Market Pulse: Now the bad news
Last week I wrote about good news stories that weren’t highly covered in the media. There were a lot to choose from. Unfortunately, it’s not all roses. There also is bad news to worry about. Here are two:
Third quarter GDP growth came in at 3.5 percent (that’s good), but that figure would have been a whopping 5.3 percent if trade had not dragged it down by 1.9 percent. That was the largest negative contribution to GDP growth in 33 years.
That brings us to tariffs. When there is a 10 percent tariff on Chinese goods, most Americans assume China is paying the tariff. Wrong. U.S. companies pay and often pass it on to consumers. Keep that in mind if the current administration follows their plan to raise the tariffs to 25 percent at the start of 2019.
When a company switches production from China does that reduce our trade imbalance? Not necessarily. Many supply chains are being shifted to other countries, like the Philippines and India. That partly explains why the India ETF (INDA) rose 10 percent and the Philippines ETF (EPHE) rose 8 percent over the last month, even as the rest of the global markets fell.
Our tariffs are causing major disruptions in cross-national supply chains. That’s putting a strain on international economies. Can the U.S. economy thrive when other economies are weakening? It didn’t under Obama and won’t under Trump. It is a global economy.
From 1998 through 2001 our government ran a budget surplus. That was rare. The deficit, which is how much we borrow every year, resumed in 2002 but swelled from 2009 through 2012 as a result of the Great Recession. Once the economy improved, the deficit fell.
Beginning in 2017 it began rising again, and not by a little. This year’s budget deficit is about double the level it was just three years ago.
Having the deficit soar during a strong economy with falling unemployment hasn’t happened since the Vietnam War era. If the deficit is rising when the economy is good, what will happen when it weakens? That scares me.
Maya MacGuineas, president of the Committee for a Responsible Federal Budget, says that a year from now the U.S. will be spending more on interest payments than it will on Medicaid. There’s more. In four or five years, it will cost more to service the debt than what we spend on the military.
This is an economic and a national security issue that few are talking about.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.