US economic growth on track: Fed report

Global economy sprinting ahead but trade war could end the race

WASHINGTON, April 19, (RTRS): “Robust” business borrowing, rising consumer spending, and tight labor markets indicate the US economy remains on track for continued growth, the Federal Reserve reported on Wednesday, with the risks of a global trade war the one big outlier.

In its periodic “Beige Book” summary of contacts with businesses in its 12 regional districts, the Fed said the overall outlook among businesses “remained positive,” but that many were worried about the Trump administration’s use of tariffs.

“Contacts in various sectors including manufacturing, agriculture, and transportation expressed concern about the newly imposed and/or proposed tariffs,” the central bank said in its report, which covered the period from March to early April.

In fact, the word “tariffs” appeared 36 times in Wednesday’s report after not appearing at all in the previous Beige Book published March 7. It was referenced as a factor affecting prices or as a potential concern for the outlook in 10 of the 12 regional banks’ activity summaries.

But otherwise the economy appeared to be motoring along, with some evidence that the tax cuts approved in December may have begun filtering through to business spending and investment.

Several Fed districts reported a jump in commercial and industrial lending, from a “robust” 17 percent year-over-year increase in St Louis to “solid” growth in Atlanta and “healthy” demand in Cleveland.

“Markedly stronger growth in loan volumes was seen in commercial and industrial, and commercial real estate,” the Dallas Fed reported.

That dovetails with other Fed data showing commercial and industrial (C&I) loan growth, a closely watched gauge of business credit demand, has picked up pace in the last two months after slowing sharply through 2017 and into the start of 2018. Year-overyear C&I growth for all US banks accelerated to 3.4 percent in early April, its fastest in more than a year, after falling to near zero at the end of last year.

Demand has been strongest among lenders outside of the top 25 largest banks, Fed data shows. Small banks registered year-over-year C&I loan growth of 6.2 percent in early April, the largest in more than two years.

The jump in business borrowing could be a precursor to the sort of investment boom that Fed officials hope would follow from the recent steep cut in corporate taxes.

That would likely support the core view among Fed policymakers for at least two and perhaps three more interest rate increases this year. The Fed raised rates at its March policy meeting but is not expected to do so when it meets again in about two weeks.

Price increases nationally were described as “moderate,” with steel costs rising “dramatically” in some areas due to the Trump administration’s announcement of tariffs on imports of the metal.

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The global economy will race further ahead this year, expanding at its fastest pace since 2010, but trade protectionism has the potential to quickly tire it out, the latest Reuters polls of over 500 economists worldwide suggest.

The risk of a trade war between the United States and China threatens to curb the economic momentum created by years of policy stimulus. That was the biggest worry of economists, foreign exchange and bond market strategists polled by Reuters.

In the latest global economic survey, three-quarters of over 250 economists said they were concerned the US-China trade war would significantly damage the global economy. Twenty-three respondents who said they were very concerned.

“In our view, the risk of an imminent, all-out trade war seems limited. On the other hand, escalating protectionism is currently the greatest pitfall facing the global economy,” economists at CA-CIB said. “More importantly, protectionist worries have increased significantly over the past three months.”

Still, global growth was forecast to average 3.8 percent this year, the highest since polling began for this period in October 2016. That would be the fastest growth since the 4.3 percent struck in 2010.

The latest expectation was lower than the International Monetary Fund’s projection of 3.9 percent. But the IMF also warned rising trade disputes may damage global growth .

Current US-China trade restrictions would do little to overall global trade, but any escalation might cause more turmoil in financial markets. Stock markets have already halted their multi-year advance.

“After applauding President Trump’s tax cuts, the equity markets are less charmed by his protectionist threats,” wrote economists at BNP Paribas in a note to clients.

Just three months ago, most economists said threats to the global economy from protectionist policies, particularly President Donald Trump’s “America First” trade policy, was slowly fading.

That changed after Trump imposed import tariffs on certain commodities and China retaliated.

The dispute is going to damage economies across the world from the Americas, to Europe and across Asia, according to nearly 90 percent of 230 economists who answered a separate question on the regional impact from the ongoing trade spat.

It is expected to restrain eurozone economic growth, as well as the US economy, dulling an expected boost to growth from the administration’s fiscal stimulus .

Still, the view on inflation and the interest rate path for major central banks was largely unchanged. The dilemma for central bankers remains the same: inflation is modest and in most cases below target despite expectations for solid growth and low unemployment.