“Dark clouds continued to gather over the once-promising trade discussions between the United States and China….On a more auspicious note, tariffs imposed last year on steel and aluminum imported from Mexico and Canada were lifted this week, which will likely bring the USMCA trade agreement a step closer to ratification” - (Wells Fargo Securities, US Review, May 24, 2019)

Darker clouds on the US economic horizon are surfacing. The foreign trade disputes with China and a potential dispute with Japan are of course worrying. Fortunately, from Canada’s perspective, the trade disputes over aluminum and steel have ended, but the new NAFTA agreement (called USMCA) is far from ratified in Congress.

Although US real GDP rebounded upward in the first quarter (3.2% at an annual rate), business investment, housing expenditures, and imports were all unusually weak. Growth in the quarter was exaggerated by a massive inventory buildup and a strong surge in exports, both of which were distorted by trade concerns.  

In the US, the range of uncertainties triggered by the Trump Administration, plus the ebbing stimulus from the tax bill, are already starting to show up in the macroeconomic data.

The following projections produced by Wells Fargo suggest that the American economy will expand 2.8% this year and only 2.1% in 2020. Consumer spending is projected to downshift from 2.6% growth in 2018 to 2.4% growth this year and 2.1% in 2020.

In this goldilocks outlook, the unemployment rate is expected to stay below 4% right through to the end of next year and pre-tax corporate profits are projected to expand a healthy 5.7% this year and then barely expand in 2020.

Wells Fargo assumes no change in the federal funds rate through to the end of 2020.

In other words, in their financial projections, the peak in short term interest rates has already been reached.

(Click on image to enlarge)