Expert Insights: Decoding Economic Trends and Effects

Both before and during each Market Pulse webinar, our audience submits their burning questions to our expert panelists. For our March Market Pulse webinar, an all-star economist panel, composed of Dr. Amy Crews Cutts, President and Chief Economist at AC Cutts & Associates, Dr Robert Wescott, President of Wescott Strategic Advisors, and Dr. Mark Zandi, Chief Economist at Moody’s Analytics, addressed many of these audience questions in a lively panel discussion. Below are their answers on questions around economic indicators, tariffs, and more. 

Q: What are some key economic statistics and indicators you are tracking that our audience should be checking regularly?

Dr. Amy Crews Cutts, President and Chief Economist at AC Cutts & Associates: There's the usual statistics. We're all, of course, looking at the big macro picture things, but here are four of the lesser known indices that I pay close attention to. The first is the National Association of Credit Management Credit Managers Index. It's similar to the purchase managers index from ISM except it's for the financial side. So are people paying their bills on accounts receivable? How are sales and bankruptcies doing? Accounts sent for collection? That sort of thing goes into the index, and it comes out at the end of each month. Then, there's the National Federation of Independent Business’s Small Business Economic Trends Survey, which surveys small business owners about things affecting their businesses. I really like the Visa Spending Momentum Index, which is based off of credit card transactions, as another way to look at what's happening before retail sales come out. It's been showing some weakness, especially in the discretionary side recently. There’s also the Primerica Household Budget Index, which looks at the impact of inflation on necessity goods, such as food, utilities, and healthcare in household budgets.

Dr. Robert Wescott, President at Wescott Strategic Advisors: I do feel we have to keep an eye on three things in particular. 

So the first is labor. The labor market has been strong, and that really has been a key support for the U.S. economy for the last three or four years. We are looking in particular at Indeed job data, for example, which is now down about 30%. It’s been dipping over the last three years. So even though the labor market has been strong and the unemployment rate has been in the 4% range for quite a while, we're concerned that the job growth is slowing and we see easing there. 

The second factor has been the stock market. There has been a lot of research done showing that if your stock market wealth goes up, you're more inclined to consume. American households have about 170 trillion dollars of household wealth. Their household wealth is up by 13 trillion dollars in the last four quarters. I really think that's been boosting growth a lot, and the stock market is now down about five trillion dollars in the last 4 weeks. The wealth effect is considered to be about 4%. So if your wealth goes up 1,000 dollars, then that year you'll be inclined to spend about 40 more dollars because you feel wealthier. That's been working as a very strong, positive force for the U.S. economy. But if the stock market turns down, which it is down currently, we have to keep a close eye on stock prices. 

And the third thing that we're looking at is consumer confidence, and those numbers have been down pretty sharply over the last couple of months. I think consumers are starting to pay attention to tariffs and wondering how that's going to play out and the effect it’s going to have. And it's not just sentiment, because sentiment is about measuring whether you feel happy or not.  We've seen dips in retail sales and in real consumer spending in January, and there was only a little bit of an uptick in February, but that's going to be a really soft number as well. So, I am concerned. I believe we're going to see a negative number for real consumer spending in the first quarter, and I think that is likely a key building block for a potentially negative GDP number in the first quarter.

Dr. Mark Zandi, Chief Economist at Moody’s Analytics: Something that I look at is the Consumer Confidence Index from the Conference Board. It's a monthly survey that's been done since the beginning of time, with the average index being around 100. The rule of thumb is that if the Conference Board survey of consumer confidence falls more than 20 points in a 3 month period., that means consumers are losing faith. They're running for the bunker. They become much more cautious in their spending, and that's the trigger for recession, which generally begins about six later. If you look at the last few months, confidence is down quite a bit. It's not down 20 points though as of now, but if that falls as sharply in March as I suspect it will, that would be a good sign that we could be headed down the recession path. A recession is a loss of faith. Consumers lose faith that they're going to hold on to their job. Businesses lose faith that they're going to be able to sell whatever they produce. And most times, sentiment doesn't really matter. It reflects the economy. But, at turning points, the causality shifts, and it is the sentiment that drives the train. And that's why that Conference Board’s survey is so useful. 

Q: If tariffs are implemented, how quickly before we feel the impact of and what could the impact be on stock earnings? How should stock holders respond, if at all, and is a trade deficit healthy for a country? 

Dr. Wescott, Wescott Strategic Advisors: In some ways, the techniques that we use to grow the economy are pretty well known. You can undervalue your currency, and you can provide subsidies to have overcapacity in certain industries. It's not as though there is no problem, and that tariffs have no role. There is a sequence of steps that you can use as a country if you feel like some countries are not trading fairly with you. In the old fashioned days, you could take a country to the WTO. You could also negotiate voluntary export restrictions, like the U.S. did with Japan when they felt too many Japanese cars were entering the country in the 1980s. Tariffs are really a sort of last resort, but could have a role if nothing else is working and you can't get bilateral negotiations going with a trading partner that's not playing nicely. There are things you may have to do, so some anti-dumping duties or tariffs may be sensible. 

I'm concerned about applying tariffs to everyone in the world. I do think we're already seeing the impacts on business behavior in America. We saw a surge of imports in January. We've talked to clients, and it's pretty clear that it really was companies trying to get goods on their shelves in their own inventory before tariffs came in. Some people say it's all about gold. We do not think so. We've looked at the details there, and it's more than just a gold story. So that's already starting to affect behavior. We've seen it in the prices of home appliances, which have gone up about 6% in the last two months, even though tariffs haven't really been fully implemented yet. So, we're starting to see some price effects already creeping into the system, and those are all concerns.

We've been looking very carefully at the Smoot-Hawley tariffs of 1930. People forget that tariffs are an opening act and during the Smoot-Hawley tariffs, essentially a 25% tariff by the U.S., 24 countries imposed retaliatory tariffs on the U.S. within six months. And then it becomes a cycle of retaliation. So, you are starting a geopolitical activity when you impose tariffs. That’s the ultimate concern of economists. 

Dr. Crews Cutts, AC Cutts & Associates: I've been watching some of the freight numbers, and it's a little complicated with Lunar New Year coming as there was an advance of inventories as a result. But I think that we're starting to see a little bit of companies try to rush to get things in under those tariffs again, so we might see a little bit of action again ahead of the potential April tariffs. But we're also starting to see businesses pull back on their orders, worrying about whether it'll be fulfilled, and what the pricing will be going forward. So there's a little trepidation there about getting too deeply involved with the on-again, off-again nature of the situation, so there’s a bit of a rush in advance and also a lot of caution.

Dr. Zandi, Moody’s Analytics: I think broad-based tariffs are a bad idea. It's very hard on low and middle income households, because they devote a higher share of their budget to imported goods. It costs American jobs because other countries are not going to stand still. I don't think it solves the trade deficit problem. If we don't want a trade deficit, then we have to get rid of our Federal budget deficit. That's the solution. And I don't think the tariffs are going to entice businesses to come here into the United States. With that stroke of the pen, the tariff policy can be changed immediately. So nobody's going to plan based on the tariffs that are put in place, and they can vary by company within the same industry. I don't think it's going to generate a lot of revenue. because it could result in less tax revenue because of a weakened economy. It's going to raise spending on income support programs that are automatically embedded into the fiscal process. So it's a lose-lose situation all the way around. 

I could see strategic tariffs as a possibility if nothing else is working and you are unable to turn to the WTO or form a trans-Pacific partnership that could include creating a free trade agreement with the other Pacific Rim nations that would exclude China as a way to pressure them into playing fair. As an economist, I'm really glad we're at this point with tariffs. This is an empirical question. Let's just see how this plays out.