Trade policy causes slowdown in business investment

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By: P.J. Griekspoor 

 

 

At a summit in Dodge City, the slowed economic growth was attributed to uncertainty.

Uncertainty about tariffs is serving to put a damper on business investment, manufacturing is slowing down and the service section is falling. The good news is unemployment remains low nationally and even lower in Kansas, especially western Kansas.

That’s the word from Chad Wilkerson, vice president, economist and branch executive with the Oklahoma City office of the Kansas City Federal Reserve, who presented an economic forum to a packed room in Dodge City on Aug. 9.

 

The Federal Reserve at the national level has a dual mandate from Congress, Wilkerson said. The first is to work to maintain maximum employment, defined as 4.1% unemployment. The second is to keep prices stable, defined as an inflation rate of 2%.

On both fronts, the Fed is currently succeeding, Wilkerson said. The national unemployment rate stands at 3.7%, and inflation so far this year is at 1.8%. He said the slowing economy in the Kansas City Fed region, which includes Kansas, Oklahoma, Nebraska, Colorado, Wyoming as well as western Missouri and northern New Mexico, is being affected by a severe downturn in agriculture and a smaller drop in oil and gas production.

On a national level, the slower economy is the result of falling energy prices and a strong dollar, as well as a slowdown in the world economy. Energy prices have been affected by tightening credit to energy firms as the fundamentals of supply and demand have weakened. However, the economy is still growing despite slowing down, he said. And the labor market remains strong.

 

 

As a result of those conditions, the Fed decided at its June meeting to lower the interest rate by 25 basis points, based on a cloudy economic outlook and inflation below the target level. That was a decision that drew a statement of dissent from Esther George, who heads the Kansas City Federal Reserve.

George said that in her opinion, incoming economic data and the outlook for economic activity over the medium term, no change in the federal funds rate was warranted. However, she said, a change in conditions would change her mind.

“There are certainly risks to the outlook as the economy faces the cross currents emanating from trade policy uncertainty and weaker global activity,” her statement read. “Should incoming data point to a weakening economy, I would be prepared to adjust policy consistent with the Federal Reserve’s mandate s for maximum sustainable employment and stable prices.”

Turning to Kansas economic news, Wilkerson said that the pace of Kansas employment growth has remained sold in the metro areas but has been slower in southwest Kansas. While the national jobless rate stands at 3.7%, Ford County is between 2% and 3%, and the rate of job growth has slowed.

“The very low unemployment rate is responsible for holding back job growth,” he said. “In part, that is because employers cannot find workers to fill the jobs they would like to create.”

District energy activity has slowed over the past nine months as prices have ticked down closer to marginally profitable levels of $53 to $54 a barrel for oil land $3 per mcf for natural gas. Drilling and business activity has slowed, credit has tightened, and the expectations are for the decline to continue, he said.

It is trade policy uncertainty and supply chain disruption that has caused the expansion in manufacturing to slow down, Wilkerson said. A recent survey found that 25% of manufacturers in the region say they have had to change suppliers as a result of tariffs. He said businesses were surveyed by Kansas City Fed employees during their visit to the region the second week of August.

 

 

He said there are expectations that agricultural incomes will begin to rebound somewhat, but that a farmland values will remain mostly flat. Cattle and wheat prices are down from earlier in the year, but are similar to recent years, while corn has finally begun to see some recovery.

Trade policy, especially the ongoing trade war with China, is holding down exports. This has resulted in an oversupply as well as lower prices for soybeans and hogs, which had seen China as a major buyer. Kansas is below the national average in production of both hogs and soybeans, so its economy has been impacted less than that of states to the east, he said.

Asked about how the goal of 2% for inflation was derived, Wilkerson said it is easier to deal with moderate inflation than minor deflation. He said wage growth is also tied to the inflation rate, and that allowing it to fall too low could have a negative impact on wage growth, which has already been stagnant.

He said that while the Fed is keeping an eye on agricultural credit conditions, there has not yet been a tightening of credit to the sector.

Employees of the Kansas City Federal Reserve have been traveling the region, surveying businesses by region and holding economic summits to report on their findings to local businesses.

 

(Farm Progress)

www.farmprogress.com

 

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