Slowing economy needs a fiscal stimulus

The US economy is slowing fast. The Institute for Supply Management’s (ISM) index has hit 47.2 and new export orders index fell to 41 per cent, its weakest reading since the end of the financial crisis in 2009. As a result, both capex and business sentiment have now rolled over and are falling sharply. Markets have started to react to this and we are already seeing a sharp increase in volatility.

Some countries facing a downturn have already initiated both monetary and fiscal easing. While the Federal Reserve has responded with two rate cuts, monetary easing may not be enough. We will need further fiscal easing to reignite the economy. But this is unlikely to happen in the current rancorous environment where the two branches of the government are so bitterly opposed to each other. 

Consumer sentiment also suffers during impeachments

Given the manufacturing slowdown, it is left to the consumer to provide support for the economy. Unfortunately, impeachment proceedings have tended to dampen consumer sentiment as the accompanying chaos creates anxiety. We saw this during the impeachments of both Presidents Nixon and Clinton, with Consumer Sentiment Indexes nosediving during their impeachment processes and only recovering after the uncertainty was removed. 

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Source: University of Michigan, Strategas Research, September 2019

New NAFTA could also take a hit

The other casualty of impeachment process could be the USMCA - the new NAFTA - which has seen the odds of approval by Congress fall sharply to 30 per cent from recent highs of 50 per cent. USMCA is crucial for the reshoring of supply chains out of China back to the US. As companies move manufacturing out of China, some of this will move to other low-cost countries in Asia, but Mexico is expected to be a big beneficiary given its proximity the US. So, Congressional approval of the USMCA is key to this process. The delay of USMCA not only hurts Mexico, it also hurts US companies which are working hard to reduce their costs.

We don’t know how a cornered President Trump will react to the trade war with China. He may put it on hold as he focusses on fighting the Democrats and/or the EU, or he could double down and become even more entrenched in his position. In either case, the levels of uncertainty are growing, and this is poor timing given the challenges facing the US and the wider global economy. We expect volatility to increase in the coming months, and the impeachment process could add more fuel to the fire.

Aditya Khowala

Aditya Khowala

Portfolio Manager