Road Warrior

Global and domestic economic risk

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The U.S. economy is in its 63rd month of expansion, though to some it does not feel like an expansion. Commodity and equity markets are bouncing around at any news, both domestically and globally. The bottom line is that your checkbook and your balance sheet’s destiny are being shaped by many different factors. Let’s discuss some of these factors and some perspectives on risk.

 

Geopolitical Risk

Currently, as of mid-August, geopolitical risk is the largest risk with a “code red.” The unrest in Ukraine and tension in the Middle East move markets daily. Unfortunately, agriculture is often the industry first affected by political and military unrest. The recent sanctions by the Western nations on Russia are a classic example, with Russia in return banning agricultural imports from producers in Western nations. On the input side, military and political unrest in oil, gas and fertilizer producing nations can come back to take a bite out of profits with increased cost because of supply. Europe, particularly the economy of Germany, bears watching as this sector of the world teeters on the brink of recession. As fall and winter approach, will the regimes in this part of the world use energy as a negotiation variable?

Second, a region that is in a “code yellow” risk zone includes Brazil, Portugal, and Argentina. Brazil is risky due to political components, and the others’ risk is because of the possibility of financial default. This can unravel markets around the world which can impact currency and equity values very quickly.

Third, China, while currently a “code green” or early “code yellow,” has been using stimulus to support its struggling housing industry and to improve the slowing economy, which is at a 7.5 percent gross domestic product (GDP) growth rate. Longer-term, natural resource issues involving air, water, and land quality are major concerns that will impact sustainability and the economic growth of the second largest economy in the world.

 

Domestic Risk

Within the U.S., while job numbers are improving, wages and workforce participation rate are troubling. Workforce issues along with an anemic housing market that is a large component of the economy most likely lead to a prediction of modest growth in the U.S. economy.

The estimate for GDP growth rate for the second quarter of 2014 was 4.0 percent, which is up from -2.1 percent for the first quarter, but the bottom line is the U.S. economy will probably grow at 2.0 percent to 2.5 percent annually for the remainder of the year.

If unemployment rate that is reported in the news is in the range of 5 percent, GDP growth is in the 3 percent to 4 percent range, and inflation ticks up to 2.5 percent, expect a rise in interest rates.

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Dave Kohl is an ag economist specializing in business management and ag finance. He can be reached at sullylab@vt.edu.

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