Month: February 2025

Manufacturing PMIs

USA: US manufacturing sector returns to growth and business confidence surges

The seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI^®) moved back above the 50.0 no-change mark for the first time in seven months during January. At 51.2, the PMI was up from 49.4 in December, and pointed to a modest improvement in the health of the sector at the start of the year.

The renewed strengthening of business conditions in large part reflected returns to growth of both new orders and output.

New business increased for the first time since June last year amid improving customer demand and greater confidence in the economy. New export orders nonetheless continued to fall in January, albeit marginally.

Production volumes rose for the first time in six months. Although the pace of expansion was modest, the increase represented a marked turnaround from the end of 2024 when output had fallen at a solid pace.

The aforementioned rise in new orders had been a factor leading to growth of output, while a number of respondents linked the expansion in production schedules to the start of the Trump presidency.

As well as supporting demand in January, the incoming administration also provided a boost to business confidence.

Manufacturing sector optimism jumped sharply from the end of 2024, showing the largest monthly improvement in sentiment since November 2020. Confidence hit a 34-month high as more than half of respondents predicted a rise in manufacturing production over the coming year.

A combination of higher new orders and improving business confidence meant that manufacturers increased their staffing levels for the third month running. Moreover, the pace of job creation was the highest since June 2024.

Backlogs of work continued to fall as a recent period of subdued demand meant that spare capacity remained in the sector. That said, the pace of depletion slowed sharply and was the weakest in seven months, reflecting the renewed expansion of new orders.

Although firms continued to scale back their purchasing activity in January, the pace of reduction was the weakest in the current eight-month sequence of decline and only marginal.

Some firms indicated that their current holdings of inputs were sufficient to deal with orders, and showed a desire to draw down on stocks during the month. In fact, inventories of purchases fell markedly, and to the largest extent since August 2023. Stocks of finished goods were also down in January.

Suppliers’ delivery times lengthened for the fourth consecutive month, reflecting staff shortages at vendors and extreme weather conditions – both the wildfires in California and unusually freezing conditions elsewhere in the country.

Firms were also faced with a further sharp increase in the cost of inputs, with the pace of inflation unchanged from December.

Manufacturers therefore raised their own selling prices at a marked pace. The rate of factory gate price inflation quickened for the third month running to the fastest since March 2024.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence

“A new year and a new President has brought new optimism in the US manufacturing sector. Business confidence about prospects for the year ahead has leaped to the highest for nearly three years after one of the largest monthly gains yet recorded by the survey. Over the past decade, only two months during the reopening of the economy from pandemic lockdowns have seen business sentiment improve as markedly as recorded in January.

“Manufacturers report that political uncertainty has cleared and the pro-business approach from the new administration has brightened their prospects. Production has already improved after falling throughout much of the last half of 2024, amid rising domestic sales. Factories have also stepped up their hiring to meet planned growth of production capacity.

“However, a rise in the rate of increase of both input costs and selling prices could become a concern if this intensification of inflationary pressures is sustained in the coming months, especially as the combination of higher price pressures alongside accelerating economic growth and rising employment is not typically conducive to cutting interest rates.”

The ISM:

(…) the ISM Manufacturing Index crested above the 50 line into expansion for the first time since 2022. News that manufacturing activity is once again in expansion mode will not be salve to worried investors as it reflects a pre-tariff assessment.

There was broad based strength in the ISM with four of the five components that make up the headline index higher at the start of the year. Specifically, new orders leaped three points to 55.1, which marks the fifth-consecutive monthly move higher suggesting more of a trend-step up rather than one-off bump. The measure of current production was also in expansion for the first time in nine months signaling stronger activity.

The one caveat in this report is that stronger activity comes with stronger price pressure. The prices paid index rose to 54.9, consistent with the broadest expansion in manufacturing input prices since May. Eleven industries reported paying higher prices for materials last month. This could prove problematic for the Fed to the extent goods disinflation subsides as services inflation remains elevated, making the road to 2% all the more challenging.

Factories have laid off workers in four out of the past five months, but that may be poised to change. Manufacturing hiring looks to have at least stabilized according to purchasing managers. The employment component rose 4.9 points, which was more than any other sub-component, to crest modestly above 50 in January. That said, the underlying details in terms of number of industries hiring was not overly positive.

CANADA: Modest expansion of Canadian manufacturing economy

The seasonally adjusted S&P Global Canada Manufacturing Purchasing Managers’ Index™ (PMI^®) recorded 51.6 in January. That was indicative of a modest rate of expansion, and down since December when the PMI registered 52.2. That said, the headline index has now recorded above the crucial 50.0 no-change mark for five months in a row.

Production rose again in January, in line with the trend since last October. The latest expansion was partially linked to higher sales. Latest data showed that new orders rose, supported by an increase in new export sales for the first time since August 2023.

Anecdotal evidence suggested that the threat of US tariffs had led to some clients bringing forward orders. However, uncertainty and hesitation were also widely reported across product markets, largely over the extent of US tariffs and how the possibility of a global trade war could impact economic activity. Subsequently, new work overall rose only modestly and to the weakest extent in three months.

Tariff concerns also weighed on the confidence of manufacturers. Although firms are hoping to bolster output in the year ahead as they plan to release new products, business expectations were at their lowest since last July. Such uncertainty led firms to take a circumspect approach to purchasing activity, with firms reducing their input buying to the greatest extent since last August.

With production rising to a greater extent than new orders, manufacturers added to their warehouse inventories during January. Growth was modest and down on December’s record increase, however. Some firms noted challenges in shipping out goods, due to ongoing difficulties in sourcing transportation and poor weather conditions.

A modest increase in staffing levels was recorded in January, extending the current period of growth to five months. Open positions were reported to have been filled, whilst there was some recruitment in reaction to higher sales and production requirements. Firms were subsequently able to keep on top of their workloads as signalled by another cut in work outstanding. Backlogs have now been reduced consistently throughout the past two-and-a-half years.

Finally, input price inflation accelerated in January to a 21-month high. A stronger US dollar was reported to have raised the price of imported goods, according to panellists. Output charges rose in response, with inflation also picking up to its highest level since last August.

Eurozone factory downturn eases at start of 2025

The HCOB Eurozone Manufacturing PMI, a measure of the overall health of eurozone factories compiled by S&P Global, rose from 45.1 in December to an eight-month high of 46.6 in January. Albeit still below the critical 50.0 threshold which separates improvement from deterioration, it signalled the softest decline since May last year.

Data broken down by the eurozone nations where PMI survey data are collected revealed continued growth in Greece and Spain. That said, rates of expansion cooled from the previous month. France and Germany recorded the joint-lowest Manufacturing PMI prints in January, although the rates of contraction signalled in both instances were noticeably softer than in December. Austria and Italy also posted further (but slower) deteriorations, while the Netherlands saw a fractionally faster decline at the turn of the year.

The uplift in the headline index was principally a reflection of its main two components – new orders (30%) and output (25%) – which saw much softer declines in January. In both cases, the rate of contraction was the slowest since May 2024, indicating a relative improvement compared to the second half of last year. Export* markets were less of a drag on eurozone factory sales performances, with foreign customer orders falling by the smallest margin since last May.

Eurozone factories still tapered their purchasing activity in January, although the decline was the softest seen for eight months. Stocks of inputs (which is also a component of the Manufacturing PMI) subsequently recorded a weaker rate of depletion.

That said, employment levels were cut further at the start of 2025, with the rate of job shedding accelerating fractionally. This marked a twentieth successive month that factory staffing numbers have declined. Surveyed companies noted that they were still able to make inroads into their outstanding orders, as evidenced by another monthly reduction in backlogs of work.

Meanwhile, January survey data indicated a renewed rise in manufacturers’ operating expenses. For the first time since last August, input costs rose during the latest survey period. However, the rate of inflation was modest and well below the historical average. Businesses refrained from passing on higher costs to their customers as output charges were unchanged. This brought a four-month sequence of discounting to an end. Notably, since May 2023, eurozone goods prices have decreased in 19 out of 21 months.

Looking ahead, eurozone goods producers were more optimistic towards the outlook for production. In fact, growth expectations rose to their strongest since February 2022, the survey month prior to Russia’s full-scale invasion of Ukraine.

Commenting on the PMI data, Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, said:

(…) “Even though the new US administration will likely hit the European manufacturing sector and its export industry with tariffs and other measures, confidence in the future has made a remarkable jump. The index for future output is four points higher and slightly above its long-term average. Maybe there’s hope that the lethargy is ending, with general elections in Germany and possibly France, and a climate of “the time is ripe to change things and get things done.”

“Germany and France hold the red lantern in the eurozone’s manufacturing sector, with Austria and Italy not faring much better. At least the manufacturing recession has slowed somewhat in all these countries, and this applies across a broad range of sectors. In Germany and France, the situation for capital goods, intermediate goods, and consumer goods is no longer as dramatic as it was the previous month. It’s possible that things will improve further this year. Despite all of Trump’s tariff threats, we must remember that for most countries in the eurozone, 90% or more of exports go to countries other than the US.”

CHINA: Manufacturing new orders growth accelerates at the start of 2025

The headline seasonally adjusted Purchasing Managers’ Index™ (PMI®) fell to 50.1 in January, down from 50.5 in December. Posting above the 50.0 neutral mark, the latest data signalled that conditions in the manufacturing sector improved for a fourth straight month, albeit only fractionally.

Manufacturing production in China increased for a fifteenth successive month at the start of 2025. Moreover, the pace of expansion accelerated from December, in line with the trend for new orders. According to panellists, higher new business, driven by better underlying demand and increased promotional efforts, supported the rise in output. Some manufacturers also noted that client desires to stockpile underpinned the growth in new work inflows. The rise in new orders stemmed mainly from improvements in domestic demand, however, as export orders fell fractionally in January.

On the back of better demand and hopes for further growth amid expectations of increased business development efforts and supportive government policies, sentiment improved among Chinese manufacturers at the start of the year. The level of business optimism remained below-average, however, as concerns over trade amidst US tariffs threats continued to weigh on the outlook.

Concerns regarding expectations for growth also affected hiring decisions in January, as employment levels fell at the fastest pace since February 2020. A reduction in staffing levels and rising new orders nonetheless led to a fourth monthly accumulation of backlogged work in the Chinese manufacturing sector.

Meanwhile purchasing activity continued to expand in response to higher work inflows. The rise in input buying, coupled with an improvement in delivery times, enabled firms to grow their stocks of purchases for the sixth month in a row. Similarly for post-production inventories, a further accumulation was observed with panellists also indicating interests to retain additional inventory as buffer stocks.

Finally, average input prices stabilised at the start of the new year, with instances of suppliers offering discounts offsetting mentions of rising raw material costs. Some manufacturers therefore took the opportunity to lower selling prices to support sales, leading to a second monthly decline in average charges and at the quickest pace for one-and-a-half-years. Export charges meanwhile stabilised in line with the trend for input costs.

Did sentiment actually improved?

JAPAN: Strongest deterioration in manufacturing conditionsfor ten months

At 48.7 in January, the headline au Jibun Bank Japan Manufacturing Purchasing Managers’ Index™ (PMI®) fell from 49.6 in December to indicate a modest decline in overall operating conditions that was nonetheless the most pronounced since last March.

Output fell for the fifth consecutive month at the start of the year, with the respective seasonally adjusted index indicative of a moderate decline in production levels. Moreover, the contraction was the steepest for ten months as firms often indicated that a lack of new orders had led to output cuts.

The level of new orders placed with Japanese manufacturers also fell in January, and at a moderate pace that was the most pronounced for six months. Where sales fell, firms mentioned sustained weakness in client confidence, particularly in the semiconductor and automotive segments. International demand was also soft, as new export sales contracted though the latest fall was the softest in the current 35-month sequence and fractional.

In the absence of new orders. goods producers opted to complete existing orders, as signalled by another sharp reduction in backlogs of work. At the same time, firms mentioned that additional experienced staff had been taken on as part of attempts to stimulate sales, which contributed to a second successive monthly increase in employment levels.

Business confidence remained positive in January, reflecting expectations that new production launches and customer numbers would be successful. Firms were also hopeful of a wider economic recovery, with notable emphasis on the automobile and semiconductor sectors. The degree of confidence eased on the month, however, to the lowest since December 2022.

Input purchases were lowered for the fourth month running during January, with the latest reduction the steepest since last March amid lower production requirements. The weakness in output and demand also contributed to sustained declines in holdings of both pre- and post-production inventories, as manufacturers opted to adjust inventories in line the with the current muted demand environment.

There was evidence, however, that vendor performance deteriorated in January, though the extent to which lead times lengthened was the softest in the current-five-month sequence and only fractional.

The survey’s price indices showed that inflationary pressures remained elevated across the Japanese manufacturing sector. Firms mentioned that higher labour, logistics, raw material and utility prices had been key factors behind higher cost burdens. Positively, the rate of inflation eased from December to reach the lowest for nine months. Firms opted to partially pass higher costs to clients though raised output prices, though the rate of charge inflation also eased on the month.

ASEAN manufacturing sector starts 2025 on a softer note

The S&P Global ASEAN Manufacturing Purchasing Managers’ Index™ (PMI®) signalled only a modest improvement in the health of ASEAN manufacturing in January, with a reading of 50.4, down from 50.7 in December and the lowest for nearly a year.
The improvement in operating conditions was highlighted by only slight increases in order book volumes and output. Growth rates in both categories have slowed, with the most recent gains being the weakest observed in their respective current 11- and four-month growth trends. (…)

China Hits Back Against Trump’s Tariffs With Targeted Actions Moves include 10-15% levies on US energy, agricultural tools

Beijing imposed a 15% levy on less than $5 billion of US energy imports and a moderate 10% fee on American oil and agricultural equipment on Tuesday, moments after new US tariffs entered effect. China said it will also investigate Google for alleged antitrust violations, although Alphabet Inc.’s search services have been unavailable in the country since 2010.

In more targeted measures, authorities put Calvin Klein owner PVH Corp. and US gene sequencing company Illumina Inc. on a so-called blacklist of entities that could affect their sizable operations in China, and imposed new export control on tungsten and other critical metals used in electronic, aviation and defense industries.

President Xi Jinping’s response appeared carefully calibrated to avoid major blowback on China’s economy while showing Trump an ability to inflict damage on a range of fronts, including by disrupting the key minerals supply chain and hurting US companies with major operations on the mainland.

(…) Trump said Monday the two leaders would speak again, “probably over the next 24 hours,” an assertion to which Beijing hasn’t publicly responded. The Chinese tariffs are set to kick in on Feb. 10, potentially leaving room for negotiation. (…)

China is the largest producing country of tungsten, accounting for about 80% of the global production. Tungsten, known for its remarkable density and high melting point, acts as a buffer against intense temperatures and is most commonly used in armor-piercing missiles in the defense industry. (…)

• Trump Blinks on North American Tariffs The President pauses after minor concessions from Canada and Mexico.

President Trump never admits a mistake, but he often changes his mind. That’s the best way to read his decision Monday to pause his 25% tariffs against Mexico and Canada after minor concessions from each country. (…)

If the North American leaders need to cheer about a minor deal so they all claim victory, that’s better for everyone. The need is especially important for Mr. Trump given how much he has boasted that his tariffs are a fool-proof diplomatic weapon against friend or foe. Mr. Trump can’t afford to look like the guy who lost. (…)

None of this means the tariffs are some genius power play, as the Trump media chorus is boasting. The 25% border tax could return in a month if Mr. Trump is in the wrong mood, or if he doesn’t like something the foreign leaders have said or done. It also isn’t clear what Mr. Trump really wants his tariffs to achieve. Are they about reducing the flow of fentanyl, or is his real goal to rewrite the North American trade deal he signed in his first term? If it’s the latter, there’s more political volatility ahead.

Mr. Trump’s weekend tariff broadside against a pair of neighbors has opened a new era of economic policy uncertainty that won’t calm down until the President does. As we warned many times before Election Day, this is the biggest economic risk of Donald Trump’s second term.

BTW: “On Monday, Trump aides tried to play down the aggressiveness of his trade actions, with National Economic Council director Kevin Hassett saying on CNBC that this is a “drug war,” not a “trade war” and that the media and Canadian government were interpreting the tariff orders incorrectly.” (WSJ)

BTW #2:

Fentanyl realities (Axios)

Trump’s order imposing tariffs on Canada specifically cities the flow of fentanyl from our northern neighbor.

Yes, but: There’s very, very little fentanyl actually being intercepted at the Canadian border.

For fiscal year 2022 through the first quarter of fiscal year 2025, U.S. Customs and Border Protection seized more than 66,000 pounds of fentanyl at the southwestern border with Mexico.

• In that same period, it seized just 70 pounds at the Canadian border.
• To be sure, the White House said the fentanyl crossing from Canada is still enough to kill 9.5 million Americans a year.

There’s likely to be more than $1 billion in tariffs per pound of fentanyl seized crossing over from Canada.

Data: U.S. Customs and Border Protection. Chart: Axios Visuals

U.S. Frackers and Saudi Officials Tell Trump They Won’t Drill More

Trump for months has encouraged the U.S. shale industry to “drill, baby drill,” but another American oil boom isn’t in the cards soon, no matter how many regulations are rolled back, according to oil executives. After many producers overdrilled themselves into bankruptcy during the shale boom’s heyday, the industry is now focused on keeping costs down and returning cash to investors.

The president’s advisers concede that U.S. frackers won’t pump much more, according to people familiar with the matter. The advisers say his best lever to bring down prices might be to persuade the Organization of the Petroleum Exporting Countries and Saudi Arabia, the group’s de facto leader, to add more barrels to the market.

But Saudi Arabia has told former U.S. officials that it also is unwilling to augment global oil supplies, say people familiar with the matter. Some of those former officials have shared the message with Trump’s team. (…)

Keith Kellogg, Trump’s special envoy to Ukraine and Russia, has said global producers should try slashing oil prices to $45 a barrel, to pressure Russia into ending the war with Ukraine. (…)

At lower oil prices, Saudi Arabia would struggle to generate enough revenue to pay for social services, monthly payments to citizens and big infrastructure projects. It will need about $90 a barrel this year to balance its budget, according to the International Monetary Fund.

There is a clash coming between Trump and Saudi Arabia over oil prices, one of the former U.S. officials said. (…)

Two former U.S. officials were told the kingdom would be reluctant to rush to boost production because they were weary of a repeat of the 2019 oversupply.

That year, the Trump administration asked the kingdom to anticipate the return of the Iran embargo by opening up the spigots. But Trump surprised the Saudis by allowing exemptions for some Iranian oil buyers in Asia—leading to an oil glut and lower prices.

Another factor is that the Saudis say privately they need Russia’s involvement in OPEC+—an alliance between the cartel and other producers, including Russia—to prop up prices.

The Saudi government is also giving priority to peaceful relations with Iran, an about-face from their adversarial attitude back in 2018. Back then, the Saudis opposed the nuclear agreement and backed sanctions. Now, the kingdom wants to be part of nuclear negotiations rather than lobbying against them, Saudi officials say.

Slower Labor Cost Growth Continues to Help the Inflation Fight

The fourth quarter reading on the employment cost index (ECI) offered further evidence that the cooler jobs market is reducing upward pressure on inflation. Employment costs rose 0.9% in the fourth quarter, in line with expectations. Over the past year, compensation costs have risen 3.8%.

While that remains notably stronger than the past cycle’s peak of 3.0%, it has neared the realm consistent with the Fed’s 2% inflation target once accounting for the stronger pace of productivity this cycle (productivity growth allows businesses to raise compensation faster than selling prices). (…)

Annual growth in hourly earnings averaged 4.0% in the fourth quarter, up two tenths from the prior quarter. Unlike the more volatile AHE figures, however, the ECI controls for compositional shifts in the employment base along industry and occupational lines. It also includes state and local government workers as well as benefits (about 30% of compensation), making it a more encompassing measure of labor costs.

About AI and productivity:

Good January, Good Year?

Source:  @RyanDetrick

The Dumbest Trade War in History Trump will impose 25% tariffs on Canada and Mexico for no good reason.

The WSJ Editorial Board:

President Trump will fire his first tariff salvo on Saturday against those notorious American adversaries . . . Mexico and Canada. They’ll get hit with a 25% border tax, while China, a real adversary, will endure 10%. This reminds us of the old Bernard Lewis joke that it’s risky to be America’s enemy but it can be fatal to be its friend.

Leaving China aside, Mr. Trump’s justification for this economic assault on the neighbors makes no sense. White House press secretary Karoline Leavitt says they’ve “enabled illegal drugs to pour into America.” But drugs have flowed into the U.S. for decades, and will continue to do so as long as Americans keep using them. Neither country can stop it.

Drugs may be an excuse since Mr. Trump has made clear he likes tariffs for their own sake. “We don’t need the products that they have,” Mr. Trump said on Thursday. “We have all the oil you need. We have all the trees you need, meaning the lumber.”

Mr. Trump sometimes sounds as if the U.S. shouldn’t import anything at all, that America can be a perfectly closed economy making everything at home. This is called autarky, and it isn’t the world we live in, or one that we should want to live in, as Mr. Trump may soon find out. (…)

American car makers would be much less competitive without this [free] trade. Regional integration is now an industry-wide manufacturing strategy—also employed in Japan, Korea and Europe—aimed at using a variety of high-skilled and low-cost labor markets to source components, software and assembly. (…)

Thousands of good-paying auto jobs in Texas, Ohio, Illinois and Michigan owe their competitiveness to this ecosystem, relying heavily on suppliers in Mexico and Canada.

Tariffs will also cause mayhem in the cross-border trade in farm goods. In fiscal 2024, Mexican food exports made up about 23% of total U.S. agricultural imports while Canada supplied some 20%. Many top U.S. growers have moved to Mexico because limits on legal immigration have made it hard to find workers in the U.S. (…)

None of this is supposed to happen under the U.S.-Mexico-Canada trade agreement that Mr. Trump negotiated and signed in his first term. The U.S. willingness to ignore its treaty obligations, even with friends, won’t make other countries eager to do deals. Maybe Mr. Trump will claim victory and pull back if he wins some token concessions. But if a North American trade war persists, it will qualify as one of the dumbest in history.

President Trump conceded Sunday that there may be “some pain” from his sweeping tariffs on Mexico and Canada, but they will eventually lead to a new “GOLDEN AGE.” Nice of him to promise a glorious future because the pain is already unfolding, and the tariffs won’t even take effect until Tuesday.

Mr. Trump says the tariffs will revive U.S. manufacturing. But Jay Timmons, CEO of the National Association of Manufacturers, said in a statement that “a 25% tariff on Canada and Mexico threatens to upend the very supply chains that have made U.S. manufacturing more competitive globally.” (…) “the ripple effects will be severe, particularly for small and medium-sized manufacturers that lack the flexibility and capital to rapidly find alternative suppliers or absorb skyrocketing energy costs.” (…)

The hammer blow to Mexico and Canada shows that no country or industry is safe. Mr. Trump believes tariffs aren’t merely useful as a diplomatic tool but are economically virtuous by themselves. This will cause friends and foes to recalibrate their dependence on America’s market, with consequences that are hard to predict. How this helps the U.S. isn’t apparent, so, yes, “dumbest trade war” sounds right, if it isn’t an understatement.

The NYT:

Canada, Mexico and China are America’s three largest trading partners, supplying the United States with cars, medicine, shoes, timber, electronics, steel and many other products. Together, they account for more than a third of the goods and services imported to or bought from the United States, supporting tens of millions of American jobs. (…)

“Hopes that Trump’s tariffs threats were merely bluster and a bargaining tool are now crumbling under the harsh reality of his determination to deploy tariffs as a tool to shift other countries’ policies to his liking,” said Eswar Prasad, a trade policy professor at Cornell University. (…)

Ernie Tedeschi, the director of economics at the Yale Budget Lab, estimates that a 25 percent tariff on all Canadian and Mexican imported goods — paired with a 10 percent tariff on all Chinese imports — would lead to a permanent 0.8 percent bump in the price level, as measured by the Personal Consumption Expenditures price index. That translates to roughly $1,300 per household on average. Those estimates assume that the targeted countries enact retaliatory measures and that the Federal Reserve does not take action by adjusting interest rates.

Mr. Tedeschi expects tariffs on that level to eventually shave 0.2 percent off gross domestic product once inflation is taken into account. (…)

Bloomberg:

(…) And Trump told reporters that the US would “be doing something very substantial” with tariffs targeting the European Union. (…)

Trump said he was not concerned about warnings from economists that tariffs would fuel price growth, a concern for voters which helped propel him back to the White House in last November’s election.

“Tariffs don’t cause inflation, they cause success” Trump insisted. (…)

The Tax Foundation:

We estimate the 25 percent tariffs on Canada and Mexico and 10 percent tariffs on China proposed to go into effect as early as February 1, 2025, would shrink economic output by 0.4 percent and increase taxes by $1.2 trillion between 2025 and 2034 on a conventional basis, amounting to an average tax increase of more than $830 per US household in 2025. The tariffs on Canada and Mexico alone would increase taxes by $958 billion between 2025 and 2034 on a conventional basis, amounting to an average tax increase of more than $670 per US household in 2025.

Gramm and Summers: A Letter on Tariffs From Economists to Trump Like our predecessors in 1930, we oppose the use of tariffs as a general tool for economic policy.

In an extraordinary act of unity, 1,028 American professional economists in the spring of 1930 signed a letter urging Congress to reject and President Herbert Hoover to veto the Smoot-Hawley Tariff Act. Yet that June, Congress passed it and the president signed it into law. The Smoot-Hawley Tariff helped turn a stock market rout and a building financial crisis into a worldwide depression and triggered a global trade war that halved American exports and imports.

Today, we write this letter in a similar spirit of unity. While the professional economists who have signed today’s letter differ on many issues, we are united in our opposition to tariffs as a general tool of economic policy. Even in efforts to promote national security, tariffs are prone to abuse. Many of the worst restrictions on trade, such as the Jones Act, have been implemented in the name of promoting national security.

Our united opposition to non-defense-related tariffs is based not on our faith in free trade but on evidence that tariffs are harmful to the economy. Protective tariffs distort domestic production by inducing domestic producers to commit labor and capital to produce goods and services that could have been acquired more cheaply on the international market. That labor and capital are in turn diverted from producing goods and services that couldn’t be acquired more cheaply internationally. In the process, productivity, wages and economic growth fall while prices rise. Tariffs and the retaliation they bring also poison our economic and security alliances. (…)

It is telling that the Trump tariffs implemented in mid-2018 and the Biden expansion of those tariffs didn’t stop the secular decline in manufacturing employment as a percentage of the total labor force. The decline in manufacturing employment as a percentage of total employment is being driven by the same secular forces that caused employment in agriculture during the 20th century to fall from 40% to 2% of the labor force: a vast increase in labor productivity and a decline in the demand for manufactured products relative to services. This is a worldwide phenomenon occurring in both developed and developing countries.

In the long history of the country, there is little evidence to substantiate the claim that America prospers more when trade deficits fall than it does when they rise.(…)

The tariffs on steel and aluminum created only a small number of jobs, but since for every worker in the steel and aluminum industries there are 36 workers employed in American industries that use steel and aluminum in production processes, those modest gains were offset by the jobs losses in industries that use steel and aluminum as inputs. With foreign retaliation, the estimated cost to the economy of jobs created by the 2018 tariffs on washing machines, steel and aluminum clearly amounted to many times what the jobs paid in wages.

In sum, tariffs don’t have a predictable effect of reducing trade deficits, and trade deficits aren’t necessarily an adverse economic development. Indeed, trade deficits often arise as foreign investors choose the U.S. as a preferred destination for their capital. (…)

A review of the economic history of our nation yields no credible evidence that broad-based tariffs have benefited the nation as a whole. Protectionists often point to the 19th century as a period of high tariffs and strong economic growth. But a close look at the data for the 19th century shows conclusively that the country industrialized fastest when tariffs were falling, not when they were rising. (…)

FT: The absurdity of Donald Trump’s trade war Tariffs on Canada, Mexico and China will harm America’s own economy and diplomatic power

(…) One absurdity is that these measures are entirely unprovoked in trade terms; they are being used as a coercive tool to further Trump’s domestic political agenda and extract concessions from American neighbours that may be beyond their power to give. Another is that the US will be one of the main victims — in the resulting harm to its own economy and its standing in the world. (…)

That the president is now riding roughshod even over the revised deal, the USMCA, sends a message America’s word cannot be trusted. (…)

Yet the trade war is symptomatic of a larger issue in Trump’s America. The president alone decides which issues are important, exaggerates the diagnosis, and chooses the medicine. As with his attempts to impose his own priorities by firing federal workers and freezing grants, the tools are often blunt. His trade war threatens to be disastrous, but the chaos will not end there.

How Stupid Is This Trade War? Let Me Count the Ways

In sum, even though Trump has a mandate for an anti-globalist and protectionist policy, starting with the two neighbors maximizes the risk to US jobs and prices. It offers minimal prospect of stemming fentanyl, stirs the risk of more migrants coming from Mexico, and is minimally effective in reducing the trade deficit. The reason markets appear to hate this, and didn’t believe Trump meant it, is that it’s a terrible idea. (…)

Trump’s complaints about unfair treatment by the European Union, and Japan’s US $70 billion trade surplus and the yen’s severe undervaluation suggest they’ll also be in the America-First crosshairs. Under a full-scale trade war scenario, the WTO predicts a “catastrophic” double-digit loss in global gross domestic product, as in the 1930s when the US passed the infamous Smoot-Hawley Act. (…)

Marko Papic of BCA Research argues that the US strategy is to make an example of allies, proving that it won’t use kid gloves with anyone else. But putting an onerous tax on accessing American consumers means they’ll no longer drive global growth, and the rest of the world will shift away from the US market:

China has been doing this already, and they have been extremely successful. This is something that I’ve told members of Congress directly; they are losing the battle over the hearts, minds, and pocketbooks of people in Indonesia, Brazil, Vietnam, etc. (…)

From my January 6 post Fear:

The most fearful thing about the coming tariffs brawl is that Trump is totally wrong about the history of tariffs:

September 2024 during a town hall in Warren, Michigan:

“We’re going to use tariffs very, very wisely. You know, our country in the 1890s was … probably the wealthiest it ever was, because it was a system of tariffs. And we had a president — you know McKinley, right? You remember Mount McKinley? And then they changed the name. He was really a very good businessman, and he took in billions of dollars at the time, which today it’s always trillions, but then it was billions and probably hundreds of millions. But we were a very wealthy country, and we’re going to be doing that now.”

Factchecking from various sources:

McKinley was not a businessman. He was a lawyer turned politician, elected to Congress in 1877 and only became president in 1897.

McKinley, the congressman, became chairman of the House Ways and Means Committee and was responsible for framing a new tariff bill. He believed that a protectionist tariff had been mandated by the people through the election and that it was necessary for America’s wealth and prosperity. (…)

“The Republican campaign orators and pamphleteers say that the various import duties levied by Congress are paid by the foreigners who send goods to America, denying that the price of any article which may be called a necessary expense will be increased to Americans by the operation of the new tariff law.”

The Tariff Act of 1890, commonly called the McKinley Tariff, became law on October 1, 1890. The tariff raised the average duty on imports from 38% to 49.5%.

“Let the facts, which are multiplying every day, tell who it is that pays the onerous tariff taxes. They will answer that the American people pay these taxes and that the burden of them rests most heavily upon the poor, inasmuch as there are very few of the necessities of life the prices of which are not increasing on account of the McKinley tariff.” (NYT) (…)

The Tariff Act was a major topic of fierce debate in the 1890 Congressional elections. The tariff was not well received by Americans who suffered a steep increase in prices. The 1890 tariff was also poorly received abroad. Protectionists in the British Empire used it to argue for tariff retaliation and imperial trade preference.

Inflation was particularly high on what the NYT called “necessaries” such as farm products (+6-8%), textiles (+4%), metals and metal products (+6%), building materials (+5%) and “miscellaneous” (+11%) per BLS research.

In the 1890 election, Republicans lost their majority in the House with their number of seats reduced from 171 to 88.

In the 1892 presidential election, Harrison was soundly defeated by Grover Cleveland, and the Senate, House, and Presidency were all under Democratic control. Lawmakers immediately started drafting new tariff legislation, and in 1894, the Wilson-Gorman Tariff passed, which lowered US tariff averages.

Trump’s contention that the 1890s were “probably the wealthiest ever because it was a system of tariffs” also does not verify. (…)

Estimates of annual real gross national product (which adjust for this period’s deflation) are fairly crude, but they generally suggest that real GNP fell about 4% from 1892 to 1893 and another 6% from 1893 to 1894. By 1895 the economy had grown past its earlier peak, but GDP fell about 2.5% from 1895 to 1896. During this period population grew at about 2% per year, so real GNP per person didn’t surpass its 1892 level until 1899. (…)

The Smoot-Hawley Tariff Act of 1930 had a significant negative impact on the U.S. and global economy, exacerbating the effects of the Great Depression.

The Act dramatically reduced international trade:

• It raised import duties on over 20,000 imported goods, increasing tariffs from an average of 40% to nearly 60%.
  

• U.S. imports decreased by 66% from 1929 to 1933.
  

• U.S. exports fell by 61%.
  

• Overall world trade declined by approximately 66% between 1929 and 1934.
  

• At least 25 countries responded by increasing their own tariffs on American goods.
  

• Countries that retaliated against Smoot-Hawley reduced their imports from the United States by an average of 28–32%.
  

• Even countries that merely protested the Act reduced their imports from the U.S. by 15–23%.
  

• The Act highlighted the dangers of protectionist trade policies, leading to a shift towards free trade agreements in subsequent years.
  

• It resulted in a transfer of tariff-setting authority from Congress to the executive branch, as lawmakers sought ways to quickly reverse the tariffs.(!)

My friend Hubert Marleau sees the writing on the wall:

A lot of American growth is being financed with an increased amount of debt. It now takes a startling $2 of government debt to generate $1 of GDP growth, which is both unprecedented and higher than all other developed countries. Indeed, things are never that easy when there is an elephant in the room. They can bring hidden consequences, not least two other left tails in Trump’s agenda: universal tariffs, which are subject to the laws of unintended consequences, and deportation of illegal immigrants, which is an onerous direct cost for many businesses. It may not be all clear at this point which tails (right or left) will prove to be more important for the future, but as a consequence, neither should be disregarded, for the “Trump trades” may have run their course, thereby pulling bets on “American Exceptionalism.” Chinese soft power is rising all over the world. (…)

When Trump 1.0 introduced tariffs in 2017, the US failed to increase either its trading volume with other nations or create new jobs in American factories. He only increased input costs and tied American industries in knots.

World trade moved on without the US, handing it over to other nations instead. Over the past 8 years, its share of international trade to N-GDP has dipped to 25%, while more than 4 out of every 5 countries have registered significant gains. Consequently, the US share of global trade is now under 15%, having opted out of a number of bilateral and regional agreements, and abandoned trade talks on partnerships.

To date, the tariff regime has done less damage to China than to compel Mexico, Europe, the Middle and even Canada to look elsewhere to trade. A continuation of this trend could eventually jeopardize the favourable inheritance of a prosperous economy that was unwittingly gifted. Indeed, the application of broader tariffs may trigger trade wars against the U.S. that could not only undermine its relevance as a trading power, but also sap its economic prowess. (…)

On Saturday, he confirmed that a 25% tariff would be applied to goods from Canada. His justification for this economic assault is that Canada has enabled illegal drugs to pour into the U.S.; has not taken steps to stop the inflow of illegal immigrants; and has a huge $200 billion trade surplus with America. All of these allegations are false. First, the U.S. Custom and Border Protection (CPB) reported that last year 21,148 pounds of fentanyl at the southwest border were intercepted, versus a tiny 43 pounds at the northern border. Second, Canada has a plan to spend over $1.0 billion on border protection. Third, Canada has a relatively small trading surplus with the US in comparison to its other major trading partners, and on top of that is paid with a service deficit. Canadians just don’t know what is left to satisfy Mr. Trump. (…)

On February 1,at 10:06 ET, the equally conservative American Enterprise Institute had a similar message: “Trump is winging it, saying we have a large trade deficit with Canada when we don’t, and that Canadians are responsible for fentanyl coming across the border when they aren’t.”

One Response to Trump’s Tariffs: Trade That Excludes the U.S. A growing number of countries, including American allies, are striking trade deals as the Trump administration erects a higher fence around its global commerce.

In just the last two months, the European Union concluded three new trade deals.

The bloc, completing negotiations that started 25 years ago, reached a major agreement with four South American countries in December to create one of the world’s largest trade zones, linking markets with 850 million people.

Two weeks later, the European Union struck a deal with Switzerland. Then last month, the bloc bolstered trade arrangements with Mexico. It also resumed talks, after a 13-year postponement, on a free-trade agreement with Malaysia.

“With Europe, what you see is what you get,” the European Commission president, Ursula Von der Leyen, boasted to the World Economic Forum in Davos, Switzerland. “We play by the rules. Our deals have no hidden strings attached.” (…)

Of course, the United States, with the planet’s largest and strongest economy, cannot be ignored. But it can, at least sometimes, be avoided.

By punishing longtime allies with tariffs, Mr. Trump is encouraging other nations to form trading blocs and networks that exclude the United States.

This month, Indonesia became the 10th nation to join BRICS, a group including Brazil, Russia, India, China and South Africa that was established in 2009. This economic club now includes half the world’s population and more than 40 percent of its total economic output. Another eight countries, including Bolivia, Thailand, Kazakhstan and Uganda, are on the path to becoming full partners.

In May, the 10-country Association of Southeast Asian Nations, known as ASEAN, will meet the six Middle Eastern nations that make up the Gulf Cooperation Council. The summit’s host, Malaysia, has invited China to attend.

China is also poised to update its own free-trade agreement with ASEAN, which includes Cambodia, the Philippines, Indonesia and Vietnam. And trade and investment between ASEAN and India, the world’s most populous nation, is deepening.

Britain, too, recently christened a new partnership. In December, it officially joined the trans-Pacific trade bloc, a group that includes Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. London is also looking to repair its frazzled economic relationship with the European Union.

And Brazilian and Mexican officials have talked about expanding their trade agreements.

The global economy is increasingly becoming “one that is characterized by ever deepening trade relationships excluding the United States,” said Jacob F. Kirkegaard, a senior fellow in Brussels at the Peterson Institute for International Economics.

The trend is not necessarily anyone’s preference, he said, but the arrangements offer a “second best” option given America’s rejection of a more open economic order. He added that the proliferation of trading blocs, like the one between the European Union and South American nations, also helped countries avoid an overreliance on China. (…)

The biggest changes in trade can be seen in Asia. Nearly 60 percent of Asia’s trade happens within the region, according to a new report from HSBC Global Research. And half of the world’s fastest-growing trade corridors are there. In 2023, China’s exports to ASEAN nations bypassed those from the United States.

China’s trade with Latin America — Brazil, in particular — has also been rising.

India’s status as a world economic power has grown as well. It surged past Britain to become the world’s fifth-largest economy in 2022. “India’s trade expanded across the geopolitical spectrum,” an update on trade released last week by McKinsey Global Institute reported.

And India is on the path to becoming a leading exporter of digital services, which are not subject to tariffs. An increasing number of European, Australian and Japanese multinationals are opening operational hubs — known as global capability centers — there.

New Delhi flexed its economic independence by refusing to go along with Western sanctions against Russia. And now it and China are the biggest buyers of cheaper Russian oil.

Persian Gulf nations like Saudi Arabia and the United Arab Emirates have also shifted their attention to India and China, increasing energy exports to meet the growing demand. Asia receives more than 70 percent of total gulf oil and gas exports, according to one report.

Global trade is still growing, but it is being reconfigured. (…)

Trade, it turns out, is like water flowing through a stream strewn with rocks. When it can’t go through them, it goes around them.

Goldman Sachs:

Goldman Sachs US Economics Research previously estimated that a sustained 25% tariff on imports from Canada and Mexico would increase the effective US tariff rate by 7 percentage points (pp) from the current 3%, implying a 0.7% increase in US core PCE prices and a 0.4% hit to GDP. Additionally, in an Oval Office interview on Friday, President Trump raised the prospect of levying additional tariffs on goods imported from the European Union.

Large tariffs pose downside risk to our S&P 500 earnings estimates and return expectations. If company managements decide to absorb the higher input costs, then profit margins would be squeezed. If companies pass along the higher costs to its end customers, then sales volumes may suffer. Firms may try to push back on their suppliers and ask them to absorb part of the cost of the tariff through lower prices.

We estimate that every 5pp increase in the US tariff rate would reduce S&P 500 EPS by roughly 1-2%. As a result, if sustained, the tariffs announced this weekend would reduce our S&P 500 EPS forecasts by roughly 2-3%, not taking into account any additional impact from major financial conditions tightening or a larger-than-expected effect of policy uncertainty on corporate or consumer behavior.

Our economists describe the outlook as unclear but believe there is a substantial probability that the tariffs on Canada and Mexico will be temporary.

Our FX strategists believe tariffs would also lead to further dollar strength, although this should have a limited impact on aggregate S&P 500 earnings. In total, S&P 500 companies derive 28% of revenues outside the US. Our top-down earnings model suggests that, holding all else equal, a 10% increase in the trade-weighted USD would reduce S&P 500 EPS by roughly 2%. S&P 500 companies report less than 1% of revenues explicitly from each of Mexico and Canada.

In addition to downside risk to earnings, rising policy uncertainty will likely weigh on equity valuation multiples. The US Economic Policy Uncertainty Index jumped on Friday to 502, a top percentile reading relative to the last 40 years. The historical relationship between policy uncertainty and the S&P 500 Equity Risk Premium suggests that the recent uncertainty increase should reduce the forward 12-month P/E multiple by about 3%, holding all else constant.

Combining these modeled EPS and valuation sensitivities suggests near-term downside of roughly 5% to S&P 500 fair value if the market prices the sustained implementation of the newly-announced tariffs. To the extent investors believe the tariffs will be a short-lived step toward a negotiated settlement, the equity market impact would be smaller.

In contrast, equities would fall further if investors view the latest tariff announcements as signals increasing the probability of additional escalation. While equity investor positioning has declined from the extreme levels reached in December — our Sentiment Indicator now registers a moderate +0.6 standard deviations above neutral — elevated economic and earnings growth expectations underscore the potential downside risk to stocks if investors are forced to reassess the fundamental outlook.

Mr. Trump complains about the U.S. trade deficit, arguing that just about every country in the world treats the USA “very, very badly”.

Imports of goods and services (black) began to significantly outpace income and expenditures in 2014. Coincidentally (or not), this is also when households net worth accelerated as house and equity prices took off after the U.S. emerged out of the Great Financial Crisis.

Wealth exploded even more after the pandemic, initially thanks to the various pandemic-related bounties, but later boosted by continued gains in house and equity prices.

Trends in imports are more in sync with household wealth than with overall income. Various studies have demonstrated the propensity to buy foreign goods and services as income and wealth rise. In the USA, since 2014, real income and consumption rose 34% but real imports gained 45% as real household wealth exploded 72%!

Furthermore, since 2014, the U.S. dollar strongly appreciated making foreign goods and services so much cheaper for Americans, including the lesser wealthy segments. Import prices excluding foods and fuels are only up 7% against the 37% increase in core inflation.

 

Prices of imported goods ex-vehicles rose 2.6% between 2014 and 2024 while CPI-Durable Goods rose 10.1%. For the same period, CPI-New Vehicles jumped 21.7% while imported vehicle inflation was only 7.7%.

In 2014, 47.8% of motor vehicles sales were assembled in the U.S.. In Q4’24, the ratio was down to 40.3%.

Total real imports of goods and services rose 44.5% since 2014 while the USD appreciated 35.3%; exports only rose 6% since 2018.

All in all, the explosion in wealth and a strong USD largely explain the worsening U.S. trade balance over the last 10 years. Wealthier and cash rich Americans splurged on cheap and cheaper foreign goods and services, first thanks to the Fed’s post GFC policies, then to the U.S. government’s pandemic bounties and, more recently, to the additional boost to wealth from house and equity prices.

Strong December Spending Amid Only Modest Inflation

(…) Hard inflation data today suggest that price pressures persist in both goods and services. The headline PCE deflator rose 0.3%, while the core metric—excluding food and energy prices—was up a more modest 0.2%. That gain keeps the annual rate of core inflation at a sticky 2.8% annual rate for the third-straight month and the underlying drivers of inflation suggest goods disinflation is quieting still-strong services inflation, where prices rose 0.3% in December.

Real disposable personal income advanced another 0.1% in December, and is up 2.4% over the past year, still running very much at a rate that is supportive of continued consumption. That helps shore up broad economic activity in the U.S., but makes stomping out the final mile of inflation all the more challenging for the Fed.

This is particularly true when more interest-rate sensitive categories may be seeing a near-term boost in spending amid fears of tariffs. (…) It’s fanning cost plans for businesses and pushing consumers into a buy now, or pay more later mindset.

While spending was strong across categories, real spending on durables was particularly robust, up 1.1% in December along with upward revisions revealing a 2.6% pop in November spending.

Spending on autos accounted for most of November’s surge. The 5.6% pop in November spending on motor vehicles was the biggest since January 2023, this category saw a more modest gain of 0.3% in December. The strength in December durable goods spending is less about autos and more about broad-based gains in other categories. Furnishings, recreation and other goods each posted monthly increases of 1.3% or larger on an inflation-adjusted basis in December.

Rather than a reawakening in demand for durable goods we suspect some of this is a pull-forward in demand for big-ticket items and is tariff-related as consumers make key outlays now before prices go up. That said, the tariff rationale is trickier to apply to non-durable goods categories such as spending on groceries and gas, both of which posted real increases in December.

Americans may have pulled some purchases ahead of changes in EV subsidies and/or tariffs as spending outpaced labor income in November and December.

Wages and salaries keep rising 0.4-0.5% per months or 5.5% annualized but total nominal expenditures grew at a 7.6% annualized rate in the last 4 months of 2024 or 4.9% annualized in real terms, a sharp acceleration from +3.4% a.r. in the previous 4 months. Real expenditures on durable goods exploded 16.4% a.r. since August after an already very strong +6.7% a.r. in the previous 4 months.

On a YoY basis, real Durables were up 6.1% in December and 5.7% in Q4 on top of a very strong Q4’23 (+5.8%). Since 2019, Americans have increased their stock of durable goods by 31.4%. Nothing exceptional one might say since this followed +33.5% in the previous 5 years!

All this while the number of light weight vehicle sales actually declined!

Americans pounce on bargains when they see them. Even if most of them are imported…

This chart clearly shows the hugely deflationary goods prices since 1995 while imports from China mirrored the growth in spending on goods.

Tariff War Likely to Put Canada Into Recession, Economists Say

The Canadian economy is set to face the most severe shock since the Covid-19 pandemic and will probably sink into a recession if a tariff war persists, say top economists, with one calling it an “existential threat.”

President Donald Trump’s 25% tariffs on most goods the US buys from Canada and Prime Minister Justin Trudeau’s plan to retaliate on C$155 billion ($105 billion) worth of American-made products will trim real gross domestic product growth by 2 to 4 percentage points, according to economists’ estimates.

For an economy that was projected to grow at 1.8% in 2025, that would imply the first annual contraction in 16 years, outside of the pandemic. Consumer prices are likely to increase at a faster pace than the Bank of Canada’s 2% target, the unemployment rate is expected to rise and the Canadian dollar will weaken further.

Meanwhile…

• Rubio Calls ‘Status Quo’ at Panama Canal Unacceptable, as Trump Renews Vow to Seize It
• Trump Vows to Punish South Africa Over Law to Expropriate Land South African Elon Musk has spread the baseless conspiracy theory that there’s a “genocide” against White farmers in the country.

FYI:

How to Cover Stupidity (Including Our Own)

(…) In Homo Cretinus, Olivier Postel-Vinay describes stupidity as a “mental polyp” that subtly encloses specific brain regions, impairing cognitive flexibility. This form of stupidity, he said in an interview, is not an occasional lapse or lack of knowledge but an “attack on intellectual integrity” that renders us incapable of exercising common sense.

“Our societies have never known such a high level of education, which obviously doesn’t prevent the development of stupidity,” he says. For Postel-Vinay, stupidity transcends ignorance because it operates even in highly informed individuals, who remain ensnared by rigid beliefs.

Such beliefs lead people to ignore contradictory information and select the evidence that supports their ideas. Postel-Vinay defines this confirmation bias as the polyp’s “tool of choice” because it perpetuates a self-reinforcing cycle of false beliefs that impedes intellectual development. Thus, he says, opinions become dogma in even the most intelligent individuals. Social media echo chambers only make the situation worse.

In his recent book Elogio dell’ignoranza e dell’errore (In Praise of Ignorance and Error), the Italian writer and former prosecutor Gianrico Carofiglio distinguishes between two types of ignorance: unconscious ignorance and conscious ignorance. The former, he said in an interview, is particularly dangerous to democracy because it combines a lack of knowledge with the arrogant belief that one already knows enough.

“Unconscious ignorance undermines the foundations of democratic debate, trust in science, and respect for knowledge,” Carofiglio said, describing it as an attitude that poisons public discourse and fuels misinformation. On the other hand, he argues that we should embrace conscious ignorance—an intellectual humility that helps us recognize our own limitations while remaining receptive to the knowledge of others. This form of ignorance, like the Socratic “I know that I know nothing,” is the foundation of true competence.

By recognizing that others may hold truths beyond our understanding, we reduce the tendency for categorical statements that exacerbate division. “The truth each of us holds is, for the most part, a legitimate opinion,” Carofiglio explains. “And opinion pushes us to engage in dialogue with others, which is precisely the opposite of polarization.”

Any historian will confirm that stupidity influences the world at least as much as its noble cousins justice and truth, particularly at moments of turmoil. Postel-Vinay talks about the First World War, which he describes as “the result of an enormous concentration of stupidity at the highest levels of European political and military leadership.”

Postel-Vinay points out that even when the lessons of such events appear clear, they are rarely learned. “At the time,” he writes, “stupidity is generally only recognized as such by a minority of observers or actors, who have no influence on the course of events or who, when they have the means to intervene, lack the courage to do so.”

Postel-Vinay notes that, from Europe at least, American society seems to be in the grip of a similar moment. Isaac Asimov once said that “there is a cult of ignorance in the United States, and there always has been.” Asimov argued that this ignorance is “nourished by the false notion that democracy means that my ignorance is as good as your knowledge.”

For Carofiglio, the ethical challenge journalists face requires us first to examine how our own personal biases and assumptions affect us. We must examine our own stupidity, as human beings and as journalists. Fact-checking is not truth, and punctiliousness is not rigor.