The U.S. is firing on all cylinders, as the Federal Reserve continues to raise rates to keep the U.S. economy from overheating. Beata Caranci, Chief Economist at TD Bank Group weighs in on the state of the U.S. economy.
There is some discussion that there may be middle ground found in things in terms of like infrastructure spending. President Trump just before the election had floated the idea of a middle income tax cut, which Democrats would probably be open to. So there is those possibilities. But we never put anything into the forecast until we see it. We do know this is a political environment in the US in terms of these two parties have in the past been obstructive to policy, in terms of not being able to agree necessarily on economic policy and direction. So we will wait to see what we get. But in the meantime, the US economy has plenty of economic momentum from past stimulus.
And frankly, it's in a late-stage business cycle in terms of strong employment growth, stronger wage growth, business investment continuing, so it really doesn't need any fuel added into it. So we're not downgrading or upgrading the forecast based on the results. It's status quo.
Let me ask you, though. I mean, when we chatted before, I know we talked about, you know, you had lots of deregulation, you've had the tax cuts, adding fuel onto a pretty healthy economy already. That is running out. I mean, it will run out very soon, and you still have the US debt, budget deficits, I think coming in around $780 billion. That feels hard even just saying that. So where does that leave the government, given the fact that, you know, I know they're hoping for increased business activity to get more tax inflows, but is that going to work out?
Yeah, so one way to think of it is they're running large and growing deficits as a share of GDP, which is highly unusual for this point in the cycle. Typically when your unemployment rate is falling, you are moving towards a balance and surplus, and they're literally going in the opposite direction. So that is causing them to do more treasury issuance, and that means you're a little bit at the mercy of the market. So they want to buy what you're selling. And so that's the vulnerability that gets introduced on that perspective.
From the perspective of the new Congress coming in in the new year, and this becomes interesting because they will be facing another debt ceiling in March. Basically, the Treasury's authority to pay debt, they're running out of that money. So they have to go, almost like hand in hat, or hat in hand, to go ask for an extension. If you don't have the authority extended, it would put at risk making bond payments, treasury coupon payments.
That is a very low probability. We haven't seen that before. They tend to have political infighting, and then the markets react--
Make it work.--and you get an outcome that works. But that will be the first test of the new Congress around March of next year, that we are already in the heightened equity volatility market, and that's one area that you can see it come really early to the forefront.
Last thing, I guess, which is a bit of a wild card, and an incredibly important wild card, is trade. NAFTA-- USMCA, excuse me-- is now written but not done, because we have split Congress. You've got China, which I think everyone is very focused on, and even the people that I've spoken with, China is, you know, may not like the way in which the US is dealing with China, but I think a lot people agree something needs to be done in terms of intellectual property and a list of other things, too. How big a deal is that from, I guess, you trying to understand the economic outlook, not just for the States but for Canada?
Yeah, so this is getting interesting, because the US put a 10% tariff on $200 billion in Chinese products about a month ago. And that's supposed to rise on January 1 from 10% tariff to 25%, absent that China and the US agree prior that there's going to be changes. So when we get to our new forecast round, which we do in December, one of the assumptions we're going to have to make is, are they going to follow through on that 25% tariff? Because that will mark down US GDP growth, not in terms of a huge amount, but it will shave down that growth trajectory.
So that's the first consideration. And then the second consideration is the US has also threatened to do an additional $267 billion at another, we don't know, 10% to 25% tariff. Those two combined actually start to take down that growth profile at a faster rate. You combine that with the fiscal spending that they've been doing and other risk factors, that US growth profile starts to look less rosy by the time we get to the end of 2019 and into 2020.
And so this is why you have some analysts saying the R word. You know, where would that possibly come into the forecast? There is a lot of moving parts happening on the policy side, and trade is one of these ones that are, in many respects, controllable. These are self policies that they're putting in place. But you could have unintended consequences from it, and so we're mindful of it.
We haven't seen the price impacts come through on the consumer side in a meaningful way, but they are showing up on the producer side. So the margins of companies are getting squeezed, because they're facing higher labor costs and higher input costs.
That was Beata Caranci. She's chief economist at TD Bank Group, with great insights as always. Thank you so much for joining us tonight. Any comments or questions, we'd love to hear from you. Send them to MoneyTalk@td.com, and we'll get you in touch with someone who can answer those questions for you. Thanks so much for watching, and we'll see you next week.