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Q2 U.S. Economic and Credit Trends Outlook - FAQ

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Q2 U.S. Economic and Credit Trends Outlook These questions were answered with assistance from Amy Crews Cutts, Chief Economist, and Cristian deRitis, Senior Director at Moody's Analytics. 1. What is your GDP prognosis if there is not trade war, but instead we lower our trade deficit? a. We tend to focus on the downside risk assuming that tariffs would go into place, but what if China makes some concessions through the negotiation process. For example, what if China agrees to increase its purchases of US goods over the next few years? That's a possibility that could help to lower the bilateral trade deficit, but it's not something that would be likely to occur right away. It would take time to implement such a plan, as U.S. producers may not be in a position to meet increased demand immediately. In addition, the details around these purchases impact our outlook as well. It's one thing if China increases its purchases of US goods for its own domestic consumption. It's another if China were to buy goods such as petroleum, only to re-export them to another country. In this case, the overall US trade deficit may be unchanged even if the bilateral trade deficit improves. Given current expectations that any concessions would be relatively small, the proposed upside scenario wouldn't be that different from the Moody's baseline scenario presented during the webinar. In addition, the tax cuts passed last December and the additional spending authorized by Congress back in February will increase the US deficit making it difficult for the overall US trade deficit to shrink anytime soon – even if China were to modestly increase its purchase of US exports. As the US increases its borrowing overall, it will spend more on everything including additional imports. As a result, it is very unlikely that we'll actually see the trade deficit shrink in the short term. Longer term, if negotiations with China lead to a more favorable trading terms, then that could be a positive for the trade deficit and the economy overall. That impact would likely be observed two or three years from now, as companies adjust and the fiscal impact of the tax cuts and increased spending are fully absorbed.

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