Economist Offers Predictions

November 27, 2017 03:56 PM
 
Interest rates, oil prices and the state of trade provide clues to the near-term outlook

It’s not often a noted economist says he’s “grappling” with trying to figure out where the U.S. economy is headed. But that’s what Todd Buchholz told farmers attending the 2017 Farm Credit Mid-America Insights Conference in Nashville in November.

“Predictions and models aren’t working because the economic models of the world are shredded,” says Buchholz, managing director of the $15 billion Tiger hedge fund.

Buchholz says the rate of change possible today in the world makes it increasingly challenging to predict what will happen next. But that doesn’t mean it’s impossible.

He evaluates three critical levers—interest rates, oil prices and trade—to assess the present state of the U.S. economy and predict where it’s headed and its potential impact on farmers. Below are his takeaway on each influencing factor.

Interest Rates Are Likely to Hold Steady

“The economy is the best it’s been in 10 years, but telling you that is like pointing out the tallest building in Paducah, Ky. It hasn’t been a towering recovery,” Buchholz says. “Inflation has stayed low so interest rates have stayed low, allowing businesses and individuals to borrow.”

He believes inflation will continue to remain low, but if it pops up, then the Federal Reserve Board could slam on the brakes and the U.S. could fall into a recession.

He doesn’t believe the stock market will stumble significantly anytime soon. “I don’t think the stock market is in a big bubble. It could lose 10% in a week. That wouldn’t surprise me, but where else are you going to put your money today except in the stock market?”

Oil Prices Are in a Reasonable Range

“Oil is high enough businesses are making money and low enough we can afford to put fuel in our car, and that’s good for everyone,” Buchholz says.
But he says U.S. consumers have not been quick to spend their energy savings (approximately $150 billion) because they’re waiting to see if the economy has stabilized. With time, he predicts that “lower oil prices … will eventually help the overall economy. Farmers will pay less to fertilize and plow their fields.”

Looking ahead, his “best guess” is that oil will stay around $40 to $65 a barrel. One reason he gives for that is President Donald Trump’s administration supports the U.S. oil fracking industry, which produces a high volume of domestic oil.

Trade Decisions Will Be Slow-Going

On one hand, Buchholz says President Trump’s deregulatory agenda and decisions for biotechnology, environmental issues and organic regulations have been a huge help to farmers. At the same time, he says farmers are right to be concerned about how the president is managing trade disputes and renegotiating the North American Free Trade Agreement (NAFTA).

“New trade tensions can end up closing opportunities to U.S. farmers,” he says. “I think Trump wants to renegotiate NAFTA. I don’t think he’s likely to pull out, but the question is what kind of concessions are the Canadians and Mexicans willing to make? They feel like they are in a stronger position than they were in 1993 and they are because of NAFTA.”

 

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