Economic Snapshot Overview by Dr. Reid Cummings - May 2018

Posted on May 11, 2018 by Dr. Reid Cummings
Dr. Reid Cummings

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Greetings, and welcome to the May 2018 Mobile Bay Economic Snapshot.

For some time we have commented that, we expect to see interest rates rising, inflation gaining momentum, and uncertainty over tariffs and trade continuing, if not increasing. Recent news lends support to these views.

In its early May meeting, the Federal Reserve Board chose not to raise interest rates, but signaled that even though they took no action now, rate increases are likely to occur this year. Some economists expect as many as three moves higher. Still, while the Fed held course, mortgage rates nudged higher, perhaps reflecting recent higher yields on the benchmark 10-year Treasury note. At the end of March, the average 15-year mortgage rate was 3.9%; at the end of April, it was 4.02%, a 3.1% increase. Similarly, the average 30-year mortgage rate on March 31 was 4.4%; April closed with the rate at 4.58%, a 4.1% increase for the month. Anyone in a business tied closely to the cost of money should pay attention to moves by the Fed.

The Consumer Price Index, most commonly referred to as CPI, has shown a steady rise over the last few years. The Federal Reserve uses the CPI as an important gauge of inflation because it measures increases or decreases in goods and services routinely purchased by American consumers. The CPI’s so-called ‘basket of goods’ includes  Food and Beverages (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks), Housing (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture), Clothes (men's shirts and sweaters, women's dresses, jewelry), Transportation (new vehicles, airline fares, gasoline, motor vehicle insurance), Medical Care (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services), Recreation (televisions, toys, pets and pet products, sports equipment, admissions), Education and Communication (college tuition, postage, telephone services, computer software and accessories), and Other Goods and Services (tobacco and smoking products, haircuts and other personal services, funeral expenses). The CPI bears watching because if it rises too fast, the Federal Reserve will likely react quickly with an interest rate hike.

This month the U.S. is expected to complete its North American Free Trade Agreement negotiations with Canada and Mexico. Although outcomes at this point are uncertain, they will almost certainly contain provisions that increase competitiveness for American manufacturers and workers. Unless extended, tariffs scheduled to be imposed soon include $50 billion on Chinese imports (May 22), 25% on steel (June 1) and 10% on aluminum (June 1). Negotiations with our trading partners continue, and the possibility remains that the dates for tariff impositions could be extended. Possible reactions include the reciprocal imposition of tariffs on goods exported by U.S. businesses. We believe it wise to watch this arena closely because any tariff reciprocity will almost surely increase costs for American consumers.

So what does all of this mean? All we can say with certainty is that there is likely much more uncertainty on the horizon.

Until next time, from everyone at the Center, we wish you and yours all of the best.

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