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Former Fed Adviser: Economy on Sugar High That Will Crash in 2019

Former Fed Adviser: Economy on Sugar High That Will Crash in 2019

Danielle DiMartino Booth, a former adviser to the president of the Dallas Federal Reserve, said in a recent opinion piece on Bloomberg that the economy is currently on a “sugar high” due to tariffs as companies rush to secure products and materials before the trade war with China gets worse.

Against that backdrop, it’s becoming clear that many companies are rushing to secure products and materials before prices rise regardless of current demand. You could say they are in panic-buying mode.

Per Bloomberg:

Across the U.S., companies are hitting the panic button. The Trump administration has levied 10 percent tariffs on $200 billion of Chinese goods, a charge that is expected to rise to 25 percent by 2019. This tops the tariffs on $50 billion of Chinese goods that were imposed in August, and is an effective tax on U.S. consumers, who will soon be paying more for everything from cosmetics to clothing to cars if they aren’t already.

Against that backdrop, it’s becoming clear that many companies are rushing to secure products and materials before prices rise regardless of current demand. You could say they are in panic-buying mode. The upside is that this behavior bolsters economic growth in the short term. The downside is that there is likely to be a nasty hangover. The noise in the economic data will be amplified by the rebuilding from Hurricane Florence. The estimates of the storm’s damage span from $20 billion to $50 billion.

DiMartino Booth cites the September Chicago Purchasing Index report, the “bellweather for the broader national manufacturing sector.” The index fell from 63.6 to 60.4, with the new orders component sinking to a six-month low while the inventory component surged above the 60-mark. Readings above 50 denote expansion so to put that into perspective, inventories have only breached 60 twice in this year, ranking those two in the 97th percentile over the past 30 years, which is rarified air.

As per the Chicago PMI: “Firms continued to add to their stock levels, building on August’s marked rise. The scarce availability of inputs continued to encourage stockpiling while forecasts of higher future demand also contributed to the rise in inventories.”

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Indications that the tariffs will rise to 25 percent by year-end suggest the panic-buying mode will stay in effect for the next few months, making labor resources even more scarce. The latest Duke University CFO Survey reveals that those who set compensation budgets anticipate wages will rise by 4.8 percent over the next 12 months, the biggest increase in 18 years.

DiMartino Booth goes on to say artificial supply was evident in the August trade deficit, which had the widest margin in six months as exports slowed and panic buying fueled imports — and the 4.2 GDP during the last quarter. This is leading to economists to reduce their third-quarter GDP estimates to account for weaker exports, while also downgrading the quality of economic growth to account for the reasons behind the inventory build.

Or, in the words of JPMorgan Chase & Co. chief economist Michael Feroli, the economy is looking “less boomy, more noisy.”

DiMartino Booth says this panic buying will not serve as a permanent prop to the U.S. economy and, rather, fourth quarter estimates will likely rise before falling off the cliff during the first quarter of 2019.

Look for fourth quarter estimates to be revised upwards and then look out below into the first of the year. And no, the first-quarter disappointment will not be the seasonal anomaly many economists typically ascribe to economic growth in the first three months of the year. In other words, it could be that much worse.

DiMartino Booth is the founder, CEO and Director of Intelligence at Quill Intelligence LLC. She also is the author of “Fed Up: An Insider’s Take on Why the Federal Reserve Is Bad for America.”