Economic Outlook Raymond James Equity Research Scott J. Brown, Ph.D. October 2, 2018 Scott J. Brown, Ph.D. Raymond James © 2018 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved. International Headquarters: The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863

Topics Current Economic Conditions growth, employment, inflation Fiscal Policy Federal Reserve Policy The Economic Outlook Risks

Growth in underlying domestic demand is strong

Job growth has remained strong

The job market has grown tighter

Inflation has remained moderate

Nominal wage growth has picked up somewhat

Inflation-adjusted wage growth has been weak

Government has lagged in this recovery

State & local gov’t was a drag in the early recovery

Fiscal stimulus = a wider federal budget deficit

Trade Policy Why trade? GATT (post WWII) -> WTO (1995) benefits vs. drawbacks Why does the U.S. have a trade deficit? Should we focus on the bilateral trade deficit? China’s trade surplus is 1.3% of its GDP Trump Trade Policy Tariffs on lumber Tariffs on washing machines Tariffs on steel and aluminum (section 232) (NAFTA 2.0) USMCA China: 25% tariffs on $50 billion (mostly industrial inputs) 10% on $200 billion (inputs, capital goods, consumer goods) rising to 25% in January possible tariffs on another $267 Auto tariffs (section 232)?

Demographic constraints will dampen growth

Demographic constraints will dampen growth

The Fed expects growth to slow

The Fed expects to tighten gradually

Long-term interest rates are poised to move higher

Risks to the Outlook Geopolitical Tensions Korea, China, Russia, Middle East, etc. A Misstep on Trade Policy (China) Disruption of supply chains Fed Tightens Too Much Soft landings are hard Bubble? Excessive optimism / Capital misallocation Excessive leverage Political Mueller Investigation 2018 Midterm Elections

Summing Up