Today, we’ll preview tomorrow’s report on 2Q Gross Domestic Product which is expected to be quite strong. Following that discussion, we’ll look into China’s recent devaluation of the yuan and the possibility that we may be entering a currency war with China.
Regarding tomorrow’s GDP report, there is a broad consensus that the US economy perked up significantly in the 2Q following 2.0% growth in the 1Q. The Commerce Department will release its first of three estimates on 2Q GDP growth tomorrow at 8:30 EST. The pre-report consensus is that the number will come in at a 4.3% annual rate, with some forecasters expecting it to be above 5%.
A lot of good things were happening in the economy in the April-June quarter. The biggest tax cuts since the Reagan era delivered another boost to consumer spending and business investment, along with rising inventories and international trade.
Consumer confidence has soared like a rocket since the multi-decade lows recorded in the Great Recession of 2008. Keep in mind that consumer spending accounts for almost 70% of GDP.
While there is a broad consensus that tomorrow’s initial 2Q GDP report will come in strong, there is less agreement on what to expect for the second half of the year. While many forecasters expect the economy to remain in this stronger (4+%) gear in the second half, others are not so optimistic. Some feel the 2Q growth spurt will be temporary and growth will slip back to 3% or lower in the months ahead. That remains to be seen.
For now anyway, the fiscal stimulus (tax cuts and increased federal spending) is adding steam to an economy that’s already come a long way in the nine years of this expansion, the second longest on record. Unemployment is near the lowest level since 1969, and steady hiring and low inflation also are bolstering consumer spending, which accounts for about 70% of GDP.
The bottom line is that we are expecting to get a strong 2Q GDP number tomorrow morning, something north of 4%. It remains to be seen if that growth will continue in the second half of this year. I am optimistic it will continue at least into the 3Q and maybe beyond. These economic trends aren’t usually reversed overnight.
I’ll have more analysis on tomorrow’s GDP report in Forecasts & Trends on Tuesday.
China Devalues Yuan – Is It a Currency War?
We’ve seen a lot of headlines over the last month suggesting that we’re in a currency war with China. China’s leaders have allowed the yuan (also known as the renminbi) to fall sharply in recent weeks without taking steps to curb the slump. Forecasters are rightfully wondering if this is the beginning of something bigger or if it’s just another correction.
Some analysts speculate that China is devaluing its currency now in retaliation for President Trump’s tariffs on steel and aluminum, and the fact that he is threatening more tariffs on $200-$500 billion of Chinese exports to the US. I think the answer is very likely YES.
China has often been accused by the US government of intentionally keeping its currency depressed to cheapen its goods in the world market, making them more attractive than those from countries with stronger currencies.
As I have warned often this year, it is not unusual for our trading partners to retaliate against Trump’s sanctions with tariffs on US goods we export to them. As I have also written, these trade wars ultimately result in higher prices paid by US consumers. President Trump either doesn’t get this or he doesn’t care.
China has a few more likely responses, including its already announced plans to place tariffs on US goods and agriculture. The Chinese government could encourage boycotts of certain goods, or make life even more difficult for US companies doing business in China with additional onerous regulations.
It could also buy fewer US Treasuries. In fact, as I wrote on June 21, China has already started reducing its holdings of US government debt. It will be interesting to see if this trend continues. China is the largest foreign holder of Treasury securities at apprx. $1.2 trillion.
While I would say that China’s latest move to devalue its currency is significant and deserves watching closely, I would not go so far as to call it a “currency war” as some are suggesting – at least not yet.
I’ll keep you posted.
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