EDITORS John Gillin Greg Diamond Scott Garliss
LOOKING FORWARD...
If people are making less money or losing jobs, and companies are spending less on growth and development, that will damage the global economy. It can show up in the form of deteriorating credit-worthiness, less borrowing, or companies possibly shutting their doors. This is where the Fed’s rate hikes come into play. The best time to raise rates is during economic expansion, when paying more is not as painful for the economy. But today, cracks have begun to show in the economy, and Fed data indicate trade concerns in several sectors. As a result, growth appears to be moderating. The last thing the market wants to see in the face of slowing growth is more rate hikes. As liquidity dries up, less money circulates in the system, meaning there’s less to spend, which hurts demand and chokes off growth, perpetuating a negative cycle. The Fed’s monetary path and the trade negotiations with China need to be viewed in tandem. A trade stalemate will result in further pressure on global growth. And, if the Fed is hiking rates and slowing growth further... everyone loses.
The China-U.S. trade talks and the Federal Reserve’s policy path are major concerns for the market. The big driver here is the negotiations between the U.S. and China. Companies are worried about the damage rising tariffs could do to their earnings per share, and many are hooked on the cheap cost of producing goods in China and selling them in the U.S. Just look at Apple. China-based Foxconn builds Apple’s iPhones. It then ships them to the U.S. for finishing touches and mass distribution. Tariffs mean Apple is going to have to pay a lot more to build phones. And to maintain its margins, Apple would have to raise costs or pay its suppliers or manufacturers less. It’s already struggling to sell its $1,000 iPhone, so raising the price won’t help. And as Apple tries to negotiate down the cost of building a phone, that pain will trickle out to other places. If suppliers are receiving less money, they will spend less, take it out on their supply chain, freeze pay, or lay off workers. Given the volume of products it makes and the geographic diversity of the companies it uses, the global economy will feel the effects.
American Consequences 11
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