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 this week.
“Predictions and models aren’t working because the economic models of the world are shredded. They haven’t been good since 1990,” says Buchholz, managing director of the $15 billion Tiger hedge fund, Harvard economics teacher, CNBC regular participant, and a former White House director of economic policy during President George H.W. Bush’s administration.
Buchholz says the rate of change that is possible today in the world, thanks to technology, makes it increasingly challenging to predict what will happen next. But that doesn’t mean it’s impossible. Buchholz says he evaluates three critical levers--interest rates, oil prices and trade--to assess the state of the U.S. economy today and predict where it’s headed and its potential impact on farmers. Here is his takeaway on each 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,” he told farmers. “Inflation has stayed low so interest rates have stayed low, allowing businesses and individuals to borrow.”
Buchholz says he believes inflation will continue to remain low but if it pops up, then the Federal Reserve Board could slam on the brakes. “Then we could tumble into a recession,” he notes.
He adds that 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 that we can afford to put fuel in our car, and that’s good for everyone,” he says.
However, Buchholz believes American 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 to 2018, Buchholz says his “best guess” is that oil will stay around $40 to $65 a barrel. One reason for that he says is because President Trump’s administration supports the U.S. oil fracking industry, which produces a high volume of domestic oil.
Trade decisions will continue to be slow-going. On one hand, Buchholz says President Donald 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 Mr. 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.
“Mexico is looking for Plan B with NAFTA,” Buchholz adds. “They’re signing deals with Brazil and Argentina.”
As for the Trans Pacific Partnership (TPP), it will continue to go on without U.S. involvement, Buchholz expects. He says to “look for President Trump to continue working to make bi-lateral agreements with Britain, Japan and other countries.”