but the United States itself.
That makes sense, and yet, if we’ve been less than forthcoming in sharing data on trade and unemployment trends, it wouldn’t be surprising. This is a national security issue and we don’t want to play politics. But the concern is valid. In fact, the United States can become economically worse off as a result of our trading deficit. Is that the kind of America we want to live in?
So the question is do the economic indicators we see in the August Market Outlook suggest that there might be trouble ahead for the American economy? There’s no question that economic data support the view that things look difficult right now. However, if the economy were to pick up steam over the next couple of quarters (and that’s significant enough to measure), we could end up with an ideal rate of economic growth, more employment, and better consumer confidence – all of which could have far-reaching implications for the U.S. and the rest of the world. Please consider all this.
