Business confidence unsettled by trade disputes
U.S. trade disputes with China and Mexico are reverberating throughout Charlotte, making some businesses reluctant to make new plans for growth, according to the president of the Federal Reserve Bank of Richmond.
“At a time where profits are high and the market is relatively high, you might expect people to be investing in growth,” Thomas Barkin said in an interview with the Observer this week. “For the most part, they’re being cautious about investments that double down.”
Barkin shared those perspectives during a visit to Charlotte, part of the territory he’s responsible for as head of the Fed’s 5th District. It’s one of 12 districts across the U.S. The Richmond Fed oversees big banks in an area that encompasses Maryland, Virginia, North and South Carolina and most of West Virginia.
Barkin has been in his position since January 2018. He replaced Jeffrey Lacker, who abruptly retired in 2017 after acknowledging he had improperly discussed sensitive information involving Fed policy with an analyst.
For Barkin, the Fed role has meant a switch from his private-sector roots. Prior to joining the agency, he served as chief risk officer for consulting firm McKinsey & Company, where he had spent about 30 years.
Barkin said he was very familiar with Charlotte before joining the Fed. His time at McKinsey included running the firm’s Charlotte operations and other Southeast offices for a decade.
Over the past year and a half, Barkin has traveled his district, including to Greensboro, Raleigh, Wilmington, Rocky Mount and Greenville. He said he’s in Charlotte every month.
In a wide-ranging discussion, Barkin also touched on recession fears and his take on Charlotte’s economy.
Here are highlights from the interview.
On Charlotte’s economy
When the financial crisis was unfolding about a decade ago, it was unclear how a region so heavily dependent on the financial services would fare.
In a major development, the city lost the headquarters of Wachovia, which San Francisco’s Wells Fargo agreed to buy in 2008 as Wachovia teetered on collapse. Since the recession, Charlotte’s economy has become much more diversified, better positioning it for the next downturn, Barkin said.
He pointed to examples of companies that have relocated to Charlotte since the recession, such as Honeywell, which last year announced plans to shift its headquarters from New Jersey.
“I’m very impressed with the health of the Charlotte economy,” Barkin said. “Not just the unemployment rate, which is low like any big city, but also just the fundamentals of (job) growth in this city.
“Now, anytime there’s a downturn, everyone will get hit,” he said. “But certainly you’re not as uni-dimensional as you were in 2008, and that diversity can’t but help you.”
Charlotte also continues to have a strong talent pool, which adds to its strength, he said.
“There are other cities in the district where you’ve got businesses but not workers, or you’ve got workers but not businesses, and I think Charlotte’s got that nice combination of both.”
On recession odds
This month, the U.S. entered its 10th year of an economic expansion that began when the Great Recession ended. But some economists say odds for another recession are growing.
Consulting firm Deloitte, in a March analysis, predicted the U.S. economy will weaken late this year and in early 2020, in part from the impact of tariffs. A relatively small financial crisis will then push the economy into recession, according to the analysis.
And this month, the National Association for Business Economics released a report that said recession risks appear low in the near term but are expected to rise rapidly in 2020. The report put the odds of a recession starting this year at 15%, and 60% by the end of 2020.
Barkin said certain events could spark a recession, such as an international conflict. Also, developments that raise uncertainty for businesses, such as trade disputes, can lower confidence for company leaders, causing them to reduce employment and take other steps that eventually affect the economy, he said.
“I do worry about our ability to talk ourselves into a recession,” he said.
Barkin said that a positive for the U.S. is that consumer spending, which makes up about 70 percent of the economy, appears to remain healthy. That health is being supported in part by 50-year lows in unemployment and wages that are up more than 3% year over year, he said.
“There’s no reason why upturns have a sell-by date,” he said. “They last as long as they last.”
On trade disputes
Businesses across the U.S. have been closely watching the Trump administration’s escalating trade war with China, as well as the administration’s threats to impose a 5% tariff on all Mexican goods beginning Monday.
Charlotte-area businesses that Barkin has spoken to continue to make investments amid the trade disputes, he said. But they’re not planning to ramp up those investments, Barkin added.
Tariffs on goods from China could have big impacts on South Carolina’s automotive industry, Barkin said. That’s because some automobiles and parts used in automobile manufacturing are imported from Mexico.
BMW produces most of its cars for North America in South Carolina but relies heavily on imported parts from Mexico, Bloomberg reported in May. BMW bought $2.5 billion in parts from Mexican suppliers in 2015, according to Bloomberg.
“Those sort of kind of classic, big-product-manufacturing businesses ... those are the ones that would get hit by Mexican tariffs,” Barkin said.
Many industries won’t be affected by the tariffs, he noted. But, he said, tariffs can have indirect effects, such as hurting the confidence of businesses through creating uncertainty.
“As I talk to businesspeople, they’re nervous about what the rules are going to be,” he said. “I do think it’s in the interests of the economy and of these businesspeople to have the rules settled, and they can make their investment decisions accordingly.”