The trade war between the U.S. and China continues to weigh on economies across the globe. Economists widely expect the Federal Reserve to cut interest rates at the end of its policy meeting next week, despite data which suggests the U.S. economy is still going on strong. According to the U.S. Commerce Department, the gross domestic product grew 2.1% in the second quarter of this year, beating estimates of 1.8%.
“The U.S. economy is stronger today because the rest of the world is in a recession. That’s not the way it’s supposed to work, but that’s the way it’s working now. Because the rest of the world is in a recession, our interest rates are scraping bottom. And because our interest rates are scraping bottom, our economy is actually doing pretty darn well,” said Todd Buchholz, former White House director of economic policy under President George H.W. Bush.
“The U.S. is such a big domestic internal economy. Eighty-eight percent of our economy has pretty much nothing at all to do with exports or imports. And moreover, a third of that is to Canada and Mexico,” he said. “So, as long as North America is doing OK, Donald Trump doesn’t give a darn about what’s going on at the IMF meetings.”
Back to school specials sign in a store at Providence Place Mall. (Photo by: Jeffrey Greenberg/Universal Images Group via Getty Images)
Recent data from the University of Michigan shows consumer sentiment is near 15-year highs as Americans remain upbeat about the health of the U.S. economy. With the unemployment rate sitting at 49-year lows, Buchholz said consumers have plenty of money, but people simply aren’t buying big ticket items like homes and automobiles.
“If you look at interest rate sensitive sectors… housing has plateaued. If you look at automobiles, automobiles have plateaued, so economic strength is no longer coming from those powerful sectors,” he said. “Does that mean we’re going into recession? No, I don’t think so, because the consumer is still doing fine.”
Meanwhile, Dow components Boeing (BA) and Caterpillar (CAT) both reported much weaker than expected earnings for the second quarter of this year. Both companies have seen a major increase in international exposure in recent years, which Buchholz said could be the reason for the bad performance.
“Right now, it’s better to not be a major exporter like Boeing and Caterpillar and better to be doing your business on the basis of American consumers, not foreign consumers,” he said.
When asked if the Fed should look at the global economy when deciding whether it should cut rates, Buchholz said it depends on how the world is doing.
“I think it’s low-grade fever. It’s not a disaster. This is not 2008. Things are not falling apart around the world,” he said. “They’re just looking pretty darn sluggish at a time when the U.S. economy can kind of shrug it off and say ‘we’re doing all right’.’’
Nick Rose is a producer for Yahoo Finance.
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