The government shutdown, now almost three weeks along, is costing the economy a lot of money — an estimated $6.5 billion dollars a week. More importantly, the shutdown will prove detrimental to first quarter GDP when its impact is linked to the effects of the ongoing trade war and the crisis unfolding overseas with Brexit. That was the main message Marci Rossell, an economist and who formerly worked for CNBC and the Federal Reserve Bank of Dallas, delivered to bankers and other industry leaders Jan. 9 at the Wisconsin Economic Forecast Luncheon, sponsored by the Wisconsin Bankers Association.
Characterizing in one word — disruption — the forces that impact the economy, Rossell said the worst disruption is often man-made and policy-based. Trade wars and shutdowns fit the characterization perfectly, she said, and they “will define the first quarter.”
“From an economic perspective, it makes no sense to shut the government down,” Rossell said. Immigration, specifically construction of a wall at the southern border of the United States, has been the sticking point between the President and House Democrats and has has led to the current shutdown, which began at midnight on Dec. 22. But Rossell said a wall between the United States and Mexico made no sense: “Net migration from Mexico has been negative since 2006.”
The demographic boom that’s driving current waves of migrants has its source in Honduras, Guatemala and El Salvador, Rossell explained. She said when you look at the facts around immigration, the demographics won’t support it continuing.
Also not long lived, in her opinion, would be the shutdown. In a tight labor market, “as soon as the TSA agents go out and get other jobs, there will be pressure to end the shutdown,” she predicted.
Rossell also said she believed the trade wars were wrongheaded. “China is not a developed country,” she said. “Their GDP is lower than Mexico. The idea that they rival the United States in economic power is nonsense.”
The stated objectives for the trade war with China has been to improve the terms of transfer of technology and to protect intellectual property. And while these are important objectives, Rossell said these were matters better settled by the World Trade Organization. The Trump administration and the Chinese government have now restarted trade talks in an attempt to reach a deal before a March 2 deadline raises tariffs to 25 percent.
The chaotic Brexit negotiations underway in Europe have been impacting the markets. “The generations who remember a belligerent Soviet Union are dying out,” she said, therefore Germany and France don’t want to give Great Britain a good deal on Brexit. Doing so would cause the Eurozone to unravel quite quickly, she said. She said she’s betting on a last minute deal to be brokered by the March 29 deadline.
“Turn off your smartphone until March 29”, Rossell suggested. “Your blood pressure will be elevated until then.”
Rossell said she expects the final three quarters of 2019 will see fundamental economic strength without a recession. Even a flattened yield curve isn’t indicative of impending recession, she said.
In related news, the Economic Advisory Committee of the American Bankers Association released its economic forecast on Jan. 9. It predicts the pace of growth will moderate through 2019 and 2020, reflecting fading policy support in the U.S. and a slowing global economy. The median forecast of 15 chief economists from major North American banks surveyed the first week in January is that economic growth will ease to 2.1 percent in 2019 and 1.7 percent in 2020 (on a Q4/Q4 basis). This puts the current expansion at the longest in U.S. history.