Vanguard’s Economic and Market Outlook for 2019 takes a conservative view on tariff rates, assuming that they go as high as 25%.  Even with that factored in, our chief globalist economist Joe Davis contends that tariffs are unlikely to have a material negative impact on the U.S. economy, since the U.S. relies far less on imports and exports, relative to most other economies. Joe acknowledges that certain industries and sectors will be more adversely impacted by tariffs, while others will benefit–but in the aggregate he does not foresee a significant impact in terms of the overall economic growth rate of the U.S.    

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Rebecca Katz: Bob in Quincy, Illinois, says, “How do you think the tariffs will affect the economy next year?” And you talked a little bit about U.S. but also China, so maybe shed perspective on that as well.

Joe Davis: Well I mean it is and, again, everything I will say, I think this bears repeating. This is our economic assessment of what has already been enacted as well as what we anticipate is likely to be enacted from a tariff policy, both the United States as well as China. I’ll focus on those 2. This is not a judgment of the political nature of these initiatives. I’m asking, what is the economic assessment in my job?

And so we have a number of models, including the Federal Reserve’s own model to estimate what the impact of higher tariff rates do to the U.S. economy, to other economies around the world. There’s a lot of math and computers involved, but the long story short is the current tariffs that are enacted will not have a material impact, negative impact, on the U.S. economy. They will have more of a detriment to China’s economy. I think that’s one of the reasons why we’ve seen a softening in their economy. When you put all the math aside, it’s very simple. Although trade is a very important component of U.S. economy, relative to most other economies, we do not rely as much on exports and imports.

Rebecca Katz: Okay.

Joe Davis: And so the current estimates are that current tariff rates will roughly shave only 10 to 20 basis points, so 0.2% or 0.1% off a 3% growth rate on the U.S. economy. So can it offset growth? Yes. But is it recessionary? No.

Now we are assuming that some of the recent truths so to speak from President Xi and President Trump in terms of the 250 additional consumer goods that could go from 10% tariff to 25%, we actually assume, at least in our baseline for planning and our forecast, that those tariffs actually do, are enacted and go to 25%. So we’re being a little bit more, I would say—

Rebecca Katz: Conservative.

Joe Davis: —conservative in terms of our estimates.

Now one of the risks we talk about in the outlook, and actually the biggest one that keeps me up at night, is that we go beyond that and that we have another round of tariffs that are pursued on both sides, and so we have an escalation.

Now, again, buyer simulations, all else equal, just that on the economy would be a drag on both major economies and hence other economies. Now within that, there’s winners and losers. There’s some companies and sectors in the U.S. that would benefit from that and some that would, well, if I’m talking about in aggregate, it’s a modest headwind. However, the wildcard is, how do the financial markets and how does that uncertainty “transpond” to the world? So if there is any at all, with the collateral damage, that’s what we tried to assume. We assume there’s certain market volatility associated just with tensions between the two largest economic and military powers in the world. But that’s why it’s the biggest risk to our forecast.

But we’re a little bit more pessimistic going into 2019 that we’re trying to assume, and that in and of itself is not enough to derail the economy. Could it be unnerving to markets? Certainly. But it’s not enough, in and of itself, to derail the economy.


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