CUMBERLAND — On Thursday, Kennesaw State University Economics Professor Roger Tutterow gave his interpretation of what President Donald Trump is aiming to accomplish by imposing tariffs.
Speaking at Synovus’ annual Economic Forecast Breakfast at the Cobb Energy Performing Arts Centre, Tutterow said he is an “unapologetic advocate of free markets” and “a strong supporter of free trade.”
But he believes Trump’s push for trade tariffs is an attempt to “hit reset” on U.S. trade policy.
“I grew up here in Cobb County,” Tutterow said. “On my playground when I was in elementary school, we used to say, ‘The first punch is worth 10 pounds.’ And I think (Trump) goes into negotiations and throws the first punch in the form of a tariff trying to get a reset on our trade deals.”
Tutterow said he also sees a connection between the tariffs and Trump’s criticism of the Federal Reserve raising interest rates.
“If you’re putting a 10 percent tariff in place and you’re doing so because you’re trying to level the playing field, then if the dollar appreciates by 10 percent, it zeroes out the effect of that tariff,” Tutterow said. “And if you recognize that typically when interest rates rise, the domestic currency appreciates, he may be concerned that higher interest rates leading to dollar appreciation can offset what he’s trying to do on the trade side.”
However, Tutterow said interest rates are still historically low. The Federal Reserve lowered rates to 0 percent in late 2008 and left them there for seven years. Rates were raised once in 2015, once in 2016, three times in 2017 and four times in 2018, Tutterow said, bringing short-term interest rates to between 2.25 and 2.5 percent.
“By any metric, those are low short-term rates,” he said, pointing to a slide that showed interest rates around 5 percent in 2006, 10 percent in 1989 and 15 percent in 1981.
As to whether rates get raised this year, Tutterow said the general consensus is that there will be two rate hikes, but he thinks there will only be one.
“But even if we have two and we finish in 2019 at 3 percent, … that’s just putting us into what we would call the neutral range. … We’re going from a very accommodating monetary policy to just an accommodating one. And so we’re moving toward normalcy not because we’re fighting inflation, but because an economy that grew 3 percent last year doesn’t justify having short-term and long-term rates as low as they’ve been. It’s normalization.”
Speaking of economic growth, Tutterow remarked that the U.S. is halfway through the 10th year of economic expansion.
“By the book, the recession of 2008 (and) 2009 ended in June of 2009. So when June rolls around and the economy is still growing — and it will be — we will be in the 120th month of this expansion. And at that point, we will tie the expansion between March of 1991 and March of 2001 to become the longest (expansion) in the post-World War II era.”
Tutterow said he understands that when the economy is growing for that long, there are concerns that a recession could be on the horizon. The average economic expansion in the modern era is 58 months, he said, so by April, the economic expansion will have been growing twice that long.
“I do not believe that economic expansions die of old age. Economic expansions die and recessions become a part of reality because of bad policy, because of asset pricing bubbles that build and pop, because of over accumulation of inventories and because of a portfolio of things like terrorist attacks and oil embargoes and military excursions that we economists call exogenous shocks,” Tutterow said.
While there are risks —the global economy is growing slower than it has in the past, the housing market and durable goods are to some degree at risk — Tutterow said he doesn’t believe a recession is imminent.
“Rather, we believe the risk of recession is about one chance in three. And that risk is very much back loaded in the final months of 2019,” he said.
The factors that lead him to make that prediction are high consumer confidence and retail sales.
“There is no doubt that repeated stories about the government shutdown are starting weigh a little bit on both CEO and household confidence. But what is undeniable is the fact that the surge in confidence that we saw in 2017 and 2018 has manifest as strong retail sales. … So as long as confidence is maintained, as long as the consumer sector maintains its footing, the risk of a recession remains relatively low.”
As to whether the shutdown ends soon, Tutterow predicts the federal government will reopen in the next couple weeks.
OIL PRICES AND AUTOMOBILE SALES
Later in his presentation, Tutterow showed a slide detailing the rate of light truck and car sales, both of which were on the rise until 2014.
“(In 2014), light truck sales continued to soar while auto sales — think sedans — started moving sideways and then started turning down. What could have caused this decoupling between light truck sales and automobiles? Gas prices.”
Tutterow explained that when gas prices began to fall around 2014, those looking to buy new cars turned back toward SUVs and trucks and away from smaller vehicles because fuel efficiency became less of a deciding factor.
While low oil prices might be bad news in areas of the U.S. that depend on the oil and gas industry — such as Texas, Oklahoma and North Dakota — it is “great news in Cobb County” when prices come down.
“Georgia is a net importer of energy,” Tutterow said. “Metropolitan Atlanta has some of the longest commutes in the nation. We have a major airline hub here. We’re cultivating ourselves as a logistics and wholesale trade hub. All of those things benefit from lower gas prices. So when I hear about oil prices dropping and some segments of the stock market being concerned, that is not our issue in Cobb County. Lower oil prices translate into a lower price at the pump, which returns cash into the pockets of consumers throughout our region.”