Capital Investment Advisors

Why The American Economy Is Currently Positioned For Success

This past week marked a new chapter in the ongoing story of the Trump administration’s tariff battle with the world. These new developments might constitute a win for the U.S. in the global trade fight.

As a refresher, while China is getting all the attention, it’s important to remember that the Trump tariffs are also designed to change the trade behavior of Mexico, Japan and the entire European Union (EU). What we saw last week indicates that the controversial, confrontational U.S. tariffs may be working.

President Trump announced that America might impose punitive tariffs on car imports. That news did not play well in other countries. According to the Financial Times, the EU warned of tariff retaliation against US products to the tune of $300 billion. This figure is roughly equivalent to the $330 billion worth of automobiles and vehicle parts that the U.S. imports every year.

European Commission President Jean-Claude Juncker weighed in, stating the European Union and the U.S. have the largest bilateral trade and investment relationship in the world, worth roughly 900 billion euros (or $1.06 trillion) per year, and growing.

Today, the U.S. is the third-largest exporter of cars to the EU in terms of value, with a 15.4% share of auto imports in 2017. Couple this with the fact that the U.S. is the number one destination of EU car exports, both regarding units (with a 20.4% share in 2017) and value (29.3% share in 2017).

From these numbers, we can begin to see that trade with the EU is much more important than trade with China.

At the global tariff table, President Trump has been a shrewd negotiator. The Trump Administration needed a trade win to build support in the scuffle with China. So, if the President can bring in the EU, then his already strong leverage against China becomes even greater. The result is that he could bolster our chances of achieving fair trade.

This strategy is playing out right now. If the auto tariffs were to escalate, then allying with the EU on trade would be off the table. But, that’s not the case – at least for now. The U.S. and EU have agreed to negotiate on industrial tariffs; the EU has agreed to purchase U.S. soybeans to make up for a fall-off in purchases from China.  The EU also promised to purchase liquefied natural gas from us.

What do these changes and conditions mean? Well, I think you and I both know what President Trump can accomplish in Washington. These new trade developments are a tremendous step toward validating the proposition that the threat of higher tariffs may actually result in lower tariffs.

Remember, President Trump hasn’t gone looking for a trade war. His strategy in the tariff fight has been and remains to put America on better economic footing.

Additionally, the NAFTA negotiations have resumed, meaning there is the real possibility that we could have a deal by Labor Day.

And to round out the entire picture at home, let’s take a look at how the US is faring economically during the trade skirmish. The GDP for the second quarter just hit 4.1% – Real GDP climbed at a 4.1% quarter over quarter rate, and Nominal GDP surged to 7.4%.

As the Wall Street Journal reported, this is the fastest pace in nearly four years and reflects broad-based momentum, suggesting that this second-largest expansion on record isn’t running out of fuel.

This growth comes thanks to robust consumer spending, solid business investments, thriving exports and increased government outlays. Really, the uptick in consumer spending is as predicted as a result of the 2018 individual tax cuts. The business cuts made a difference in business spending. And in Washington, the expanding national budget gave way to the increase in outlays.

Alongside this good news, the Fed is set to continue to raise rates. The core Personal Consumption Expenditure (PCE) inflation is still trending up, but only moderately. So, there’s not much to change the case that the US is likely headed for its longest expansion on record. Perhaps the key as we go forward is to watch whether capital expenditures raise productivity, and in turn raise wages (in a good way). And remember, this is the most important part of the equation – earnings.

While the global tariff negotiations may be far from over, the bottom line is that we’re making progress. Stay tuned to see what unfolds in upcoming chapters.

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