Showing posts with label tariffs. Show all posts
Showing posts with label tariffs. Show all posts

Sunday, February 22, 2026

Trump Gets a Lesson in Constitutional Law

" All I can offer them is that most major decisions affecting the rights and responsibilities of the American people (including the duty to pay taxes and tariffs) are funneled through the legislative process for a reason. Yes, legislating can be hard and take time. And, yes, it can be tempting to bypass Congress when some pressing problem arises. But the deliberative nature of the legislative process was the whole point of its design."

        Justice Neil Gorsuch concurring in Learning Centers v. Trump


President Trump is learning the same way that President Harry Truman learned over 70 years ago that the power of the presidency is not unlimited. In Youngstown Sheet and Tube v. Sawyer (1952) the Supreme Court found that President Truman could not seize the steel mills under the exigency of the Korean War without the express approval of congress. Similarly the court ruled that Trump does not have the power to impose tariffs under the International Emergency Economic Powers Act (IEEPA) without the express approval of Congress. To be sure Trump has other tariff statutes available to him that are authorized by Congress and he is using them as we speak.

What all this means is that tariff are here to stay, but much of the recent arbitrariness of the process will be removed. There will of course be a series of court fights about how the refund process will work for those who paid the illegal tariffs. My guess is that will take time given the number of claimants and the huge dollar amount in excess of $100 billion.

Nevertheless, the bottom line is that for the first time the Supreme Court placed a real check on Trump's growing dictatorial powers. The next check will likely come when the court decides that he can't arbitrarily remove members of the Federal Reserve Board. Thus in a modest measure the framers of our constitution are being vindicated.

Monday, September 1, 2025

Donald Trump (National Socialist*)

President Donald Trump is nominally a Republican, but in reality, he is putting us on the road to an American version of the national socialism of the 1930’s. Domestically he is attempting to seize the commanding heights of the economy by taking ownership positions in Intel and U.S. Steel and by taking a 15% cut from NVIDIA’s sales to China. ( https://shulmaven.blogspot.com/2025/07/on-road-to-serfdom.html ) Remember that under national socialism businesses remain under private ownership but are under the control of the government. This is a far cry from capitalism. 

 

Further Trump is challenging the independence of the Federal Reserve by demanding the removal of Lisa Cook from the board for allegedly committing mortgage fraud. How did this come about? His minion Bill Pulte, the director of the Federal Housing Finance Agency, pulled the mortgage of files of Lisa Cook as well as the files from such Trump adversaries as New York Attorney General Letitia James and Senator Adam Schiff. Let us be clear, this was no accident and soon the IRS and other federal agencies will get into the act.

 

To enhance his powers domestically Trump has appointed his cronies in the Justice Department, the F.B.I., the regulatory agencies and on the courts. Indeed, one of his private attorneys, Todd Blanche is now a deputy attorney general, and another, Eric Bove, was just confirmed to the Court of Appeals. Perhaps more serious is that he has purged a host of officers in the military and the CIA who might be more loyal to the constitution than to him. A defining feature of national socialism is loyalty to the leader, not to the law.

 

In keeping with his national socialist tendencies Trump is in the process of establishing a 150,000-member national police force in the form of Immigration and Customs Enforcement (ICE) officers. These officers could at the stoke of a pen be empowered to engage in broader law enforcement activity and unlike the military they would not be subject to the strictures of the Posse Comitatus Act of 1878. Indeed, Trump seems to be using the military in violation of that act anyway. Meantime many U.S. citizens have been caught up in the roundup of illegal immigrants.

 

Internationally Trump through his tariff policies is attempting to turn the open economy of the United States into more of an autarky where domestic production would be sheltered from international competition. In imposing his tariff regime Trump ignored Congress which has near exclusive power over tariffs and taxation. Trump has now lost twice the courts on his tariffs; and it will soon be up to the Supreme Court to rule on them. Further Trump has imposed punitive tariffs on our allies all while cozying up to dictators Putin and Xi. This all part of the national socialist playbook. It might be stretch, but could there be a Trump, Putin, Xi axis?

 

All the while the moral eunuchs of the Republican Party have either cheered Trump on or silently acquiesced. ( See from 2019:  https://shulmaven.blogspot.com/2019/02/the-republican-moral-eunuchs-and.html ) Similarly, fearful of retaliation, the business community has remained silent and bowed to his wishes. Thus, in eight short months Trump has seized control of a good part of the economy and the security apparatus of the state.

 

To be sure this not the first time the U.S. experimented with national socialism in peacetime. In 1933 President Roosevelt used the National Industrial Recovery Act (NIRA) and the Reconstruction Finance Corporation (RFC) to take control of a good part of the economy. Fortunately, the NIRA was declared unconstitutional in 1935 and the RFC withered away. Let us hope the Supreme Court does the same thing to Trump’s tariffs.

 

Later in 1971 President Nixon imposed a system of price, wage, rent and dividend controls on the entire economy. Nixon also used the IRS against his enemies and spied on his political opponents. The Nixon controls expired in early 1973 and he was impeached in 1974. Say what you will about Nixon; he respected the process. I doubt that can be said of Trump. In 2009 President Obama temporarily took control of the banking and automobile industries.

 

To conclude Trump is in the process of creating an American version of national socialism. I am not going to use the polite words of state capitalism or American Capitalism with Chinese Characteristics. Forewarned is forearmed!

 

*- The reference to national socialism is derived from Germany’s Nazi Party. The official name of the Nazi Party was Nationalsozialistische Deutsche Arbeiterpartei  or NSDAP which in English is the National Socialist German Workers Party. The Italian version of national socialism was called Partito Nazionale Fascista, PNF which in English is the National Fascist Party.

Monday, August 11, 2025

The Wall Street Journal Follows Shulmaven on Socializing the Economy

 Today's Wall Street Journal brought with it an important article by economics columnist Greg Ip entitled "U.S. Marches Towards State Capitalism...." (See: https://www.wsj.com/economy/the-u-s-marches-toward-state-capitalism-with-american-characteristics-f75cafa8?mod=hp_lead_pos5 , paywall) In the article Ip outlines how the U.S. is moving towards state capitalism with Trump's demands for a share of NVIDIA's chip exports to China, the golden share in the U.S. Steel takeover and Biden's industrial policy. In my words, socialism with American characteristics. 

Aside from the over-night news about chip exports, Shulmaven made the same case on July 27th where we added tariffs and Biden's DEI policies. ( https://shulmaven.blogspot.com/2025/07/on-road-to-serfdom.html )Whether we call it state capitalism, socialism or fascism, the result is the same. We are entering a world of state controlled economic activity which in the words of Hayek will put us on "the road to serfdom."

Saturday, August 2, 2025

The Guns of August*

One hundred and eleven years ago the guns of August opened fire signaling the start of World War I. Although far from being deadly, the July employment report reeked carnage on the stock market with the S&P 500 declining by 1.6% on Friday while the bond market sustained a massive rally with the 2-year note yields declining by 27 basis points and 10-year yields declining by 14 basis points. The markets are clearly sniffing out a recession.

 

Nonfarm payrolls increased by a meagre 73,000 jobs, but what really spooked the markets was a gigantic downward revision of 258,000 jobs for May and June. Further, all of the gain can be accounted for by healthcare and social services, hardly growth drivers. The three-month average for employment gains of 35,000 jobs is indicative of a stalled labor market. The far more volatile household survey was much worse with the average monthly decline from May to July of 287,000 jobs. My guess is that the administration’s immigration raids are now taking their toll on the job market. The labor market is experiencing simultaneous demand and supply shocks.

 

In March I called for the recession of 2025 to begin in the second quarter. (See: https://shulmaven.blogspot.com/2025/03/the-recession-of-2025.html ) That obviously didn’t pan out, but with real final domestic demand growing at only 1.2% in the second quarter and the job market stalling out, it was pretty close to a recession.

 

The day before the employment data came out, President Trump announced a panoply of tariffs on a host of countries that have failed to make a deal with him. Those tariffs and the earlier ones announced for the E.U. and Japan means that the U.S average tariff rate is now about 19%, eight times above where we started the year. Simply put, Trump called the market’s bluff on the TACO trade an eventuality we noted in June. (See: https://shulmaven.blogspot.com/2025/06/stocks-too-complacent-about-taco-trade.html )

 

As a result, with Trump’s tariffs now baked into the cake and with a stalled job market, the U.S. economy is on course for stagflation. The tariffs will keep inflation as measured by the core price indices above 3% and that will put the Fed between a rock and a hard place, especially because the unemployment rate will remain well contained, at least for now.

 

Adding insult to injury President Trump fired BLS Commissioner Erika McEntarfer because he didn’t like the revisions to the employment data. His big, beautiful economy is not as beautiful as he thought. This banana republic move will lower the market’s confidence in future data coming out for the government’s data mills, not a good thing.

 

Lastly, I have been skeptical of the stock market’s big rally off the April lows. (See: https://shulmaven.blogspot.com/2025/06/my-ucla-anderson-forecast-presentation.html ) My sense is that this skepticism will soon be justified.


*- With apologies to Barbara Tuchman

Sunday, July 27, 2025

On the Road to Serfdom*

 Although few people realize it, the Trump/Biden years will be remembered when the United States took a giant step on the road to serfdom by socializing the economy. The Republicans of yore held up the virtues of the free market; under Trump that is no longer the case. For generations the Democrats have never been comfortable with the workings of the market, but they conceded its ability to generate wealth and to create a mass prosperity. However, today there are growing voices in the Democratic Party to socialize much of the economy.

Under Biden the country embarked on an industrial policy whose goals were to penalize the production of fossil fuels and subsidize clean energy (solar and wind), subsidize computer chip making, and further increase the government's involvement in healthcare, just to name a few. Biden also left the initial Trump tariffs in place. You can't look to the Democrats to support free trade. Further, Biden attempted to micromanage the economy by putting DEI into every nook and cranny of employment law.

Compared to Trump's second term, Biden's industrial policies were chump change. Trump is in the process of jacking up tariffs from 3% to close to 20%, extorted $550 billion from Japan to fund a sovereign wealth fund, made an investment in rare earth producer MP Materials (See: https://shulmaven.blogspot.com/2025/07/the-pentagon-makes-play-for-rare-earths.html), and with a "golden share" gave the president control of U.S. Steel. To me the sovereign wealth fund brings up memories of the corrupt Reconstruction Finance Corporation of 1932-1953, a path to corruption if there ever was one. Although American universities are need of significant reform, Trump's attempt to micromanage them goes far beyond what is necessary.

My sense is that under Trump we are on the road to something that will look a lot like Mussolini fascism where the private sector carries out the will of the state. For those comfortable with Trump, I would warn them what goes around comes around. When the Democrats return to power the economy could soon be turned into a 21st century version of British Labor Party socialism of the late 1940's with the added kicker of having DEI on steroids. Either way, it is not a pretty picture. 

*-With apologies to Friedrich von Hayek

Sunday, June 22, 2025

Trump Crosses the Rubicon

In 49 BCE Julius Caesar crossed the Rubicon in northern Italy thereby declaring war on the Roman Senate. The phrase has since come to mean “passing the point of no return.” President Trump with his B-2 bomber strike on three Iranian nuclear facilities has gone where no president has gone before, including Bush II, Obama, Trump I, and Biden. As a result of this action the middle east has been irrevocably changed, hopefully for the better.

 

It remains to be seen how successful the bombing mission was and to what degree Iran will retaliate. It will take time to do a bomb damage assessment, but the early indications are that the damage was substantial. The key question will be how hard the underground Fordow site was hit. (See: https://shulmaven.blogspot.com/2025/06/israel-and-iran-fog-of-war.html )

 

The bombing raid was coordinated with Israeli strikes earlier in the week that took out Iranian air defenses in southern Iran. With the Iranian nuclear threat presumably removed, Israel prime minister Netanyahu will now have a freer hand to make peace in Gaza. He now may be strong enough to deal with the hard right members of his cabinet.

 

When Julius Caesar crossed the Rubicon, he reportedly said “the die is cast.”  The dice are now rolling in the middle east which means the middle east will look quite a bit different than the way it looked two days ago.

 

One last point, Wall Street’s “TACO trade” (Trump always chickens out on tariffs”) may no longer be valid.  (See:
https://shulmaven.blogspot.com/2025/06/my-ucla-anderson-forecast-presentation.html )   If anything, Trump proved that he is not a chicken.     

Sunday, June 1, 2025

Stocks too Complacent About the TACO Trade

 Last week brought with it the International Trade Court opinion declaring Trump’s use of the Emergency Economic Powers Act declaring his reciprocal tariffs on all of America’s trading partners to be illegal, the arrival of the new acronym TACO and a breakdown in trade talks with China. Coined by Financial Times columnist Robert Armstrong, TACO stands for “Trump Always Chickens Out.” That was brought home by Trump’s sudden pullback from his 50% tariff on the EU. (See: https://shulmaven.blogspot.com/2025/05/debt-tariffs-and-stocks.html ) When Trump was asked about it at a White House event he reacted very defensively because the one thing a bully can’t stand is being called “chicken.”


While the trade court ruling is being appealed, the Trump team said it would use all of the other powers available to him, of which there are many, to maintain his high tariff wall. On Friday he acted by doubling the tariffs on steel and aluminum from 25% to 50%. That will work as a dagger in the heart of America’s steel and aluminum using industries, namely automobile, aircraft, and machinery. This certainly won’t help Boeing, America’s leading exporter, on its road to recovery. 

The steel and aluminum tariffs will further estrange Canada from the U.S. where its direct exports will be clobbered, and it will make Canadian manufactured autos and parts even more expensive. If Canada weren’t heading for a recession before, it is now.

 

My guess is that in the long run the TACO trade maybe right, but in the short run, Trump will keep tariffs much higher than the 10% the market now expects. Thus, when the 90 day pause on high tariffs rolls around on July 2nd, a whole new round of high tariffs will be put in place. Just when investors thought it was safe to go back in the water, a dangerous riptide will be pulling away from the shore

Sunday, May 25, 2025

Debt, Tariffs and Stocks

On Friday Donald “The Tariff Man” Trump struck again with his new 50% tariff on EU products scheduled to take effect on June 2nd and a new 25% tariff on I-Phones.* (See: https://shulmaven.blogspot.com/2025/02/the-tariffman-strikes.html ) Earlier the House of Representatives passed its budget reconciliation bill that called for continuing the 2017 tax cuts plus further tax cuts along with spending cuts that would increase the national debt by about $3 trillion over the next ten years with the higher deficits front-loaded into the earlier years.

 

However, not counted in the budget calculations is the revenue coming from the tariffs. The current run rate is $250 billion/year, and a 10% universal tariff would yield in excess of $300 billion/year, which would totally offset the cumulative deficit of the reconciliation bill. Essentially Trump will be using tariffs to offset his tax cuts. Because there is little new stimulus in the tax bill and the drag from the tariffs is new, the economy will stall out. (See: https://shulmaven.blogspot.com/2025/03/the-recession-of-2025.html )

 

Nevertheless, the bond market evidenced its unhappiness by sending the yield on 30-year U.S Treasuries over 5% for the first time since 2007. The bond bear market is in full force. ( See: https://shulmaven.blogspot.com/2025/01/we-are-in-early-stages-of-bond-bear.html )                                                                                     Reflecting a run on U.S. assets, the dollar index declined 3% from just two weeks before and it stands 1% above its April low and down 11% from its January high.

 

Until last week stocks were enjoying a powerful 20% rally off the April lows. Even after last week’s decline, the S&P 500 was trading 22.3X the $260 earnings estimated for this year. That equates to an earnings yield of 4.48%, equal to the 4.51% yield on 10-year treasuries. Put simply, the equity risk premium has vanished.

 

A narrow equity premium might be justified if the economy were about to experience a growth spurt. On the contrary, we are now in the beginning of a stagflation era. Growth will be slow, and inflation will be higher than what we have been used to. (See: https://shulmaven.blogspot.com/2025/04/regime-change-end-of-economy-as-we-have.html ) Thus, if anything, we will soon be entering and era of high rather than low equity premiums and the S&P 500 will plumb new lows before the year it out. 


*- Subsequent to this post Trump announced the deadline for the new 50% tariff on EU products was postponed to July 9th.  I guess someone in the White House read this blog. HaHaHa

Sunday, May 4, 2025

A Stock Market in Denial

Investors in the U.S. stock market are living in a state of denial. To be sure, the S&P 500 advanced nine days in row for the first time since 2004, and it has bounced 14% off the early April low, investors are wishing away the trade tsunami that is about to hit the economy. As I write this, the west coast ports are shutting down, bringing with it layoffs among dock workers and truckers. That malaise will soon spread eastward. 


Consumer confidence remains in the toilet. Thus, it is no surprise that year-over-year same store sales for McDonald’s, Chipotle, and Starbucks are down. Indeed, domestic airline travel is down, and foreign tourists are staying away from America in droves. On the business side, save for the Magnificent 7, capital spending plans are plummeting. Although the recent employment report for April was better than what I would have expected, my guess is that it will turn out to be the last good report we will see for quite some time. As a result, my March forecast calling for a recession starting in the current quarter still stands. (See: https://shulmaven.blogspot.com/2025/03/the-recession-of-2025.html


Investors remain in denial that the postwar global architecture of the past 80 years is in ruins. (See: https://shulmaven.blogspot.com/2025/04/regime-change-end-of-economy-as-we-have.html ) To me this means that all of the old rules of thumb concerning the economy and the stock market are no longer valid. Simply put, we are entering a new world with unknown economic and geopolitical   consequences. In a nutshell, the world has become a much riskier place.


For those who believe that the U.S. will win the trade war with China, I have a few words of caution. According to the “Sinocism” newsletter, the domestic Chinese media are portraying the trade war as a “protracted war.” The members of the Chinese Communist Party know full well that the term “protracted war” harks back to Chairman Mao’s 1938 pamphlet calling for protracted guerilla warfare against the Japanese aggressors. That war lasted for seven years. Further, Thucydides taught us 2500 years ago that nations go to war for “honor, fear, and interest.” To China the trade war with the United States is a matter of honor.


The bottom line is that soon the denial phase of the current bear market will soon turn to anger as investors realize that the Trump tariff policy will bring with it higher prices and reduced output yielding a stagflationary recession. When that realization crystalizes, the S&P 500 will breach the April low before too long.


Sunday, April 13, 2025

Regime Change: The End of the Economy as we have Known it

 “There are decades where nothing happens: and there are weeks where decades happen.”

                       Attributed to V. I. Lenin


In the short span of twelve weeks, Donald Trump has undone the Bretton Woods monetary order established in 1944, the GATT free trade order of 1947, and the NATO collective security order of 1949. (See: https://shulmaven.blogspot.com/2018/02/my-amazon-review-of-benn-steils-marshal.html) As a result the world is now facing a simultaneous geopolitical and economic crisis and it is no surprise,  that stocks and especially treasury bonds and the dollar have sold off. (See: https://shulmaven.blogspot.com/2025/04/a-broken-stock-market-and-broken-trust.html) Simply put, the old world order is gone, an there is nothing, as of yet, to replace it. The transition will be painful.


Those who expect that the Trump tariffs are negotiating tactic will be sorely disappointed. Trump needs the revenue to finance his tax cuts, and the Democrats only differ with Trump as to the way his policy has been conducted. They still hope to reclaim their union support by being pro-tariff and they too need the revenue to finance an ever-larger welfare state. The era of free trade, as we have known it, is over.


Three years ago, I wrote that the United States was about to enter a new 13-year economic cycle. I noted:

“My guess is that we are at the very beginning of new thirteen-year cycle with unknown consequences. I would speculate that the next thirteen years will bring with it a much higher rate of inflation than we have been used to, a multi-year bond bear market and a partial deglobalization of the economy caused by local politics, supply chain issues and geopolitical tensions. To me the big question is whether this cycle will bring with it a stagflation or a high cap-ex/high inflation economy with a cap-ex boom coming from the in-shoring production and energy transition. As they say, time will tell.” ( See: https://shulmaven.blogspot.com/2022/05/the-useconomy-is-entering-new-thirteen.html)  


Although it has taken a bit longer to play out, we are now in the midst of it and perhaps something much more. We are likely entering an eighty-year super cycle in what Neil Howe has called a “fourth turning” which will involve economics, politics, values, and the way we relate to each other in society. (See: https://shulmaven.blogspot.com/2023/09/my-review-of-neil-howes-fourth-turning.html)  This is far bigger than my 13-year cycle in that it encompasses six 13-year cycles that began in, not coincidentally 1945.


If this is close to correct, then we are now entering unchartered waters. The stock market and economic histories that we have been used to over the past 80 years may no longer be relevant in understanding the future. Instead of ever rising share prices we may now be in an era where stocks go sideways for an extended period of time. I would note that between 1924-1949 the Dow Jones Industrial Average traded in a range of between 100-200 with the significant upside exception of 1928-30 and the significant downside exception of 1931-1933. For example, in 1927 the high in the Dow was 201 and which was nearly identical to that recorded in 1949 and the 1929 high was not exceeded until 1954. The equivalent going forward would be for the S&P 500 to trade in a broad 3500-6500 trading range over the next several years.


The recent action of the bond, currency and stock market is indicative of a sea change in the markets. Instead of rallying in a time of turmoil both the treasury bonds and the U.S. Dollar have sold off. Indeed, the dollar has declined 9% since the end of February. Simply put foreigners are losing trust in the U.S. Dollar and with 18% of U.S. stocks held by foreigners the selling is only now beginning. I would say the same thing for foreign holdings of U.S. real estate.


Over the weekend the Trump Administration announced that it would reduce the Chinese tariff of 145% to 20% on smart phones, computers, and other electronic products. That action has lifted the Sword of Damocles hanging over Apple. This suggests a major relief rally for Apple and the stock market as a whole, but what multiple can you put on company and the stock market as whole whose share prices are subject to the whim of one very unstable man? I would sell the rally.  




Wednesday, April 9, 2025

Bond Market Carnage Bombs Trump Back to the Table

With the yield on the 10-year Treasury bond skyrocketing from 3.9% last week to 4.4% today, the Trump Administration called for a 90 day pause on the extortionate tariffs  announced last week.  Going forward there will be a minimum tariff of 10%, except for China(125%), steel, aluminum, and automobiles. The tariffs announced last week are now a ceiling and 10% is now a floor. In response the S&P 500, as of this writing (2:43 EDT) soared 8%. I would remind readers that the best single days in the stock market occur in bear markets. 

My guess is that the downturn will resume in a few days as investors realize the huge uncertainty associated with negotiating tariffs with 80 countries over the next 90 days will have a deleterious effect business and consumer investment. As a result my call for a recession starting this quarter still stands.( See: https://shulmaven.blogspot.com/2025/03/the-recession-of-2025.html ) My view is reinforced by the fact that the  backup in interest rates will drive another stake in the already weak housing market. A 7% interest rate on a 30-year fixed rate mortgage is a killer.

Lastly something very negative is going on in the bond market. Whether it is trillion dollar basis trades going south or selling by international holders losing trust in the United States, the fact remains a 4.4% 10-year Treasury bond in a weak economy signals something is very wrong. (See: https://shulmaven.blogspot.com/2025/04/a-broken-stock-market-and-broken-trust.html)

Sunday, April 6, 2025

A Broken Stock Market and Broken Trust

 The headline read:

“Selling Swamps Exchange

Leading Issues Tumble

As Wall Street Assails

The New Tariff”

This is not from yesterday; it is from the front page of The New York Times dated June 17, 1930. The day before President Hoover announced he would sign the Smoot-Hawley Tariff Bill and stocks responded with an 8% decline in the Dow Jones Industrial Average. Responding to President Trump’s tariff announcement the S&P 500 declined by 9% last week, wiping out $6 trillion in market value. Simply put, just as in 1930, high tariffs are poison for the global economy. And to add insult to injury, the Trump tariffs are higher than Smoot Hawley.

My sense is that the decline in stock prices is not over. In the week leading up the October 19th,1987 20+% crash in stock prices, the S&P 500 witnessed a similar 9% decline. As we wrote last month, we believe that the recession of 2025 has now begun. ( See: https://shulmaven.blogspot.com/2025/03/the-recession-of-2025.html) In response to the tariff announcement and the wealth destruction that it caused, consumption and investment are freezing up and as a result of the DOGE cuts, government spending is heading lower. The recession is baked in the cake.

Adding to the unease is that in less than three months the Trump Administration has broken the trust in America with respect to our military alliances and our reliability as a trading partner. What has taken decades to build up has been destroyed in a few months. Further, even if Trump tries to repair the damage, his administration is staffed by D and F players who are incapable of playing on the global stage. Commerce Secretary Howard Lutnick, trade advisor Peter Navarro and Economic Council Director Kevin Hastett hardly inspire confidence. 


Although Scott Bessent is potentially a B or an A player, he was, according to Bloomberg News, not in the room when the tariff schedule was decided upon. Indeed, Secretary of State Marco Rubio has proved himself to be so much of a Trump sycophant that would be incapable of healing the breach with our allies and Secretary of Defense Pete Hegseth is clueless.

This is a far cry from the team Nixon had when he broke the dollar’s link to gold and devalued it. Nixon had Secretary of State William Rogers and Secretary of the Treasury John Connally, neither of whom were A players. In the background, however, were National Security Advisor Henry Kissinger and Under Secretary for Monetary Affairs Paul Volcker. ( See: https://shulmaven.blogspot.com/2021/07/my-amazon-review-of-jeffrey-gartens.html) During the 1987 stock market crash Ronald Reagan was guided by the expert advice of George Schultz and James Baker, both consummate A players. Thirty years later George W. Bush had the steadying hand of Secretary of the Treasury Hank Paulson during the financial crisis of 2008 and Obama benefitted from the advice of Tim Geithner his treasury secretary.

As a result. It is hard to see how we are going to get out of this mess with minimum damage. The easier way would be for Trump to take that advice of former Goldman Sachs CEO Lloyd Blankfein. He tweeted the other day:

Lloyd Blankfein

@lloydblankfein

“The switchboard at the WH must be burning up with gov’ts trying to surrender in this trade war. Why not give them a chance? Make the 10pct min tariff immediate but defer the “reciprocal” part 6 mos. Take the win! The Prez said he’d make us tired of winning…I’m there “

That would certainly give the markets some breathing space. The much harder way is for the Republicans in Congress to become so fearful of the midterm elections that they break with him on the tariff issue. To get there will require a lot of carnage in the markets. Similarly, a court action to declare Trump’s actions illegal will take time.


Finally, we have to remember that the Trump Administration needs the revenue from the tariffs to fund its tax cuts and to protect American industry.  A 10% tariff would raise $300 billion/year and a 20% tariff $600 billion/year. Tariffs aren’t going away. So, my guess is that when the markets open tomorrow, it won’t be pretty.


Saturday, March 29, 2025

The Week the Wheels Started Falling Off the Trump Train

 Last week the wheels started falling off the Trump train. We learned from Atlantic editor Jeffrey Goldberg, who some how was patched into a national security call on the messaging Ap Signal where he listened into a haphazard discussion on the imminent attack on Houthi bases in Yemen. To have such a discussion on Signal was a clear breach of national security by the principals involved who included National Security Advisor Michael Waltz, Vice President J.D. Vance, and Secretary of Defense Pete Hegseth. To add insult to injury, the principals lied about their conversation, only to be shown up by Goldberg, who published a transcript of the call. 


Also on the call was Trump’s envoy to Ukraine and the Middle East, Steve Witkoff. Real estate lawyer Witkoff committed the cardinal sin by listening in on the call from Moscow, where every normal diplomat knows everything is bugged by the FSB. Witkoff is a complete amateur in diplomacy, and he is so far in over his head. Further, Putin and is Minister of Foreign Affairs Sergey Lavrov have been run rings around experienced American diplomats over the past two decades. Simply put, Witkoff is being taken to the cleaners. 


This affair, now called Signalgate, will have a lasting effect on the Trump Administration. If any the American people don’t forgive, it is incompetence. Joe Biden learned this the hard way with his chaotic withdrawal from Afghanistan.


Later in the week Trump announced 25% tariffs on imported automobiles and trucks with its obvious inflationary consequences. In my largely Latino gym, the leading topic of conversation were the auto tariffs, and their imposition is obviously feeding into inflationary psychology.


The week closed out with new data on the deflator for personal consumption expenditures, which for core goods and services in February came in at a higher than expected 0.4%. Inflation has not gone away, and my guess is that market hopes for rate cuts later this year will be quashed. Not surprisingly, consumer confidence in March plummeted to a three year low. 


Further unnerving the public’s mood was Trump’s attacks on Big Law. Two big law firms (Paul Weiss and Skadden Arps) caved into his threats of pulling security clearances and access to Federal buildings. Apparently, they were guilty of supporting anti-Trump efforts. Fortunately, three firms (Perkins Coie, WilmerHale and Jenner Block) successfully filed suit to halt his efforts at intimidation. I am sure that this did not go unnoticed by Chief Justice John Roberts, a veteran of Big Law firm Hogan and Hartson. This will not augur well for the administration when their appeals hit the Supreme Court.


The already weak stock market took notice of these events and declined 1.5% on week and it is now down 5% on the year. Remember Tariff Day is set for next week on Wednesday April 2nd. To close I would note that the day before Herbert Hoover signed the Smoot-Hawley Tariff Act of 1930, the Dow Jones Industrial Average declined by 8%.


Friday, March 21, 2025

Powell Gives Trump Tariffs the Benefit of the Doubt

 The stock market initially interpreted the Fed's actions this week as dovish in that despite the prospect of tariffs on April 2, the Open Market Committee maintained its guidance for two rate cuts later this year. Although Fed Chair Powell couldn't say it, what is going on is that he is giving the Trump's tariff policy the benefit of the doubt by calling the inflationary impact "transitory." 

What we witnessed is Powell at his political best. In effect he is saying the Fed will wait and see how the tariffs play out. If instead, he were more hostile to the tariffs, Trump would have come down hard on the Fed triggering a political fight Powell does not want. This way the Fed will wait to see how inflationary the tariffs will be and if they turn out to be malign the Fed will have the political ability to react to them.

Thus, in my opinion, the stock market's enthusiasm for the Fed's move is misplaced.

Wednesday, March 12, 2025

The Recession of 2025

This coming December the Business Cycle Dating Committee of the National Bureau of Economic Research will find that a recession began in the second quarter. Although there are clear signs that the economy is weakening, most observers believe that we are in a temporary growth slowdown. Moreover, you can’t see a recession in the most recent economic data. Therein lies the point I am trying to make. When a recession is in the data, it is too late to make a credible forecast, because the whole world would already know it. The task of a forecaster is to make a call when the data is ambiguous, not when it is clear. Of course, I along with many who called for a recession 2022 and 2023 were dead wrong.* Obviously, the forecasting community is gun shy.

My argument for a recession is based on the recent 10% decline in stock prices that will dampen consumer spending, the friction caused by the Trump tariffs that will raise prices, stall capital spending, and disrupt supply chains and government spending will decline making it pro-cyclical. It looks like we are about to relearn the very hard lessons of the 1930 Smoot-Hawley Tariff Act.  

At the start of the year the value of an expensive U.S. stock market was more that two times nominal GDP. As Keynes noted, “Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.”

Moreover, I would suggest that the stock market decline is far from over. On March 5th I posted on LinkedIn that the high for the stock market was in. Steve Blitz of Lombard came back to me with the comment, “More critical is where is the low.” My sense is that the stock market and the recession will feed off each other that will send the S&P 500 down to the 4900-5000 level, making for a bear market-like 20% decline. We closed to today at 5600. 

Although it is hard to prove statistically my guess is that with 50% of consumption accounted for by the top 10% of income earners, the decline in stock prices will have a negative effect on consumer spending via the wealth effect. Consumption spending as a share labor income is very stable, not so for wealth.  Early signs of weakening consumption was highlighted by several airline executives mentioning a slowdown in air travel.

As far as supply chains go just think about the amount of steel and aluminum, now subject to a 25% tariff, which is used by the Ford F-150 truck and the Boeing 737 airplane. There may be domestic substitutes for steel, but not aluminum. The electric grid is troubled enough that it would be hard pressed to supply electricity to a new aluminum smelter.

Net Net. President Trump’s speculation that the transition to his “golden age” could be marked by a recession.

* I operate under the slogan "Often wrong, never in doubt."

 

Saturday, February 1, 2025

The Tariffman Strikes

Donald “the Tariffman” Trump will announce today a 25% tariff on all goods coming from Mexico and Canada and a 10% additional tariff on all goods coming from China. And this is only the beginning with additional tariffs on E.U. products and some specific duties coming. The tariffs on Canadian and Mexican products are an obvious violation of the United States-Mexico-Canada Treaty that Trump signed when he was president the first time. 


To put the tariff question in context, the U.S. imported $3.3 trillion of goods last year, about 11% of our GDP. On a purely arithmetic basis, a 10% tariff on all imports would raise the price level by approximately one percent and a 20% tariff would raise the price level by 2%. However, a potentially stronger dollar and foreign producers absorbing part of the cost would partially reduce the inflationary impact.


Although many economists poo-poo the long-term inflationary impact of the tariffs as a one-time increase, I am skeptical. Why? First, the tariffs will cause a costly rejiggering of supply chains in the longer run, and second in the short run there will be chaos at the Mexican and Canadian border points of entry where all goods shipment will be held up until the tariff is paid. Further it is not clear to me how consumers will respond to the price increases. Instead of thinking like an economist, many consumers might believe that a new inflationary spiral has started. Recall, all the talk about the transitory nature of inflation in 2022.


Importantly, we have to remember that tariffs are an excise tax on imports. As such they raise prices and reduce output with stagflation being the result. Throwing sand into the gears of the economy can hardly promote growth. To the contrary it will stifle growth and add to inflation.


Sunday, August 25, 2024

The State of the Presidential Race

 Over the past two months the Democrats have risen from their severely depressed state of being in mourning over Joe Biden to an exalted manic state hailing Vice President Kamala Harris as their new savior. Last week’s very successful convention cemented Harris’ leadership in the party, and she is now a small favorite to win the election in November.  However, I would caution that the current manic phase can quickly turn once again to a depressive state.

 

The most important thing that happened at the convention was what did not happen. As many feared, including myself, the convention did not turn out to be a rerun of 1968. It went off flawlessly and Harris came out of the convention as a forward-looking optimist as opposed to Donald Trump’s backward-looking pessimism. Indeed, somehow the sitting vice president became the candidate of change and Donald Trump became the de facto incumbent. As I wrote in July, this will be the year of the anti-incumbent and if Harris can maintain her image as challenger she will win. ( See: Shulmaven: Incumbents Beware )

 

Further buttressing her position is that the propaganda organs  of the state (ABC, CBS, NBC, MSNBC, CNN, Washington Post, New York Times, Facebook, and TikTok)  gushed over her acceptance speech. (See: Shulmaven: America's Party Line )  So craven have the mass media been is that their unqualified support for Harris has yet to pass the test of a single interview. In fact, Time magazine did a hagiographic cover story on her without an interview, truly unprecedented.

 

Meantime Harris’ economic proposals have drawn criticism from even normally left-of-center quarters. Her proposals for price caps on groceries, rent control and a $25,000 tax credit for new home buyers make little sense. Of course, Trump’s proposals calling for mass deportations, tariffs on all imports and executive branch control over the Federal Reserve are zanier than what Harris has proposed.

 

The critical tests for Harris will come when she actually has to do real interviews and the September 10th debate with Trump where she is the presumptive favorite. If Harris is to maintain the mantle of change, she will have to successfully answer the following question: On, what policies do you differ with President Biden? My guess is that she will be hard pressed to answer that question which will leave a big opening for Trump.

Tuesday, March 9, 2021

My Amazon Review of Robert Elder's "Calhoun: American Heretic"

 

 Slavery’s Theoretician

 

John C. Calhoun was brilliant and was one of America’s most dominant politicians for nearly four decades serving as congressman, senator, vice-president under two presidents, Secretary of War, Secretary of State and sought the presidency on several occasions. Unfortunately, he used much of his brilliance in cause of slavery. Baylor University history professor Robert Elder tells the story of his life with nuance and great detail. Unfortunately for the lay reader it 656-page length is a bit much.

 

Calhoun was born in 1782 in South Carolina’s up-country and was inculcated in his slave-oriented society. Unlike most of his brethren he goes north to Yale for his education and after returning to South Carolina he becomes one of the state’s leading politicians. After his election to Congress in 1810 be joins forces with Henry Clay to become a leader in the war hawk faction that leads the U.S. into the War of 1812.

 

His alliance with Clay continues after the war and he becomes an initial supporter of Clay’s American System. He supports the establishment of a national bank, the tariff, and a program of internal improvements. However, the coming of the Missouri Compromise of 1820 he breaks with Clay as the fight over tariffs becomes a proxy war over slavery. By 1832 he triggers the Nullification Crisis where South Carolina sought to overturn the Tariff of 1828. It almost came to war, but Clay came up with a compromise.

 

Calhoun believed the United States to be a compact of sovereign states with each or with a substantial minority having the right to nullify federal legislation. He called his theory “concurrent majority”. He basically sought a minority veto over policy. To be sure part of it was based in the Virginia and Kentucky Resolutions of 1798 authored by Madison and Jefferson in opposition to federal power. That theory was expounded 160 years later by civil rights activist Lani Guinier was nominated to be an assistant attorney general under Bill Clinton. She supported a minority veto over majoritarian rule. Calhoun was pro-union, but only on southern terms.

 

Calhoun viewed slavery as a positive good. To him it guaranteed equality among whites thereby dampening the class struggle between white factory workers and their employers. After all South Carolina was way ahead of the rest of the country in promoting universal suffrage for white males. In a way he was a Jacksonian ahead of his times.

 

To Calhoun America’s original sin was not slavery, but rather the “all men are created equal” line in the Declaration of Independence. This completely undercut his support of slavery and further although Elder does not mention it the preamble to the Constitution begins with “We the people...” not “We the states…”

 

As an international statesman Calhoun had a hand in drafting the Monroe Doctrine in 1820 and avoided war with Great Britain over the Oregon Territory in 1845. He actually opposed the Mexican War because he believed President Polk usurped the power of Congress in declaring a state of war existed between the U.S. and Mexico. Further his free trade ideas became conventional wisdom in the second half of the 20th century.

 

Elder goes into great deal about Calhoun’s family life. His wife Floride and her dozen pregnancies and his relationship with his daughter Anna who became his intellectual confidante. The last a rarity in that era. The reader will learn much about America and Calhoun in this book, but I caution it is long.


For the full Amazon URL see: Slavery's Theoretician (amazon.com)

 

Friday, September 27, 2019

"The Year of Living Dangerously," UCLA Anderson Forecast, September 2019


The Year of Living Dangerously[i]
David Shulman
Senior Economist, UCLA Anderson Forecast
September 2019

With his tweets of August President Trump escalated our trade war with China and attacked Federal Reserve Chairman Jerome Powell as an “enemy.” All of this occurring against a backdrop of near recessionary conditions in Europe with the potential for a Brexit disruption, Brazil and Mexico, a slowdown in China, rising geopolitical tensions in the Kashmir, the Middle-East, Hong Kong and the Korean Peninsula and a very real slowing in the U.S. economy. It seems that we are sleepwalking into a recession and perhaps quite a bit more geopolitically.

Although we are not calling for a recession over the forecast horizon, as we have noted for over a year it is very likely that economic growth will stall in the second half of 2020 as the effects of the 2017 tax cuts wane and as trade tensions exact their toll on corporate investment. On a fourth quarter to fourth quarter basis we are forecasting real GDP growth of 2.1% and 1.2% in 2019 and 2020, respectively. Indeed in the second half of 2020 growth is expected to decline to 0.4%, not quite a recession, but pretty close. (See Figure 1.) For 2021 we forecast growth to return to 2.1%.














Figure 1.Real GDP Growth, 2011Q1- 2021Q4, Percent Change, SAAR


Sources: U.S. Department of Commerce and UCLA Anderson Forecast

What are we Worried About?

We are worried about the following:
·        The escalating trade war with China.
·        The weakening of business investment in equipment and structures.
·        The negatively sloped yield curve.
·        The slowdown in employment growth.
·        The inability of housing activity to launch.
·        The stagnant stock market.

We will discuss each of these factors in turn.


Trade Shock

At the recent Federal Reserve conference in Jackson Hole, Wyoming Fed Chairman Jerome Powell noted:


   Moreover, while monetary policy is a powerful tool that works to support
     consumer spending, business investment, and public confidence,
      it cannot provide a settled rulebook for international trade.” (Emphasis
      added)

The reason why there is no rulebook is that we haven’t experienced a trade shock since the imposition of the Smoot-Hawley tariffs of 1930. We know how that turned out. Just after Powell made those remarks, President Trump weighed in with a substantial increase in the planned tariffs on Chinese goods (Increased to 10% and 25%, valued at about $80 billion/year) that are scheduled to go into effect on September 1st and December 15th.  As we have argued for two years tariffs are analogous to putting grains of sands into the gears of commerce which work to reduce output and increase prices.  Indeed a recent Fed study noted that trade uncertainty lowered real GDP growth about 1% in 2019 and projected another equivalent drop in 2020.[ii] And make no mistake American businesses and consumers will bear the brunt of the tariffs. And despite all of the Administration’s heightened rhetoric the real trade deficit will continue to rise as it approaches one trillion dollars this year. (See Figure 2)

Figure 2. Real Net Exports, 2011Q1 -2021Q4, Annual Data, $Billions

                                      
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Further the introduction of President Trump’s tariffs has greatly increased the uncertainty about the durability of existing supply chains thereby dampening business investment, more on that below. The Trump uncertainty is having pretty much the same effect of the uncertainties introduced by President Obama earlier in the decade with a multitude of regulatory changes coming from the Environmental Protection Administration, the Department of Labor and the Department of Energy.[iii]

Weaker Business Investment in Equipment and Structures

In response to the rise uncertainty the growth in business investment in equipment has stalled. After increasing at a solid 6.8% in 2018 real investment in equipment is forecast to grow at somewhat less than 2% from 2019-2021 and there will be several negative quarters along the way. (See Figure 3) The 11% increase in the first quarter of 2020 is based on our assumption that Boeing will resume shipments of the now-grounded 737-MAX in that quarter. Concomitantly real business investment in structures is already in declining at a 3% annual rate and that trend is forecast to continue through 2021. (See Figure 4)  Much of the decline is due to weakness in energy related investment especially related to oil and gas development in response to a 25% decline in oil prices.


















Figure 3. Real Business Investment in Equipment, 2011Q1-20121Q4F, Quarterly Data, Percent Change, SAAR

Sources: U.S. Department of Commerce and UCLA Anderson Forecast




















Figure 4. Real Business Investment in Structures, 2011Q1-2021Q4F, Quarterly Data, Percent Change, SAAR


Sources: U.S. Department of Commerce and UCLA Anderson Forecast

The Negatively Sloped Yield Curve

One of the most widely used and accurate signals of an oncoming recession is a negatively sloped yield curve where the return on short-term money is higher than the return on longer term money. Not only is a negatively sloped yield curve a signal of an oncoming recession it is also a cause because it eliminates the maturity transformation arbitrage profits of the financial system thereby reducing the willingness to lend. The indicator that the Fed uses is the difference between the yield on three month U.S. Treasury Bills versus the yield on 10-Year U.S. Treasury Bonds. (See Figure 5) Yes folks, we have been there since May. (See Figure 5). Aficionados on Wall Street prefer to use the difference between the 2-Year U.S Treasury Note versus the 10-Year U.S. Treasury Bond. That too turned negative in August.




Figure 5. Slope of the Yield Curve, 10-Year U.S. Treasuries minus Three Month Treasury Bills, Apr 1982 – Aug 2019, Daily Data, Percent



Sources: Federal Reserve Board via FRED

Although we have great respect for the signal coming from the bond market, we believe that the negatively sloped yield curve this time may sending us a false positive signal. Why? In the past then the yield curve was negatively sloped there was over-building in the housing market. This cycle, if anything, there has been under-building. As a result this time we might just skate by and avoid a recession.

Another cause of the negatively slope yield curve is the pressure coming from the global bond market. As of late-August there were about $17 trillion of negative yielding sovereign debt concentrated in Europe and Japan. (See Figure 6) With limited growth prospects, low inflation and aggressive buying from the European Central Bank European investors have little choice than to pay sovereigns a storage fee for their money. After all it hard to store a trillion euros under the mattress. As a result of the gravity coming from Europe the 10- Year U.S. Treasury yield has collapsed to 1.5%, about half of what it was last fall.







Figure 6. Selected Sovereign Yields, 30Aug19, Percent

Country
        
2- Year
10 Year
United States
1.990
1.50
France
-0.850
-0.40
Germany
-0.900
-0.71
Italy
-0.170
1.03
Japan
-0.310
-0.28
UK
0.400
0.49

Source: CNBC

Because the Fed is very knowledgeable about the yield curve and the contractionary forces coming from the trade war and European weakness, we believe that Fed has entered a significant easing cycle. Where the Fed Funds rate peaked at 2.625% last December, we now believe that the rate will be 1.625% by this December and a very low 1.125% by December 2020. The drop in the Fed Funds rate in 2020 will be the result of the economic weakness we forecast for later that year. (See Figure 7) Of course by then the yield curve will be positively sloped.















Figure 7. Federal Funds vs. 10-Year U.S. Treasury Bonds, 2011Q1 – 2021Q4F, Percent



Sources: Federal Reserve Board and UCLA Anderson Forecast

The Fed will be able to be aggressive in lowering rates because, although running somewhat above their target, overall inflation will remain benign. (See Figure 8) However we would point out that the imposition of tariffs means that there is upside risk to our 2%+ inflation forecast.










Figure 8. Consumer Price Index vs. Core CPI, 2011Q1- 2021Q4F, Percent Change a Year Ago




Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

Employment Growth Softening

In August the Bureau of Labor Statistics announced that the estimate for March 2019 payroll employment was overstated by 500,000 jobs. We will not how this preliminary estimate will translate in actual monthly job growth until we get the January 2020 data, but as a first approximation recent employment growth has been overstated by about 40,000 jobs a month. Our forecast for job growth is based on current data and therefore it should be viewed as high. Nevertheless instead the recent normal of job gains of 200,000 a month, we envision job growth in 2020 to be a tepid 70,000 a month. (See Figure 9)This eventuality will be a shock to those business that have relied on the recent history of job growth. We would also note that our forecast includes the temporary government hiring associated with the census, especially in the second quarter of 2020. Given our GDP forecast the unemployment rate will remain stable at around 3.6% through early 2020 and then rise to about 4% at the end of that year. (See Figure 10)

Figure 9. Payroll Employment, 2011Q1-2021Q4, Quarter to Quarter Change, In Thousands, SAAR

                                   


Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast
















Figure 10. Unemployment Rate, 2011Q1-20121Q4F, Percent, SAAR


Sources: U.S. Bureau of Labor Statistic and UCLA Anderson Forecast

Housing Activity Remains Sluggish

As we have noted ad nausea, post the Great Recession housing activity has failed to recover to what historically has been a normalized level of housing starts of 1.4 million – 1.5 million units. Activity has stalled out in the 1.2 million – 1.3 million range and we forecast that it will remain sluggish throughout the forecast horizon. Specifically we are forecasting 1.25 million units for 2019 and for starts to average around 1.2 million units in 2020 and 2021. (See Figure 11) This sluggishness is especially noteworthy in light of the fact that mortgage interest rates have declined from 5% in late 2018 to around 3.75% today.   What this means is that unlike 2007 housing activity is really not in position to trigger a recession this time around.





Figure 11. Housing Starts, 2011Q1-2012Q4F, Thousands of Units, SAAR




Sources: U.S. Bureau of the Census and UCLA Anderson Forecast

Stock Market Has Gone Nowhere Since January 2018

Although the S&P 500 stock index remains very close to its all-time high, as a practical matter stock prices haven’t gone anywhere since January 2018. (See Figure 12) We would note that in January 2018 the Trump Administration got very serious about imposing tariffs and in March 2018 the first round of tariffs on steel and aluminum were put in place. As a result the wealth effect associated with rising stock prices is waning.









Figure 12. S&P 500 Stock Index, 1Sep2017 – 30Aug2019



Sources: Standard and Poor’s via BigCharts.com


What seems to be OK?

Although there is much to be worried about consumption, which accounts for about two thirds of GDP is chugging along, federal spending is advancing smartly in response to the recent budget deal and businesses continue to invest in intellectual property at a heady pace. Spurred on by low unemployment and higher wage income real consumer spending growth remains solid with gains of 2.5% this year and 2.1% in in 2020 and 2021, albeit with 1% growth in the second half of 2020. (See Figures 13 and 14) To be sure the pace is off from the 3% recorded in 2018, but still quite respectable for this stage of the business cycle.  As a result, if you are going to tell a story about a recession in 2020 you would have to have consumer spending far weaker than we now have it.



Figure 13. Employee Compensation, 2011Q1- 20121Q4F, Percent Change Year Ago



Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

Figure 14. Real Personal Consumption Expenditures, 2011Q1- 2021Q4F, Percent Change, SAAR

Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Unlike earlier in the decade federal spending is now increasing at a 3% annual rate. (See Figure 15) As a result of the recently approved budget deal that increases both defense and domestic purchases the 3% growth rate established in 2018 will continue this year and into 2020 before stalling out in 2021. However we might be low for 2021 as a new Congress might aggressively respond to the weakness we expect to occur in late 2020.

Figure 15. Real Federal Purchases, 2011 – 2021F, Annual Data, Percent Change




Sources: Office of Management and Budget and UCLA Anderson Forecast

The flipside of higher government spending will be the prospect of trillion dollar deficits thorough 2021 and beyond. (See Figure 16) Although both the administration and the Congress do not appear to be interested in the deficit today the day will come when the deficit is interested in them.





Figure 16. Federal Deficit, FY 2011-FY2021F, Annual Data, In $Billions





Sources: Office of Management and Budget and UCLA Anderson Forecast

The one bright spot in business investment is the continuing growth in spending on intellectual property. That category includes, among other things, computer software, research and development expenditures and filmed entertainment. Unlike equipment and structures this sector is being driven by technological imperatives that extend well beyond the business cycle. Despite the slowdown we are forecasting real intellectual property spending will continue to grow robustly, albeit off the heady 8.4% forecast for this year. Specifically we are forecasting growth of 5.5% and 4.1% in 2020 and 2021, respectively. (See Figure 17)







Figure 17. Real Spending on Intellectual Property, 2011Q1-2021Q4, Percent Change, SAAR



Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Conclusion

Economic growth is dramatically slowing. The near 3% pace of over a year ago is now a memory with fourth quarter –fourth quarter real GDP growth for 2019 and 2020 now forecast to be 2.1% and 1.2% respectively. Further job growth will slow to below 70,000 a month, a far cry from the 200,000 plus we have been used to. The real risk is coming from the Administration’s high and erratic tariff policies and its potential impact on exports and business investment. As long has consumption remains firm we believe that the U.S. economy will avoid a recession next year, but nevertheless it will be “The Year of Living Dangerously.”

  


[i] With apologies to Peter Weir and MGM(Released in the U.S. in 1983)
[ii] See Caldera, Dario et.al, “Does Trade Policy Uncertainty Affect Global Economic Activity?” Board of Governors of the Federal Reserve System, Sept 4, 2019.
[iii] See Shulman, David, “The Uncertain Economy,” UCLA Anderson Forecast, September 2010