Washington Insider -- Friday

No Party Over Economic Expansion

Here’s a quick monitor of Washington farm and trade policy issues from DTN’s well-placed observer.

US April Exports Falter With Imports Hitting A New Record

The value of U.S. ag exports in April fell to $11.237 billion, the lowest of Fiscal Year (FY) 2019 and the smallest since September when they were just $10.315 billion.

Imports of ag products rose to $12.102 billion, a new monthly record and first time that the value of imports cleared $12 billion.

This resulted in a trade deficit of $865 million which would be the first monthly trade deficit for agriculture since May 2017 when it was $46 million. The April figure would also be the biggest monthly trade red ink on record. This also marked the fifth consecutive month with the surplus being less than $1 billion with that mark being exceeded only four times since January 2018.

This fits with historical patterns where the biggest readings on imports typically has come in the March-May timeframe.

The April data puts FY 2019 ag exports at $81.188 billion against imports of $77.252 billion for a cumulative surplus of just $3.936 billion.

USDA May 30 lowered its expectation for FY 2019 ag exports to $137 billion against imports forecast at a record $129 billion for a trade surplus of $8 billion.

USDA Releases Plan Easing Rules On Genetically Engineered Crops

The Trump administration would exempt many new genetically engineered crops from regulation by USDA under a broad overhaul of biotechnology rules announced on Wednesday. USDA said the move would cut the cost of developing genetically engineered plants and would exempt crops with traits “similar in kind” to modifications that could be produced through traditional breeding techniques.

Developers would be allowed to make a “self-determination” that their products are exempt from regulation. The administration argued the approach will allow regulators to focus on "increasingly complex products which, in turn, may pose new types of risks.”

USDA estimated the proposal would save developers an average of $3.6 million for each new genetically engineered crop, if the product is not also regulated by the Food & Drug Administration or Environmental Protection Agency. If another government agency also regulates the plant, the average savings would drop to $730,000.

“This common sense approach will ultimately give farmers more choices in the field and consumers more choices at the grocery store,” Greg Ibach, Undersecretary of Agriculture for Marketing and Regulatory Programs, said in a statement.

Washington Insider: No Party Over Economic Expansion

With all the tension in Washington just now over various trade confrontations, Bloomberg presented a “longer view” that was not terribly encouraging.

It notes the upcoming 10th anniversary of the U.S. economic expansion that began in June 2009. This cycle will surpass the 1991-2001 growth cycle to become the longest since 1854. However, the point of the report is that while “this economic achievement is impressive, few are in the mood to celebrate.” The risk of a downturn is rising, it says, amplified by heightened trade tensions with China and now Mexico. It cites IHS Markit’s U.S. Manufacturing Purchasing Managers’ Index decline in May to its lowest level since September 2009.

The other reason people are blase about this milestone, Bloomberg thinks, is that the expansion has been nothing to brag about. It has “clumped along slowly,” never overheating, which is part of the reason for its longevity — but previous cycles have been “peppier” even when they were extended.

At its present pace, this run would have to last six more years to match the aggregate growth of 1991-2001, and nine more to replicate the go-go growth of 1961-69, when GDP expanded 54%, according to calculations by Nir Kaissar, a Bloomberg Opinion columnist who’s founder of asset manager Unison Advisors. “I characterize this as the recovery of fits and starts,” says Michelle Meyer, head of U.S. economics at Bank of America/Merrill Lynch & Co.

The hallmark of this cycle has been underperformance, the report says. The Federal Reserve repeatedly predicted it would need to raise interest rates to temper excessively rapid growth — then repeatedly backed off because growth came in below expectations and inflation languished below the Fed’s 2% target.

The central bank finally did start ratcheting up rates in earnest at the end of 2016, by a total of 2 percentage points over two years. But it put its tightening campaign on hold after its December meeting, when plunging stocks, trade tensions, and a partial government shutdown rekindled fears of a slump.

Growth is lukewarm despite stimulative fiscal policy from Congress and the White House, Bloomberg thinks. The federal budget deficit had shrunk to just over 2% of GDP at the end of 2015, but it’s widened to almost 4.5% since thanks to the tax cut at the end of 2017 and more spending, particularly on defense.

The single best indicator of this expansion’s weakness is the cost of money, as measured by the real interest rate. The yield on 10-year Treasury Inflation-Protected Securities fell from 4% during the effervescent dot-com boom at the end of 1999 to below zero in 2012 and 2013. It rebounded to just over 1% late last year but has sagged back to 0.4%. When money is this cheap, it indicates weak demand for credit or an overabundance of savings — or both.

To Harvard economist Lawrence Summers, the expansion now has features of secular stagnation in which satisfactory growth can be achieved only by extreme fiscal and monetary stimulus. He believes this is now hitting much of the developed world, including Japan and Europe.

In the U.S., the 2017 tax cuts were tilted toward the rich, who don’t tend to spend windfalls and businesses, which haven’t stepped up investment significantly. The National Association for Business Economics said in January that in a poll of its members, 84% said their companies hadn’t boosted outlays or hiring in response to the tax cuts.

A key feature of the current expansion is the decline in unemployment, with only 3.1% of men age 25-54 officially unemployed in April. However, an additional 10.8% were out of the labor force entirely. “The United States is still a long way from full employment,” says Dartmouth College economist David Blanchflower, author of Not Working: Where Have All the Good Jobs Gone?

Expansions typically end when the central bank raises interest rates excessively to stave off inflation — or, less often, they’re cut short by a financial crisis, as in 2007-09, when “irrational exuberance” led to a wave of defaults and liquidations.

Because of the tortoise-like pace of this expansion, price pressures have been muted. Also, there’s little evidence of the kinds of bubbles that ended the last two expansions.

Still, our pretty-good times can’t last forever, Merrill Lynch’s Meyer says and notes “that seems to be the consensus among bond investors, who’ve driven the yield on 10-year Treasuries down to just 2.1%, the lowest in two years.” Stock investors, on the other hand, are relatively optimistic.

In 1931, John Maynard Keynes wrote about “the long, dragging conditions of semi-slump, or at least sub-normal prosperity” following a recession. Optimistically, Keynes said policymakers had the means to treat such a condition, but only if they choose to exercise their power. Blanchflower, who cites Keynes, writes: “That quote sends shivers down my spine every time I read it.”

So, we will see. There are numerous policy threats to growth from many directions just now, especially in a period that many think includes slowing of a long growth cycle — economic and trade policy fights producers should watch especially closely as the 2020 elections near, Washington Insider believes.

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