Month: March 2025

Trump Says He Will Delay Mexico Tariffs on Goods Under USMCA

President Donald Trump said he will exempt Mexico from his new 25% tariffs on any goods and services that fall under the North American trade agreement known as USMCA, offering a reprieve for a major US trading partner.

“This Agreement is until April 2nd,” Trump said in a social media post Thursday after speaking with Mexican President Claudia Sheinbaum. “I did this as an accommodation, and out of respect for, President Sheinbaum.” (…)

It’s not clear that Trump will extend the full USMCA pause to Canada, though he has already said he would exempt Canadian autos and auto parts that are imported under the trade deal. Whatever exemption is implemented is expected to last until April 2, when Trump expects to enact a fresh round of tariffs, including “reciprocal” duties on countries around the world and sector-specific ones, like on auto, pharmaceutical and semiconductor imports. (…)

“We were treated with a great deal of respect,” Sheinbaum said. (…)

The WSJ:

President Trump’s decision to lift tariffs on goods from Mexico that comply with the North American free trade pact will significantly reduce the volume of trade covered by the duties he imposed on Tuesday this week.

In 2024, about 50% percent of Mexican exports to the U.S. complied with the agreement, including products like automobiles and agricultural goods that are staples for U.S. consumers, according to the analytics firm Trade Partnership Worldwide.

Big Chunk of North American Trade Remains Exposed to Tariffs

(…) But there is a catch: The deal only applies to goods that had been traded duty-free under a 2020 North American trade agreement.

That is less straightforward than it might seem, as the U.S.-Mexico-Canada trade agreement sets forth an intricate and complex set of rules governing trade among the three countries. Thursday’s turnabout has trade experts and lawyers rushing to determine exactly what goods will be subject to higher tariffs, let alone businesses that have skin in the game.

Generally speaking, under the USMCA, which took effect during Trump’s first term, products enter the U.S. duty-free if businesses can show they comply with certain rules regarding the origins of those products’ components.

For example, a passenger vehicle only complies with USMCA if the majority of the components—including steel and aluminum—originate in North America. In addition, 40%-45% of the vehicle’s value must come from factories where workers earn at least $16 an hour.

Because USMCA rules are so complicated, businesses have sometimes chosen to pay a tariff on a given product instead of expending time and money to figure out whether it is USMCA-compliant, according to trade experts.

The analytics firm Trade Partnership Worldwide estimated that in 2024, 50% of Mexican exports and 38% of Canadian exports entered the U.S. duty-free under USMCA. These products include cars, trucks and auto parts from either country. Also falling under this category are Canadian rapeseed oils, chocolates, beef and engines; and Mexican television sets, air conditioners, avocados and tomatoes.

About 40% of U.S. imports from Canada and Mexico fell outside USMCA but still passed through duty-free: The U.S. imposes no tariffs on a host of products, regardless of the supplier country.

From Mexico, such products included computers, medical equipment, phones and beer. From Canada, such products included petroleum gases, aluminum, airplanes and turbojet engines.

Only about 10% of total Mexican exports to the U.S. in 2024 faced any tariffs at all. This included about $11 billion in auto parts and $7 billion in passenger vehicles that likely couldn’t meet USMCA rules of origin. It also included about $9 billion in low-tariff oil products in which suppliers opted to pay the duty rather than deal with the paperwork and compliance costs required to make a claim under USMCA.

In 2024, only about 22% of Canadian exports to the U.S. faced any tariffs. This included nearly all oil with low tariff rates, rather than products that couldn’t comply with USMCA rules.

The 25% tariff that Trump implemented on Tuesday is likely high enough to prompt many businesses to do the legwork to figure out whether their products fit under USMCA, said Ed Gresser, a former trade negotiator and vice president of the Progressive Policy Institute.

TPW estimates that each day the U.S. imports $1 billion of goods from Canada and Mexico that faced no tariffs even without USMCA. That means companies could now be on the hook for $250 million a day in new tariffs.

The White House said Thursday a lower 10% tariff would apply to Canadian energy products and potash from either country that falls outside USMCA.

That means that the majority of $124 billion of Canadian energy exports to the U.S. last year could be subject to higher tariffs under the new regime. Businesses didn’t bother to claim USMCA for $78 billion in Canadian crude oil that came into the U.S. last year because the products faced only 0.1% tariffs. Companies could now begin to make claims with more money at stake, although if they don’t because of resource and time considerations, the products would be subject to a 10% tariff.

About $16 billion of other primarily Canadian energy products came in tariff-free and outside of USMCA; that would now be subject to 10% tariffs.

About $3 billion of Canadian potash entered tariff-free and outside of USMCA, according to TPW, and similarly would now be subject to 10% tariffs.

Gresser said that even U.S. Customs and Border Protection officials will be struggling with implementation, which involves understanding the changes and reconfiguring electronic databases appropriately.

“A mountain of legal challenges and headaches are ahead,” he said.

Gary Hufbauer, an economist at the Peterson Institute for International Economics, said that given the complexities of rules and constant changes by Trump, businesses will continue to put orders on hold and delay investment decisions.

“This is tremendously disruptive,” he said. “There’s no rhyme or reason to it.”

Trump’s Tariffs Are No ‘Emergency’ The President invokes a law that doesn’t give him power to impose sweeping tariffs. Someone should sue.

The WSJ Editorial Board:

President Trump delayed his Mexico-Canada tariffs again on Thursday—this time for another month. He’s treating the North American economy as a personal plaything, as markets gyrate with each presidential whim. It’s doubtful Mr. Trump even has the power to impose these tariffs, and we hope his afflatus gets a legal challenge.

The Constitution gives power over trade to Congress, which for most of U.S. history wrote tariff law. That changed after the catastrophe of the 1930 Smoot-Hawley tariff, as Congress said stop us before we kill the economy again and ceded authority to the President to negotiate bilateral trade deals. It ceded more power after World War II.

The President now has the explicit power to restrict imports, but only for specific reasons. The President may impose tariffs on imports that threaten national security (Section 232) or in response to “large and serious” balance-of-payments deficits (Sec. 122), a surge of imports that harms U.S. industry (Sec. 201), and discriminatory trade practices (Sec. 301).

During his first term, Mr. Trump used Section 232 to impose tariffs on steel and aluminum and 301 on goods from China. Mr. Trump’s executive orders imposing 25% across-the-board tariffs on Canada and Mexico and 10% (now 20%) on China instead invoke the 1977 International Emergency Economic Powers Act (IEEPA), which gives the President authority to address an “unusual and extraordinary threat” if he declares a national emergency. Mr. Trump deems fentanyl and other drugs such an emergency.

IEEPA’s language is intentionally broad to give the President latitude to address wide-ranging threats. But Mr. Trump’s tariffs arguably constitute a “‘fundamental revision of the statute, changing it from [one sort of] scheme of . . . regulation’ into an entirely different kind,” to quote the Supreme Court’s West Virginia v. EPA precedent distilling its major questions doctrine.

Under that ruling, Congress must expressly authorize economically and politically significant executive actions, which Mr. Trump’s tariffs undeniably are. Whether fentanyl is an unusual and extraordinary threat is debatable, however, since drugs have been pouring across the borders for decades.

The bigger problem is that IEEPA doesn’t clearly authorize tariffs. The law lets the President investigate, block, prohibit or regulate any “importation or exportation” or financial transaction involving “property in which any foreign country or a national” has an interest or “any property, subject to the jurisdiction of the United States.”

Presidents have used the law to freeze assets of foreign governments and nationals, restrict U.S. companies from doing business with them, limit export of technologies and ban imports from adversaries. In March 2022 President Biden used the law to ban imports of Russian energy, seafood and alcoholic beverages—but notably not to impose tariffs.

In April 2022, Congress gave the President authority to raise tariffs on Russia, and Mr. Biden later did. This suggests that neither Congress nor Mr. Biden believed IEEPA provided tariff authority. No President has used IEEPA to impose tariffs. The High Court has said that a “lack of historical precedent” is a “telling indication” that a broad exercise of power is illegal.

It’s true Richard Nixon used a precursor to IEEPA to impose an across-the-board 10% tariff in 1971 to address a growing trade deficit. A lower court ruled the tariff exceeded his authority by letting him “determine and fix rates of duty at will” without Congressional permission. An appeals court upheld the tariff because it “bore an eminently reasonable relationship to the emergency confronted.”

Mr. Trump’s tariff doesn’t appear reasonably related to the fentanyl emergency. And Congress seemed to dislike Nixon’s use of emergency powers to deal with trade issues since three years later it gave the President limited authority to impose tariffs. Mr. Trump may have shunned those authorities because he wants carte blanche to impose tariffs.

Mr. Trump’s tariffs recall Mr. Biden’s use of emergency power for his Covid vaccine mandate, eviction moratorium and student loan forgiveness. The Court blocked all three under its major questions doctrine, which Justice Neil Gorsuch called “a vital check on expansive and aggressive assertions of executive authority.”

Presidents of both parties are now declaring everything to be an emergency to achieve their policy goals without having to deal with a frustrating Congress. If Mr. Trump succeeds in unilaterally imposing tariffs as he sees fit, a future Democratic President will use “emergency” power for climate change and much more. Mr. Trump’s order needs a legal challenge.

Trump and the Art of the Poker Deal Supporters imagine he’s playing chess when he’s skillfully playing cards.

Matthew Hennessy is the WSJ’s deputy editorial features editor:

Donald Trump’s admirers flatter him by saying he plays three-dimensional chess while his opponents play checkers. That’s silly. Mr. Trump’s game is poker, and he’s good at it. (…)

MAGA-world is irrationally wedded to the chess meme. (…) I’d be surprised if Mr. Trump even knows how the pieces move. It’s complicated and takes sustained concentration. To succeed at chess you have to control your passions and act deliberately. When you’ve been bested, you resign gracefully and shake your opponent’s hand.

That’s never been Mr. Trump’s style. He’s temperamentally much more suited to poker, where trash talk and nicknames are part of the fun. You bully and bluff as you try to bankrupt other players and drive them from the game. Poker success requires an appetite for risk and an intuitive sense of probability. But you can also buy the pot with a garbage hand. Sound like anyone we know? (…)

Poker rewards a certain personality type—the improviser, the opportunist. While it pays to have a cool head, you can’t win without an eye for the kill. Mr. Trump doesn’t always know when to shut up, but he never misses a chance to put the knife in.

Politics and the English language would both be poorer without their poker idioms: stack the deck, go all in, keep an ace up your sleeve, play the hand you’re dealt. Mr. Trump’s poker face is as good as they come. He’s got alligator blood. When the chips are down he doesn’t give away much, doesn’t smile or laugh very often. His body language is consistent. All good and necessary qualities for a card sharp. Equally useful for a politician.

An obvious criticism is that Mr. Trump plays too loose. He’s cocky. Runs his mouth. He’s also got more games going at the same time than is advisable, especially given his other obligations. I can’t be the only one who wonders how he keeps all the meetings, phone calls, press conferences, petty feuds, tariff threats, Truth Social posts and Fox News personalities straight in his head.

Maybe this is simply an unavoidable complication of hosting a round-the-clock poker tournament at 1600 Pennsylvania Ave. I hear it’s a hard game to get into, but if you sit down and want to play, you better have the cards.

But it’s one thing to play poker with your own chips. It’s something else to play a high stakes game with somebody else’s money with a definite bearing on his future.

Trump is playing with Americans’ money and future. His only personal stake is his reputation.

The spectators are increasingly realizing that it’s their own skins in the pot and that their apparent master only understands the bluffing part.

There is no strategy, no game plan, no counseling team other than mere loud cheerleaders. He clearly does not count the cards which seem to flow too quickly in front of him.

Bluffing only works for a while if you don’t really make occasional real wins, however lucky they may be.

Improvising can also work for a while, until the table understands there is nothing else.

Your huge pile of chips can be truly attractive and intimidating, but at some point, an erratic player simply bluffing with somebody else’s chips becomes just too scary and people look for another more inviting and rational table.

Today’s FT very well describes the current game and the mood of the real stakeholders finally realizing who they are really banking on:

• The dizzying policy changes have sparked an equity market sell-off, concern from businesses and panic in foreign capitals fearful of a repeat of the chaotic decision-making of Trump’s first term, when he threatened and launched commercial battles with America’s largest trading partners, then backed down.
• “There were three changes in 24 hours affecting us as a North American auto supplier, and that’s a little bit disconcerting,” said Jeff Aznavorian, president of Clips & Clamps Industries, an engineering group based in Plymouth, Michigan. “We can’t guess what or how or who at the moment. It’s like a whipsaw.” (…)
• “[The tariffs] are off, they’re on, they’re off, they’re 25 per cent, they’re 10 per cent . . . this is not a clear policy vision guiding things,” said Bill Reinsch, a former US trade official at the Center for Strategic and International Studies.
• “He does something, and then the market tanks . . . or a whole bunch of people, like the auto executives, come in and tell him in some polite way, ‘this is really stupid’. And then they go back and rethink and change something.” (…)
• “If we see a prolonged market downturn and the president is hearing from all his rich friends about how he’s messing up their portfolios and destroying their businesses, then maybe at that point he will think again,” Alden said.
• “There’s a lot of uncertainty in business that we can’t control, but when people are doing things that are intentionally leading to chaos it makes it really hard to run a company,” said Traci Tapani, co-president of Wyoming Machine, a metal fabrication company in Minnesota. She said her company wanted to invest in automation equipment but “we’re not pulling the trigger on it because of all this back and forth”.
• “Retailers are looking for stability in the supply chain, and the on-again, off-again nature of the announcements has made it very difficult to plan and prepare,” said Jonathan Gold, vice-president of supply chain and customs policy at the National Retail Federation. (…)
• “He’s brought in people that are either more like minded with him or are more intimidated. It’s hard to say which,” said Reinsch.

The S&P 500 is down 6.7% since its February 19 peak. Nasdaq is down 9.5%. The beloved and widely owned NVidia has tanked 28% while Musk’s TSLA has cratered 46% since its December 17 peak, four weeks after DOGE’s official launch.

Tesla shareholders, true rollercoaster fans if there are any, have done several wild rides only to end up where they were in 2021. TSLA’s P/E was cut in half in the meantime but is still 92x forward earnings.

In just the last 2.5 months, the S&P 500 forward P/E, arguably a measure of confidence in the future, went from 23.2 to 21.0, a huge 9.5% downgrade while S&P 500 companies were reporting 17% profit growth.

Trump’s rug-pull presidency

Donald Trump is building a reputation for himself as the flip-flopper in chief — the president who, after announcing a bold new policy today, is more than likely to reverse it tomorrow. (…)

Across-the-board tariffs on Mexico and Canada — two of America’s three largest trading partners — have been on and then off and then on and then off. Colombia knows the feeling.

• The government put 80 million square feet of its real estate up for sale, only to then take the “for sale” sign down.
• Trump has fired federal employees at the CDC, the FDA, the National Nuclear Security Administration, and the Department of Agriculture, only to then re-hire them.
• He touted the use of military aircraft to carry out high-profile deportations, only to suspend the flights after finding them costly and inefficient.

“This is the art of the deal,” a White House spokesman tells Axios about the tariff reversals, adding that the General Services Administration and individual agencies, rather than Trump himself, are responsible for other executive-branch actions.

Elon Musk is also distancing himself from the firings of federal workers. (…)

Republicans in Congress have repeatedly found themselves boxed in by Trump’s flip-flops.

• He spent weeks equivocating on whether Congress should pass his agenda in one bill or two — then blindsided the Senate by backing House Republicans’ one-bill approach.
• He promised not to cut Medicaid, then backed a House GOP budget plan that could force exactly that in order to meet its proposed spending cuts.
• He has vowed to achieve the unthinkable by balancing the budget — while endorsing trillions of dollars in tax cuts, plus new campaign promises like no tax on tips or overtime.

The stock market, for one, is tiring of such shenanigans. On Wednesday, stocks fell on news that tariffs were being imposed — and then on Thursday, when those tariffs were suspended, stocks fell again.

• Foreign investors like French energy company Engie are on the record as saying that they need clarity and predictability in order to invest in the U.S. — something that’s clearly missing at the moment.
• “I’m not even looking at the market,” Trump told reporters in the Oval Office Thursday, disavowing his longtime favorite metric for economic success. (…)

Probably totally unrelated…

SpaceX Starship rocket explodes after launch

SpaceX’s Starship rocket exploded minutes after it launched from Texas Thursday. (…)

It’s the second consecutive Starship test flight from Elon Musk’s space technology company to end with destruction. Another such launch resulted in an explosion nearly two months ago.

SpaceX caught the first-stage booster back at the pad with giant mechanical arms, but engines on the spacecraft on top started shutting down as it streaked eastward for what was supposed to be a controlled entry over the Indian Ocean.

Contact was lost as the spacecraft went into an out-of-control spin.

… or maybe not: “As always, success comes from what we learn, and today’s flight will offer additional lessons to improve Starship’s reliability,” the post read.

China Scolds ‘Two-Faced’ U.S. in Rebuke of Trump’s Agenda

(…) “No country should harbor the illusion that it can suppress and contain China while simultaneously building good relations with China,”  [China’s Foreign Minister] Wang Yi said Friday. “Such two-faced methods are not only detrimental to the stability of bilateral ties but also make it impossible to build mutual trust.” (…)

He offered kind words for Europe, reflecting the opportunity that China senses to strengthen relations with traditional U.S. allies. (…)

“China still has confidence in Europe and believes that Europe can become a trusted partner of China,” Wang said. “The two sides have the ability and wisdom to properly resolve the existing problems through friendly consultations.” (…)

“Where there are blockades there are breakthroughs,” Wang said. “Where there is suppression there is innovation.” (…)

Chinese officials are still working to figure out exactly what Trump wants on trade. While the White House says it is using tariffs to punish China for its role in America’s fentanyl crisis, Chinese officials say they see fentanyl as a pretext for undermining China’s economy. (…)

China “opposes the monopoly of international affairs by a few countries,” he said. “The voice of the Global South should be better listened to.” (…)

Wang also emphasized China’s close ties with Russia, playing down the hopes of some in the Trump administration that the U.S. could divide the two to isolate Beijing. That strategy has come to be known as a “reverse Nixon” or “reverse Kissinger,” a reference to the thaw in U.S.-China relations in the 1970s.

The Sino-Russian relationship “is a constant in a turbulent world, not a variable in the geopolitical games,” he said.

Trump’s Embrace of Putin Has Germany Thinking of Nuclear Weapons The travails of the Western alliance have injected urgency into a debate about homegrown alternatives to the U.S. nuclear umbrella

Services PMIs

Once again, two surveys, two readings.

S&P Global: Output growth continues to slow in February as demand falters

The seasonally adjusted S&P Global US Services PMI Business Activity Index recorded 51.0 in February. Although above the critical 50.0 no-change to signal further growth of the sector, the rate of expansion was modest and the slowest since November 2023. Growth has softened noticeably in 2025 so far compared to the robust rates seen during the second half of last year.

Panelists widely linked the weaker rise in business activity to a concurrent slowdown in new business growth. Although still rising, extending the current run of expansion to 10 months, the rate of expansion was modest and the slowest in this sequence. Uncertainty related to federal government policies around trade tariffs were reported to have weighed on demand growth both at home and abroad. Concerning the latter, new export business declined for a second successive month in February and to the greatest degree since May 2024.

The weaker trend in new business, and broader economic uncertainty, weighed heavily on service sector business confidence. The latest data showed a steep deterioration in sentiment to its lowest since September, dropping well below its long-run trend in February. That said, firms still expect on average activity to rise from present levels in 12 months’ time. Some panelists noted hopes that President Trump’s new administration would generate an improvement in the business environment in the coming months.

Subdued trends in activity and new work meant firms were broadly unwilling to replace leavers in February and this was key in explaining a first modest drop in overall employment for three months.

Despite the reduction in headcounts, service providers were able to comfortably keep on top of their workloads. Outstanding business declined in February for the first time since last August and to the greatest degree since December 2023.

A broad range of goods and services were reported to have risen in price during February, with suppliers in some cases increasing their charges due to tariffs. Labor expenses were also reported to have increased. Overall, input cost inflation picked up in February to its highest level for four months and further above its long-term trend.

However, efforts to pass on higher input costs to clients were somewhat limited by competitive pressures, weak market demand and market oversupply. This meant that prices charged rose only modestly overall in February.

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

(…) “Current output growth has downshifted markedly so far this year from a booming rate of expansion in December to a disappointingly sluggish pace in February.

“Expectations for output growth have also been revised sharply lower as service providers have become increasingly worried over signs of slower demand growth and uncertainty over the impact of new government policies, ranging from tariffs and trade policy to federal budget cutting.

“The strong private sector hiring seen late last year has consequently gone into reverse, with a steep fall in backlogs of work hinting at further job losses to come.

“Adding to the gloomier picture in February was a sharp rise in costs, which companies were often unable to pass on to customers due to weak demand. While this reduced pricing power is good news for inflation, it’s potentially bad news for profitability.”

The ISM: Service Sector Pushes Through Policy Uncertainty in February

The ISM Services Index improved to 53.5 last month. Current activity was little changed over the month with the business activity index down a tick and still comfortably in expansion territory at 54.4. Rather, the improvement stemmed from the employment index, which rose 1.6 points to an 18-month high, and an increase in new orders (+0.9 points).

Some of this improvement in new orders may reflect a pull-forward of activity as the prospect of a higher tariff environment came to the fore at the start of last month with only an eleventh-hour reprieve on tariffs on Canada and Mexico, which have subsequently gone into effect.

As in the manufacturing sector, the scramble to secure product led to a rise in the services supplier deliveries index in February (+0.4 points). Businesses also appeared to be stocking up on product ahead of potentially higher prices, with the inventory index rising just over three points last month.

Source: Institute for Supply Management and Wells Fargo Economics

While the looming threat of tariffs left a limited mark on activity in February, the anticipation may nonetheless already be seeping into prices. It is worth remembering that many industries within the Services Index are goods or goods-adjacent industries, such as construction, transportation, wholesaling and retailing.

Perhaps it is no surprise then with additional tariffs on China put in place at the start of February and the threat of tariffs on Canada and Mexico lingering that the prices paid component rose 2.2 points to remain above 60. Over the past three months, the prices paid component has averaged 62.5, which, as seen in the nearby chart, is a level only recently rivaled during the pandemic’s aftermath and the increased use of tariffs in the first Trump administration. Concerns about tariffs were widespread across respondents in industries including food services & accommodation; agriculture; construction; information; management and wholesale trade.

For the better part of the past two years, the ISM surveys have displayed the uneven fortunes of the manufacturing and services industries under tight monetary policy. The tail end of last year suggested that the unusually persistent gap between the two sectors was starting to close through the favorable route of stronger factory activity. The latest surveys highlight the more immediate threat of trade policy changes to the manufacturing sector, but we would not be surprised to see more universal signs of suffering under tariffs and policy uncertainty in the ISM Services Index in the months ahead.

One constant in the two surveys is that prices are rising and in both goods and services as Ed Yardeni illustrates

• Fed’s Beige Book

Information collected on or before February 24, 2025.

Overall economic activity rose slightly since mid-January. Six Districts reported no change, four reported modest or moderate growth, and two noted slight contractions.

Consumer spending was lower on balance, with reports of solid demand for essential goods mixed with increased price sensitivity for discretionary items, particularly among lower-income shoppers.

Unusual weather conditions in some regions over recent weeks weakened demand for leisure and hospitality services. Vehicle sales were modestly lower on balance.

Manufacturing activity exhibited slight to modest increases across a majority of Districts. Contacts in manufacturing, ranging from petrochemical products to office equipment, expressed concerns over the potential impact of looming trade policy changes.(…)

Residential real estate markets were mixed, and reports pointed to ongoing inventory constraints. Construction activity declined modestly for both residential and nonresidential units.

Some contacts in the sector also expressed nervousness around the impact of potential tariffs on the price of lumber and other materials.

Agricultural conditions deteriorated some among reporting Districts.

Overall expectations for economic activity over the coming months were slightly optimistic.

Employment nudged slightly higher on balance, with four Districts reporting a slight increase, seven reporting no change, and one reporting a slight decline.(…)

Labor availability improved for many sectors and Districts, though there were occasional reports of a tight labor market in targeted sectors or occupations. Contacts in multiple Districts said rising uncertainty over immigration and other matters was influencing current and future labor demand.

Wages grew at a modest-to-moderate pace, which was slightly slower than the previous report, with several Districts noting that wage pressures were easing.

Prices increased moderately in most Districts, but several Districts reported an uptick in the pace of increase relative to the previous reporting period.

Input price pressures were generally greater than sales price pressures, particularly in manufacturing and construction. (…)

Firms in multiple Districts noted difficulty passing input costs on to customers. However, contacts in most Districts expected potential tariffs on inputs would lead them to raise prices, with isolated reports of firms raising prices preemptively.

Tomorrow we get the important employment report.

S&P Global sees employment as weakening, the ISM as still strong and the Beige Book as softish.

The ADP report, not the best indicator, was quite weak in February with private sector employment up only 77k, following a slightly upwardly revised January increase (+3k to +186k). Employment in the services sector rose 36k (vs. 121k per month on average in 2024). Employment in goods-producing industries increased by 42k, reflecting a 26k increase in construction employment.

Median annual pay for job stayers increased 4.7% year-over-year in February, unchanged from the January pace.

• Smallest US Firms Slashed Payrolls Last Month, Intuit Study Says

Payrolls at firms that employ fewer than 10 people fell by some 124,900 from the previous month, a drop of 1%.

The declines were broad-based, showing up in all 12 employment sectors included in the survey. Leisure and hospitality posted the steepest drop in payrolls, at 1.3%, followed by the information industry. (…)

Indeed job postings have turned down since early January:

Americans are worried:

Consensus sees payroll growth at +170k. Hmmm…

Changing plans, not for the better. “If policy uncertainty persists, consumers and firms may begin to hold back spending decisions. Combined with DOGE-driven layoffs, this will put upward pressure on the unemployment rate. That is why a trade war, by definition, is a stagflation shock: Higher prices and lower sales. The biggest downside risk is that policy uncertainty could create a sudden stop in the economy where consumers stop buying cars, stop going to restaurants, and stop going on vacation, and companies stop hiring and stop doing capex. ” (Apollo)

Canada: Tariff concerns lead to accelerated contraction of servicesector in February

Canada’s service sector suffered its steepest fall in activity for nearly a year during February amid reports of a drop in market demand due to tariff concerns. New business received declined markedly, whilst confidence in the outlook slumped to its lowest level in over two-and-a-half years. Job losses were the steepest recorded by the survey since June 2020 as firms responded to weak current demand and an increasingly uncertain outlook.

On the price front, input costs showed the largest monthly increase in operating expenses since last October whilst output charges were also raised to a stronger degree.

We should worry about these sharply declining demand indicators:

 

Some people are worried as Axios observes. “On February 11, the market put just a 1% probability on the Fed cutting rates four times this year, assuming each cut is 25 basis points. Today, the probability of at least four cuts has risen to 30%, while the probability of three or more rate cuts has ballooned to 62%.”

Data: Polymarket. Chart: Axios Visuals

Euro area economic growth remains marginal

The HCOB Eurozone Services PMI Business Activity Index signalled a third successive monthly expansion in output. However, at 50.6 in February, the measure was down from 51.3 in January to a three-month low, indicating a loss of growth momentum.

Weighing on the strength of the upturn was a renewed drop in new business. For the first time since last November, new orders decreased. Demand for euro area services from non-domestic customers weakened, but to the softest extent in seven months.

A pick-up in activity alongside lower new order intakes facilitated yet another drop in backlogged work in February. Stronger inroads to incomplete business were made, with the pace of depletion at its quickest for just over a year. Eurozone service providers still lifted employment levels, albeit to an extent that was only marginal overall and softer than in January.

Cost pressures remained elevated, with input costs increasing at a rate unchanged from January’s nine-month high. In turn, the latest survey data pointed to another historically sharp rise in output prices that was the most substantial for ten months.

Commenting on the PMI data, Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, said:
“The Eurozone economy has barely grown for two months in a row now, as the mild growth in the services sector is almost fully eaten up by the recession in the manufacturing sector. The good news is that the downturn in the manufacturing sector is softening, which could pave the way for a recovery of the whole economy.

“Ahead of the next ECB meeting, all eyes are on the wage-driven input cost increases given the central bank’s emphasis on services inflation. With no sign of input cost inflation abating, it is understandable that there are some voices in the ECB who would like to discuss a pause in rate cuts at the next meeting.

“Service provider’s optimism about future activity is falling short of the long-term average, as the environment is strongly marked by political uncertainty in France and Germany as well as a flow of international news which does not encourage consumer spending. At the same time, outstanding business shrank again, which fits into this picture. However, service providers retain some pricing power as selling price inflation has increased compared to January. Overall, the picture is not bleak, but fragile.

“There is a big contrast in service sector performance between Germany and France. Germany’s services sector is growing at a moderate pace while in France, activity is shrinking rapidly and much faster than during the months before. This may be the result of an unsolved political crisis in France, while in Germany the elections may raise hope for a stable government to be formed soon.”

China: Modest growth of service sector sustained in February

The headline Caixin China General Services Business Activity Index recorded 51.4 in February. That was an improvement on January’s reading of 51.0 and represented a modest expansion of the service sector. (…)

Panellists reported that February’s expansion of activity was driven by a combination of higher sales, the start-up of new projects and promotional work. Increased new business volumes were indeed recorded during the month, although growth was also modest and – as was the case with activity – still below its historical trend level. Still, firms reported an improvement in general market demand and heightened success in converting this into actual new contract wins. Foreign sales also rose since January, with growth of new export business solid and its highest in three months.

The more positive market environment meant that employment levels rose fractionally in February with some firms directly linking growth to higher new work volumes. The broad stabilisation of staffing levels followed two months of falling employment and helped firms to largely keep on top of their overall workloads. Latest data showed that outstanding business was down for a second month running in February.

A heightened confidence in the outlook also helped to support some recruitment activity in the latest survey period. Optimism improved to its highest level since last November. Firms are hopeful of stronger market demand and better economic conditions. (…)

On the price front, February’s survey data signalled little change in input costs, though the fractional decline was significant in being the first time that prices had failed to rise since June 2020. Panellists reported that lower market demand, plus a general reduction in the price of some raw materials, had weighed on operating expenses. A marginal decline in output charges was also registered in February as firms sought to pass on reduced input costs and offer promotional discounts in a competitive market environment.

The Trump Tariff Roller Coaster He gives a month reprieve to car makers but everyone else loses.

Welcome to the Trump tariff thrill ride, where you never know what’s going to happen next. (…)

White House press secretary Karoline Leavitt said the one-month exemption is to ensure U.S. auto makers are “not at an economic disadvantage” before the President’s tariffs on auto imports from other countries take effect on April 2.

The exemption may also be less than meets the eye. According to the White House statement, the exemption will apply to cars imported from Mexico and Canada. That means manufacturers could still get whacked with tariffs on parts and materials that cross the border, which could add thousands of dollars to the cost of each vehicle.

Manufacturers that assemble cars in North America would still be at a competitive disadvantage. Mr. Trump said in his speech to Congress Tuesday that his policies would allow “our auto industry to absolutely boom.” Executives, investors and dealers beg to differ. General Motors stock is down 11.9% since Mr. Trump’s election while Ford Motor’s is 13.5% lower. (…)

Mr. Trump originally justified the tariffs under an emergency law to combat the alleged threat of fentanyl. But he claimed Tuesday the tariffs are needed because “we pay subsidies to Canada and to Mexico of hundreds of billions of dollars” and have “very large deficits with both of them.”

That sounds like White House protectionist in chief Peter Navarro. He and his boss love tariffs for their own sake. Meanwhile, the tariff barrage is causing economic uncertainty and slowing investment—a real thrill a minute. (WSJ Editorial Board)

• Walmart Asks Chinese Suppliers for Major Price Cuts on Trump Tariffs

Some suppliers, including producers of kitchenware and clothing, have been asked to lower their prices by as much as 10% per round of tariffs, essentially shouldering the full cost of Trump’s duties, according to the people, who asked not to be identified as the information is private. Negotiations are held with individual manufacturers and the price cuts differ by firm, they said.

So far, few have acquiesced. Suppliers’ margins are already razor thin due to Walmart’s strategy of procuring goods cheaply in order to maintain its competitive advantage, according to the people.

For some, any reduction greater than 2% would see them make a loss, the people said. Others have had their own upstream vendors refuse requests to cut prices more than 3%, forcing manufacturers to consider purchasing some parts from Vietnam, according to one of the people. That move has raised concerns that the lower prices will come at the expense of product quality, the person said. (…)

The retailer has historically had strong bargaining power over its Chinese suppliers and requests for lower prices have mostly been met, according to people familiar with the matter. But the scope of the recent requests are unusual and leaves manufacturers weighing whether to absorb the costs to maintain a longer-term business relationship. (…)

Walmart has said about two-thirds of its products are sourced in the US after the retailer sought to diversify its supply chain.

TECHNICALS WATCH

Ed Yardeni:

• “Will S&P 500 indexes find support at their 200-day moving averages? We think so. Sentiment is quite bearish and the next batch of economic indicators should confirm the economy is growing.”

• “Will the Nasdaq remain in its bullish channel? We expect to see some dip-buying following the rapid selloff.”

Interactive Brokers notes that

“the inverted yield curve is back! Three-month Treasury bills are now yielding more than 10-year notes, though the 2-10 portion of the curve remains normally upward sloping”:

Yield Spreads Since 1985, 2-10 (white), 3mo-10-year (blue); with NBER Recession Starts (red) and Ends (green)

• “Fed Funds futures are now pricing in 3 rate cuts for 2025, which is up from the expectations for only 1 cut that prevailed just a few weeks ago.  Economic expectations have retreated sharply, exacerbated by yesterday’s tariff implementation.  That’s a nasty combination for bankers.  Their net cost of funding has remained stable even as the yields on potential loans have declined, while at the same time, weaker economic prospects do nothing positive for their customers’ creditworthiness.  No wonder why those stocks suffered.”

Trump Administration Disbands Two Committees Advising on Economic Stats

Members of one group, the Federal Economic Statistics Advisory Committee, were told Tuesday that Commerce Secretary Howard Lutnick disbanded the committee last week because its mission “has been fulfilled,” in an email seen by The Wall Street Journal.

The Commerce Department also terminated a second expert group, the Bureau of Economic Analysis Advisory Committee, which consulted on a separate group of economic stats. (…)

A Fesac committee member, economist Erica Groshen, said the group played a critical role in guiding the offices that track U.S. inflation, employment and economic growth.

“Its work goes to the essential transparency of these statistical agencies,” Groshen said of Fesac. “When you remove that transparency, then that diminishes trust.”

Fesac guided government statistics for 25 years. (…)

The committees’ dismantling comes at a challenging moment for the government statistics agencies, which have faced tight budgets and falling response rates to surveys that are essential gauges of the health of the economy.

The move also follows a suggestion from Lutnick over the weekend that the government could change how it calculates the size of the economy by separating government spending, which would be a sharp departure from academic theory and international norms.

Fesac met twice a year to advise government statisticians and economists on how to improve and refine their surveys and calculations. Members weren’t paid for their work. (…)

Groshen, who was previously head of the Bureau of Labor Statistics, said Fesac had an especially important role advising on statistics that combine the work of multiple government agencies. That includes the Federal Reserve’s preferred inflation metric, the personal-consumption expenditures price index, which melds analysis from both the Labor Department and the Commerce Department.

“These advisory committees are really essential to maintaining the quality of the data going forward,” she said.