Can U.S. Economy Weather Trade Wars?

Financial FAQs

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Econoday.com

Why is manufacturing doing so well in the face of rising tariffs—in January when mid-winter business activity tends to slow? Consumers flush with cash from rising wages and full employment are powering higher domestic demand. Exports, on the other hand, have declined because of the rising costs of materials and parts, causing buyers to switch to exports from other countries that aren’t affected by the trade wars. Manufacturing exports had the slowest growth in two years.

The Institute of Supply Management reported that its January manufacturing index registered 56.6 percent, an increase of 2.3 percentage points from the December reading of 54.3 percent. The New Orders Index registered 58.2 percent, an increase of 6.9 percentage points from the December reading of 51.3 percent. The Production Index registered 60.5 percent, 6.4-percentage point increase compared to the December reading of 54.1 percent. The Employment Index registered 55.5 percent, a decrease of 0.5 percentage point from the December reading of 56 percent.”

Any number over 50 indicates that a majority of managers are reporting expanding business in the various sectors that the ISM Indexes measure. The question then is how long can consumers keep this up, while foreign demand for U.S. goods continues to decline? There is very little optimism that the tariff wars will subside soon, given that the revamped NAFTA Treaty has yet to pass Congress, and Democrats in particular not happy with Trump’s cosmetic tweaks that do little to change it.

Brookings’ analysis was that “After a year and a half of negotiations, the three parties are going to end up with a new trade deal that looks remarkably similar to the old NAFTA.”

The ISM’s Non-manufacturing Index for the service sector is also growing robustly, which means that most of the U.S. economy will continue steady growth; at least for the first half of this year and maybe longer if interest rates remain at their current lows.

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Econoday.com

“The NMI® registered 56.7 percent, which is 1.3 percentage points lower than the December reading of 58 percent. This represents continued growth in the non-manufacturing sector, at a slower rate. The Non-Manufacturing Business Activity Index decreased to 59.7 percent, 1.5 percentage points lower than the December reading of 61.2 percent, reflecting growth for the 114th consecutive month, at a slower rate in January. The New Orders Index registered 57.7 percent, 5 percentage points lower than the reading of 62.7 percent in December. The Employment Index increased 1.2 percentage points in January to 57.8 percent from the December reading of 56.6 percent.”

The problem with the Trump administration’s bargaining style in levying punitive tariffs on exports from friend and foe, on top of the fact that appearances seem to be more important than substance, is that such bully tactics turn off foreign countries who have lots of choices doing business elsewhere than with the U.S.

This is already showing signs of affecting U.S. growth, since consumers cannot maintain their higher consumption (largely fueled by borrowing) forever. The BEA’s Q3 2018 GDP final growth estimate was 3.4 percent, down from Q2’s 4.2 percent. Fourth quarter’s initial GDP estimate has been held up by the government shutdown.

Why the slowdown? “The deceleration in real GDP growth in the third quarter primarily reflected a downturn in exports and decelerations in nonresidential fixed investment and in Personal Consumption Expenditures (i.e., consumer spending),” said the BEA. “Imports increased in the third quarter after decreasing in the second.”

A continuation of this picture could be a sign of further growth problems, if the trade wars aren’t resolved soon.

Harlan Green © 2019

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

About populareconomicsblog

Harlan Green is editor/publisher of PopularEconomics.com, and content provider of 3 weekly columns to various blogs--Popular Economics Weekly and The Huffington Post
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