The Farm Economy: Overall Trends
The U.S. general economy remains relatively solid, particularly compared to other developed nations. However, estimates indicate that the economy has slowed somewhat in the second half of 2019, and going into 2020. Estimates indicate that U.S. GDP growth decelerated somewhat from the 3.1% and 2.0% seen in the first and second quarters of 2019, to 2.1% and 1.9% respectively, for the third and fourth quarters. Forecasts suggest that GDP growth will average around 2.0% in 2020.1
Consumer spending is likely to soften going forward, but will continue to support the economy, as consumer confidence remains high. Job growth has slowed as well, as the nation nears full employment, but the labor market will remain extremely tight going into next year, given that the headline unemployment rate currently stands at a 50-year low (3.5%). The labor market has become so tight in fact, that it, in and of itself, may be hindering economic growth as businesses across all sectors struggle to find help.
While U.S. consumers remain confident, business sentiment shows signs of weakening, amidst market volatility, tariffs and trade uncertainty, a strong dollar, and a global manufacturing slowdown. Overall, economists forecast slower, but still positive economic growth for 2020, and rate the risk of recession in the coming year as fairly low.
The ongoing trade and tariff disputes with major trading partners around the globe remain cause for concern entering 2020, although some progress has been made recently. While some U.S. manufacturers are benefiting from a more protected domestic market, others are facing both higher prices for imported raw materials and reduced access to international markets due to foreign countries’ retaliatory tariffs on U.S. exports.
The US-Mexico-Canada Agreement (USMCA), was recently ratified by the U.S. Congress, and now awaits ratification by the Canadian legislature (Mexico ratified the agreement in June of last year). While some Canadian lawmakers have raised concerns about the agreement, its ratification seems likely. The USMCA is generally considered to be a favorable agreement for U.S. agriculture.
On September 25, the U.S. and Japan agreed to a significant trade deal, after resolving some last-minute concerns from Japan regarding tariffs on Japanese-made cars and auto parts. U.S. exporters, including agriculture, have been concerned about trade with Pacific-rim nations since the U.S. pulled out of the Trans-Pacific Partnership, or TPP. Japan, the world’s third-largest economy, represents a significant market for American farm products, averaging $11 billion in purchases annually over the last 20 years. This is despite an average 17.3% tariff on U.S. ag products, which would be significantly reduced in the new agreement. Under the agreement, Japan will eliminate or reduce tariffs on a long list of US agricultural products, including a number of dairy products.
Trade with China remains the most prominent of our numerous trade disputes around the globe. On January 15, 2020, the U.S. and China agreed to a partial truce in their ongoing trade war, signing what is being referred to as the “Phase 1” China trade deal. In the deal, the U.S. agreed to roll back some of the tariffs that have been imposed on Chinese imports, as well as forego the imposition of tariffs on an additional $160 billion in Chinese imports, that had been scheduled for December. Existing tariffs on $112 billion worth of Chinese goods were decreased from 15% to 7.5%. Despite this thaw in the trade dispute, 25% tariffs remain on a number of product categories coming from China, many of which are components that American manufacturers use to produce finished products.
For its part, China pledged to increase its purchases of U.S. goods and services over the next two years by $200 billion, an increase of more than 50%. This would potentially include an average of about $40 billion in agricultural purchases over the next two years, $52 billion in energy products, and $38 billion in U.S. services. Some analysts have expressed skepticism that China can absorb, and that the U.S. can supply, such a dramatic increase in U.S. exports in such a short period. In short, while the Phase 1 agreement leaves major areas of dispute between the two nations unresolved, it does mark significant progress and perhaps a turning point in the trade war with China.
1 The Conference Board