"Kee" Points with Jim Kee, Ph.D.

  • US Economy
  • Trade Restrictions
  • Stocks and Elections

US Economy

As expected, second quarter GDP growth (annualized) came in fairly strong at 4.1%, and first quarter GDP growth (on average the lowest) was revised upward from 2% to 2.2%. As a reminder, one quarter’s GDP number has almost no predictive power as to what the next quarter’s GDP number will be. However, most economists expect growth to remain strong over the next few quarters, barring any real ratcheting up of trade tensions, which is possible. The other item of concern out there is the midterm elections, where betting odds are already giving a slight edge to the Democrats to win the House, and the Republicans to retain the Senate (HCWE & Co.). Here are a few “smart points” (I hope!) on each:

Trade Restrictions

Consumer surveys like the University of Michigan’s Survey of Consumers show growing concern over tariffs. About 15% of survey respondents mentioned concerns about trade in May, and that has risen to 35% in July (Knowledge@Wharton). Right now, the US is engaged in three simultaneous trade “feuds.” The first is with China, the second is with Canada and Mexico through the proposed rewritings of NAFTA, and the third is with the European Union (e.g. the US has imposed tariffs on steel and aluminum exports). In general, tariffs protect domestic producers at the expense of domestic consumers, who pay higher prices for imported goods. In practice, the market itself - meaning supply and demand responsiveness or “elasticities” - determines how much of a tariff is passed on to consumers in the form of higher prices, and how much is absorbed by producers by paying less to suppliers, workers, shareholders, etc.

And it just gets more muddled from there. Currently, many countries subsidize their exports by giving exporting companies access to cheap or government-provided capital, whereas in more market-oriented economies, companies have to compete for and pay more for capital. And different countries have different levels of labor and environmental regulations, which leads to different cost structures for companies from different countries. Immigrants and refugees, typically thought of as two different groups, are also causing some global confusion with respect to immigration policy. Finally, the decision-making of global firms maximizing profits does not necessarily take into account national security issues, so there is some potential conflict there. For example, it might be profitable for a company to share sensitive technology with a country in order to have access to its customers. There are probably a few circumstances where such decisions could lead to higher shareholder value, while at the same time compromising US security (Asian Times).

As an economist, I still hope for a “bullish outcome,” one where on balance trade restrictions are reduced rather than increased. That seems to be what the world would like to see. The differences today are that the US (i.e. Trump), to quote Jeanie Wyatt, is the trade bully while the rest-of-the-world is arguing against restrictions. That’s different from the past, where the “Washington Consensus” promoted trade liberalization, and the rest of the world often fought it.

US Stocks and Elections

If history is any guide, the market will probably be range-bound (i.e. up and down) until the election, with a decent bounce in November and December. That’s the historical pattern for US stocks during midterm election years: The market starts off strong and then sells off and bounces around without a strong trend until after the election, at which time it finishes strong, resulting in positive but below average returns for the year. So far that’s what we’ve seen during this midterm election year as well.