GDP, Trade Wars and Soybeans

You don’t often see these three items together in one headline, but economics and politics are producing some strange combinations these days.

Preliminary United States GDP data for the 4th quarter came in Friday morning at a lackluster 1.9%, below expectations of 2.2%, and capped off one of the worst years of U.S. GDP growth since 2009. The culprit this quarter? A reversal from the good 3Q numbers that were made great by soybean exports! 

Though soybeans are not the centerpiece of Trump’s trade agenda, their recent importance does highlight the point that exports and trade are an important part of GDP. We can drop out of trade agreements like the Trans-Pacific Partnership (TPP), as depicted below, and Trump can renegotiate other trade agreements. We may even end up with a bigger piece of the trade pie. But if the pie shrinks because of trade wars, it’s a loss to the United States and the rest of the world. During the Great Depression protectionist trade policies were referred to as “beggar thy neighbor,” an expression that goes back to Adam Smith. The world has worked hard since the 1930s to avoid repeating this mistake. 

The 4Q numbers did point to the potential for some improvement in 2017, which we believe are significant. Consumer spending was up 2.5% in the quarter, and this was the highlight of the GDP picture. Business investment was also better, as was the accumulation of inventories. The improving trend in GDP that appears to have begun in the middle of 2016 is intact, and this positive trend could be enhanced by some of Trump’s policies, including tax reform, fiscal stimulus and regulatory relief.

This week we will see a slew of important economic data. On Monday it’s personal income and PCE, Tuesday it’s consumer confidence, and Wednesday we get ISM manufacturing and the Fed’s decision on interest rates. We, as well as the rest of the market, will be shocked if the Fed raises rates so early in the year. We do expect two hikes this year, but they should come later. The week ends with the nonfarm payroll report, which is a fitting cap to this busy week that is sure to be filled with some strange combinations – but we doubt soybeans will again make the top of the list! 

Source: Bloomberg, Financial Times, Barclays