Showdown to slow down: What’s dogging our economy?

Every classic Western movie has a good, old-fashioned showdown. While this is a proven formula for cinema, the last thing we look forward to in global economics is a showdown. Economic showdowns can negatively impact growth, stock prices and inflation. Today, a number of economic issues could lead to a showdown. .Trade tensions dominate the headlines. Will the trade showdown lead to a trade war? Let's start by looking at the current situation. Today, U.S. tariffs are among the lowest in the world. Consider the following:. The average U.S. import tariff across all products is 1.6 percent. China's average tariff is 3.5 percent. Mexico's average tariff is 4.4 percent. The United States has only a 2.5 percent duty on imported automobiles from Europe and China.Europe has a 10 percent duty on autos imported from the United States.China recently cut the tariff on U.S. cars to 15 percent from 25 percent..With these numbers, it can be difficult to see free (or even fair) trade. Let the showdown begin. This face-off may lead to a slowdown in global growth. If not resolved, tariffs will increase prices, leading to margin pressure on corporate America and inflation for the consumer..Another showdown looming is the challenge that a tight labor market brings. Unemployment is at 3.9 percent, and if businesses can't find workers, economic activity may slow while wages continue to increase. .Over the past nine years, business has been good. The economy has expanded at an average growth rate of 2.2 percent. The economy can continue expanding if there is labor force growth and productivity gains — but neither of these are increasing significantly. If businesses can't find workers and there are limited productivity gains, economic growth will slow..The Fed is often blamed for ending economic expansions by increasing interest rates too fast or too much. In late 2018, data showed the economy was slowing, but the Fed communicated a steady-as-she-goes policy. As a result, the Dow Jones Industrial Average sold off sharply due to the threat of higher interest rates..In January, the Fed said it will be patient and data-dependent. This sent the stock market up. It is clear that the uncertainty around the Fed's monetary policy continues to be a risk. .We forecast a one-and-done Fed hike in 2019. If this happens, the current economic expansion will continue through 2019..There are several politically based showdowns happening this year. The first was the 35-day government shutdown. Economic activity slows down when the government is shut down. We estimate that GDP is reduced by 0.10 percent each week the government is closed. First quarter GDP growth could be significantly reduced as a result, which may cause us to reduce our annual GDP forecast..Another potential political showdown is the expanding fiscal deficit and our national debt. Typically, the budget deficit is reduced late in an economic cycle, but not this time. That means our national debt continues to grow..This showdown will likely be political rhetoric this year, but will become a very serious economic showdown in years to come. Studies argue that if a country has more than 90 percent net debt to GDP ratio, it cannot experience economic growth greater than 2 percent. Today, the United States has 78 percent net debt to GDP ratio, and it's getting larger..Looking ahead.The global theme has changed, moving from synchronized global growth to synchronized global slowdown. The fundamentals are slowing, but only back to trend growth. We expect GDP growth to be between 2.0 and 2.4 percent in 2019, a slowdown from 2018. This is not a negative theme — if directionally correct, the U.S. economy will set the record for the longest expansion in history in July..We forecast 7 percent earnings growth in 2019. The market sell-off in the fourth quarter created an oversold posture, so we anticipate 10 to 12 percent total returns in equities and the S&P 500 ending the year at 2,800..We expect the Fed to hike rates only once in 2019, moving short rates to 2.75 percent by year-end..Many of these showdowns are not new. Often, they are resolved, and the impact on the economy is manageable. Undoubtedly, there will be volatility, but overall, current data suggests another year of moderate GDP growth. .KC Mathews is executive vice president/chief investment officer at UMB Bank, Kansas City, Mo. He can be reached at (816) 860-7347 or kc.mathews@umb.com