The Arbor Outlook: Heat Waves, Dust Storms and Summer of ’34

“Old man depression, you are through, you done us wrong...”
—from “We’re in the Money,” as performed in the film “Gold Diggers”

In the summer of 1934, the entire country was sweltering with record heat and suffering on multiple weather fronts. Three years of dust storms had culminated on an April Sunday when the country was hit by the worst dust storm in history. Dust bowl conditions prevailed from Minnesota to Texas, and food production declined significantly.

That summer saw 29 consecutive days with temperatures hovering in triple digits. By year’s end, 75 percent of the country was suffering from drought conditions. In north Texas, the cicadas were too thirsty to chirp.

Americans were dying from both heat and hunger. In an attempt to bring relief to working class farmers, Congress passed the Smoot-Hawley Tariff Act, which raised taxes on 900 imports. But the import tariffs caused an international trade war and the global economy hit a wall. The Great Depression then picked up speed and spread beyond our borders.

What many may not remember is that before Smoot-Hawley, there was a tentative economic recovery afoot and unemployment numbers had temporarily leveled. The Tariff Act helped negate the fledgling recovery and thrust the U.S. and the world further into depression.

Tariff costs are almost always passed on to consumers. Makers of cars, appliances, and other products, when hit with tariffs, will often simply tack on that cost to consumers. The U.S. recently imposed 20 percent tariffs on the first 1.2 million washing machines imported this year. After that, there’s a 50 percent tariff on machines, which is expected to take effect sometime in the fall; the United States imports over 3 million washing machines a year. The result? Between February and May of this year prices rose 16.4 percent, the largest three month increase in prices ever.

Washing machine sales are a small part of the overall economy. If the tariff talk stops here, consumers would hardly notice. But investors rightfully fear what could be next.

For example, if automobiles, which are a much larger chunk of U.S. GDP, are tariffed at that same 20 percent rate, it would likely raise the price of a new car by at least $5,000. This would hit a major domestic industry hard at a time when sales are flagging.

These price increases will likely show up full force in the CPI data later this year and early next year, just as the corporate sugar high from the recent tax cuts is starting to wear off. Beyond the headlines, what worries me most as an investor is that this will almost certainly speed up inflation data at a time when the Federal Reserve has a hair trigger and is primed to raise interest rates. Raising rates into an already slowing economy tends to equal downturns. Rinse and repeat if you dare.

Margaret R. McDowell, ChFC®, AIF®, author of the syndicated economic column “Arbor Outlook,” is the founder of Arbor Wealth Management, LLC, (850.608.6121 – www.arborwealth.net), a “fee-only” registered investment advisory firm located near Sandestin.