Should Disney Be Worried About a Recession?

by Ray Keating

Review/Analysis

DisneyBizJournal.com

January 4, 2019

Variety jumped into 2019 with an article carrying the rather dramatic title of “Recession Fears Grip Hollywood: Can the Movie Biz Survive a Downturn?” “Survive”? Really?

With recent stock market tumult feeding assorted worries, perhaps it’s not surprising that this piece was published. Given that Disney is the big kahuna in Hollywood, and with its theme park, cable television, forthcoming streaming service, and other businesses, recession talk most certainly gains attention at The Walt Disney Company. But how worried should Mickey Mouse & Company be about a recession?

It’s important to understand that when the economy seriously goes off the rails, it’s usually because government has done something stupid. Therefore, I have a checklist of key areas regarding governmental actions to see which direction each is pointed in, i.e., in a pro-growth, neutral or anti-growth direction.

First is tax policy. After all, it matters a great deal whether taxes are going up or down – in particular, is tax policy changing to incentivize or disincentivize working, investing and entrepreneurship. The business tax reform measure passed and signed into law at the end of 2017 clearly was a plus for business, including business investment. Also, since the reduction in the corporate income tax rate is permanent, it will continue to have a positive effect on the economy going forward. However, given the change in control of the U.S. House of Representatives from Republicans to Democrats, further substantive positive changes on the tax front are not in the cards over at least the next two years, and that includes, unfortunately, not being able to make permanent the temporary measures in the December 2017 tax relief measure. So, tax policy looks to remain pointed in a pro-growth direction, but less so than over the past year.

Second, the regulatory relief that came during the first two years of Trump is in place - at least for now - and it will continue to work against recession. People not involved in owning and operating a business generally fail to grasp the costs imposed by government over-regulation, and how important regulatory relief is for starting up, operating and investing in an enterprise. Once again, though, with the change in the House, it obviously raises serious doubts about anything more positive happening on the deregulation front. Generally, as long as the White House and Senate work to stop efforts to impose new regulatory burdens, regulatory policy will remain pointed in a pro-growth direction.

Third, regarding monetary policy, a recession does not ride on Fed actions, as so many are asserting, especially on Wall Street. The Fed actually is being constructive by moving forward with the process of getting monetary policy back to something close to normal after running loose monetary policy without precedent for a near-decade after the 2008 economic/credit mess. Keep in mind that even as the Fed works to rein in the monetary base, bank reserves remain at astronomical levels. In addition, recent interest rate moves by the Fed have been pretty minor when put in historical context, and the Fed seems to simply be following the market. Therefore, using the word “tightening” regarding recent Fed policymaking is a big stretch. While some market readjustments are inevitable, fingering the Fed as pushing us into a recession is off the mark. In the end, the Fed is working to shift monetary policy away from one that has generated uncertainty for an extended period of time and toward greater normalcy. Therefore, monetary policy is being moved from a negative direction to a more neutral stance.

Fourth, international trade matters a great deal to the U.S. economy, given that total trade (exports plus imports) equals nearly 30 percent of U.S. GDP, and in recent times, about 40 percent of economic growth has been tied to trade. Given the aggressively protectionist positions staked out by President Trump, trade stands out as the biggest policy threat to the economy. Imposing tariffs and quotas raise costs for U.S. consumers and businesses (keep in mind that more than 55 percent of U.S. imports serve as inputs for U.S. businesses), while retaliatory measures by other nations reduce opportunities for American businesses and workers. These trade issues are far bigger concerns than what many so-called experts have been talking about over the past two years.

Unfortunately, given President Trump’s gross misunderstanding as to how trade actually works, it’s not clear what positive trade resolutions actually could be possible under Trump. The Democrats running the House will only make matters worse given the party’s longtime protectionist leanings. For example, Trump’s changes to NAFTA were, on balance, negative, and House Democrats will push to impose still more regulatory burdens into the agreement.

Plus, there does seem to be some economic slowing globally, which presents additional problems for U.S. businesses and workers on the trade front. Trade policy clearly stands out as the biggest anti-growth threat to the economy.

Fifth, contrary to wrongheaded Keynesian economic thinking, more government spending is not an economic positive, but instead is a negative. After all, draining resources away from productive private-sector ventures so that elected official can spend those dollars according to political whims is anything but an economic positive. Unfortunately, no one in Washington – Trump, House Democrats or Senate Republicans – seem interested in restraining government spending. This is an ongoing anti-growth factor for the economy. It could get worse if House Democrats, the Senate and Trump agree on some kind of infrastructure spending initiative, which only guarantees the wasting of federal dollars on non-essential projects in the states. Government pouring concrete is not the path to economic growth.

Sixth, there is the overall political climate, and that is clearly sinking more deeply into the pit of uncertainty. If House Democrats go down the path of investigations and impeachment – as expected – that’s an unknown for the economy, and such uncertainty can put the brakes on investment. In addition, Trump is adrift in terms of foreign policy and national security matters, seemingly intent on reining in U.S. global leadership in a host of areas. That creates additional unknowns, including the dangers of failing to counter current and emerging threats.

So, looking ahead on these six government/policy areas, two are generally pointed in a pro-growth direction, one is neutral, and three, to varying degrees, are pointed in anti-growth direction.

There are other positives for the economy, including high degrees of confidence among small business owners and consumers, and some negatives, most troubling being on the housing front.

In the end, the biggest worry regarding the economy is U.S. trade policy, along with a generally incoherent foreign policy. Right now, I’d put the chances of recession at about only 1-in-3. However, those odds have moved in the wrong direction over the past few months, and the key areas highlighted here warrant close watching as we move ahead.

Ray Keating is the editor, publisher and economist for DisneyBizJournal.com, and author of the Pastor Stephen Grant novels, with the three latest books being Reagan Country: A Pastor Stephen Grant Novel, Heroes and Villains: A Pastor Stephen Grant Short Story and Shifting Sands: A Pastor Stephen Grant Short Story. He can be contacted at raykeating@keatingreports.com.