Outlook For The U.S. Economy
The food and fiber sector which includes farming is very sensitive to events that occur in our nation's economy and the economic situation around the world. So let's examine a few key economic variables with an eye to forecasting trends for 2004 and what these macroeconomic forces might mean for agriculture in the coming year.
First, the economy has shown remarkable resilience to the major shocks of 9/11, war in Iraq, and the cost of reconstruction in Iraq and Afghanistan. In addition, regional energy distribution disruptions drove up energy prices mid-year. All these forces created a great deal of uncertainty and acted as drags on economic growth and job creation. But for the coming year we expect economic growth to pick up.
Second, inflation is a key variable that affects agriculture in many ways but primarily through the cost of inputs as well as land prices. Twenty years ago inflation was high and in the headlines. Today inflation is a non-topic. Earlier this year there was a false concern about "deflation" (falling prices) than the traditional concern about inflation. Deflation would be a serious problem, but it is not viewed as a likely event. Basically, inflation is expected to remain low in the coming year.
The most dramatic change in financial markets in since World War II was falling interest rates during the past two years. Low interest rates led to a splurge in consumer spending, but business investment has been slow. Agriculture benefits from lower interest rates as the sector is a major borrower. But the need to finance larger government budget deficits suggests that interest rates will be under upward pressure.
The international trade deficit has been exploding with imports into this country far exceeding what we sell to others. There are many reasons for the trade deficit, but the bottom line is that this deficit acts as a drag on the economy and economic growth and job creation. The agricultural trade balance is positive and remains a positive force on the U.S. economy.
From four years of significant federal budget surpluses (1998-2001), we have rather quickly returned to an era of what appears to be extended massive budget deficits. The deficit situation is a source of a concern particularly if government borrowing begins to put upward pressure on interest rates which we feel is likely to occur.
So what does all this mean to agriculture?
- higher energy prices increase the price of petroleum products-fuel, natural gas/propane, chemicals and fertilizers;
- lower interest rates are good for borrowing and the past year has provided some prime opportunities to refinance various debts;
- rising federal budget deficit suggest upward pressure on interest rates in the coming year;
- a rising budget deficit limits the options that Congress and the President might make regarding spending increases for agriculture. There's not a lot of flex in the budget and the prospect of a Senior Drug benefit program and increased spending for other government programs limit what the Federal government might do for agriculture.
Major risk factors that could impact the economy in the coming year include:
- how fast world economic growth picks up, especially for our major trading partners
- no further major hikes in already high energy prices (oil and natural gas)
- interest rates could increase faster than expected helping curtail economic growth
- the very remote possibility of a deflationary spiral.