The Impact of Tariffs on Inflation and Income

Goldman Sachs’ analysis of consumer prices, imports, and tariff rates in tariff-affected goods categories “suggests that most tariff costs were passed on to consumers and that there were sizeable price spillovers as well.” GS estimates that “tariffs have boosted year-on-year core PCE inflation by 10-15bp so far and that the new tariff round will add another 20bp. FX moves that can be clearly linked to trade war escalation have offset at most a modest fraction of the inflation effect of tariffs.”

The left panel of Exhibit 1 shows that consumer prices in categories affected by tariffs—targeted at China or specific products such as washing machines—have risen at a faster pace than consumer prices in goods categories not facing tariffs, a departure from the trend prior to tariff imposition. The right panel of Exhibit 1 further shows that US producer prices in tariff-affected categories have also risen more quickly, suggesting that domestic producers have been able to raise their prices because of the protection from Chinese competition. (…)

GS estimates that the upcoming 10% tariff on $300B of imports from China “implies a roughly 20bp boost to core PCE inflation. If the White House were to escalate further from a 10% to a 25% rate—which is not our expectation—that would add another 30bp, for a total further boost of 50bp.”

Goldman’s analysis “suggests that the cost to consumers likely exceeds tariff revenues from consumer goods, which we estimate at about $5-7bn so far and another $15-20bn to come, because of the spillovers to prices charged by non-Chinese producers in tariff-affected categories. (…) To put these numbers in context, we (…) estimate that the Tax Cuts and Jobs Act cut household taxes by about $128bn in 2018 and an incremental $12bn in 2019 and cut business taxes by about $168bn in 2018 and an incremental $67bn in 2019. Under our expectation that escalation ends with the upcoming 10% on $300bn round, this implies that the $80bn increase in customs revenues would amount to a bit more than one-fifth of the total $375bn tax cut through 2019.”

My own math:

• assuming all the $80B in additional customs revenues are absorbed by consumers, total consumer expenditures would be reduced by 0.6%. Applying all the $80B on expenditures on Goods, expenditures on Goods would be hit by 1.8%.
• assuming the additional cost is totally absorbed by corporations, total U.S. corporate pretax profits would be reduced by 5.0%.
• Since the truth will lie somewhere in between these 2 numbers, we know this cannot be positive.

RAILings

The AAR reports that

Excluding coal and grain, which tend to rise or fall for reasons that don’t have much to do with the state of the overall economy, carloads were down 2.2% in July and have now fallen for six consecutive months. U.S. intermodal originations totaled 1.31 million containers and trailers in July 2019, down 84,878 units from July 2018. The 6.1% decline was the sixth straight monthly decline on a year-over-year basis.

Core rail freight has collapsed and is now no higher than 5 years ago:

China Ex-Central Bankers Warn of Long Currency War With U.S.

(…) The U.S.’s labeling of China as a currency manipulator “signifies the trade war is evolving into a financial war and a currency war,” and policy makers must prepare for long-term conflicts, Chen Yuan, former deputy governor of the People’s Bank of China, said at a China Finance 40 meeting in Yichun, Heilongjiang.

Former PBOC Governor Zhou Xiaochuan said at the gathering that conflicts with the U.S. could expand from the trade front into other areas, including politics, military and technology. He called for efforts to improve the yuan’s global role to deal with the challenges of a dollar-denominated financial system. (…)

The U.S. currency-manipulation charge is part of its trade-war strategy, and it’ll impact China “more deeply and extensively” than the trade differences, Chen said Saturday. While China should try to avoid further expanding the disputes, policy makers must be prepared for long-lasting conflict with the U.S. over the currency.

“The U.S. believes, in a geopolitical point of view, it’s being contained by China with China’s holding of its sovereign bonds,” Chen said,. “That means the U.S. is not completely without weakness.”

China should work to increase the use of the yuan in global trade such as the purchase of commodities, he said. (…)

One of the PBOC officials at the meeting signaled that tensions with the U.S. could increase. Zhu Jun, director of the PBOC’s international department, said “more ensuing measures are likely coming.” She didn’t elaborate. (…)

Lower Mortgage Rates Aren’t Boosting U.S. Housing The residential real estate market is less affordable now than anytime since before the financial crisis.

(…) The thing is, though, 30-year mortgage rates are already at a very low 3.75%, down from almost 5% in November, and housing hasn’t responded. Applications to purchase a home have declined for four weeks running according to the latest Mortgage Bankers Association data. It’s not clear that even lower rates will help.

Meanwhile, plans to buy a home within six months are at multi-year lows and look to have turned for the cycle. (…)

It’s no coincidence that yield-hungry investors are the root of the increase in the median age of homes sold rising from a low of 15 years as the market last turned to where 28 years currently. The irony, as is always the case in tragedies, is that investors are so intent on maintaining their cash flow stream that they’ve entered the business of buying new homes to rent out. As if entry level homebuyers needed competition from price agnostic buyers in the new home market as well. (…)

There is seasonality in housing and housing related matters, including mortgages. On a YoY basis, demand for mortgages for purchases is rising:

SENTIMENT WATCH

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  Goldman Sachs economists say fears rise that U.S.-China trade war leading to recession Goldman Sachs Group Inc said on Sunday that fears of the U.S.-China trade war leading to a recession are increasing and that Goldman no longer expects a trade deal between the world’s two largest economies before the 2020 U.S. presidential election.

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  Political Gambits Threaten More Economic Upheaval in Europe In the U.K. and Italy, charismatic right-wing leaders are launching high-risk bids for greater power that entail clashes with the European Union, potentially disrupting their nations’ economies and Europe’s already faltering growth.

TECHNICALS WATCH

Lowry’s Research was impressed by the August 8 market rally which came with strong buying but it says that it would like to see further evidence of strong buying to signal a path towards new all-time highs.

EARNINGS WATCH

From Refinitiv:

Through August 9, 450 companies in the S&P 500 Index have reported earnings for Q2 2019. Of these companies, 73.3% reported earnings above analyst expectations and 18.4% reported earnings below analyst expectations. In a typical quarter (since 1994), 65% of companies beat estimates and 20% miss estimates. Over the past four quarters, 76% of companies beat the estimates and 18% missed estimates.

In aggregate, companies are reporting earnings that are 5.7% above estimates, which compares to a long-term (since 1994) average surprise factor of 3.3% and the average surprise factor over the prior four quarters of 5.3%.

The estimated earnings growth rate for the S&P 500 for 19Q2 is 2.8%. If the energy sector is excluded, the growth rate improves to 3.5%. The estimated earnings growth rate for the S&P 500 for 19Q3 is -1.4%. If the energy sector is excluded, the growth rate improves to 0.0%.

Of these companies, 56.6% reported revenues above analyst expectations and 43.4% reported revenues below analyst expectations. In a typical quarter (since 2002), 60% of companies beat estimates and 40% miss estimates. Over the past four quarters, 63% of companies beat the estimates and 37% missed estimates.

In aggregate, companies are reporting revenues that are 1.1% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.5% and the average surprise factor over the prior four quarters of 1.0%.

The estimated revenue growth rate for the S&P 500 for 19Q2 is 4.7%. If the energy sector is excluded, the growth rate improves to 5.2%.

Pre-announcements for Q3 are running about in line with Q2’19 but the headwinds are clearly stronger than last year.

Analysts revisions are a little better for large caps but smaller companies are still experiencing difficulties:

Of the 50 S&P 500 companies left to report Q2, 29 are consumer-centric including 20 Consumer Discretionary companies and 14 are Technology. So far in Q2, CD earnings are +1.2% while Tech earnings are –3.1%. Refinitiv reminds us that “”

Retailers are facing very tough comparisons from a year ago, when consumer spending was robust and posted its strongest quarter in 2018. The Refinitiv Retail Same Store Sales Index is looking at a 2.2% Q2 2019 growth, below the 4.9% SSS result posted last year.

Refinitiv Same Store Sales Index

According to Refinitiv, Restaurant companies should show a robust 3.5% Q2 2019 growth, above the 1.8% SSS result posted last year. But TDn2K’s Restaurant Industry Snapshot report has a different take:

Restaurant sales and traffic plummeted during July, posting the worst year-over-year results in almost two years. Same-store sales growth was -1.0 percent during the month, a drop of one percentage point from June’s results. It is the first time since September 2017 that the industry has seen sales growth numbers this low.

Same-store traffic growth was -4.0 percent during July. This represented a 0.8 percent decline from June’s year-over-year growth and the weakest traffic growth for the industry since August of 2017. (…)

The expectations for the rest of 2019 are for a continued slowdown in same-store sales growth, with some weak months ahead as the industry laps over some stronger results in the second half of 2018. Declining guest counts in comparable stores remain the norm.

And as far as Technology is concerned, last week’s decision to delay granting licenses to U.S. companies to resume doing business with Huawei Technologies should be an important mater of discussions in coming conf. calls. Huawei is a mammoth client to American companies like Qualcomm, Intel, and Broadcom, all of whom sent their chief executives to the White House last month to ask for licenses to resume dealings with the company.  (Bloomberg  )

New Listings Stink Up Earnings Season After Reports Disappoint

Shares in three of the year’s hottest IPOs, Uber Technologies Inc., Revolve Group Inc. and Fastly Inc., plunged Friday as the latest batch of newly listed companies reported some of the most disappointing results this earnings season.

Uber shares ended Friday 6.8% lower after the ride-hailing company missed sales estimates. Revolve fell 15.6% after the fashion e-tailer reported earnings below expectations. And Fastly, which saw its shares dip below its IPO price intraday, declined 18.1% after reporting lighter than expected margins.

The disappointment spread to other IPOs that have not even reported yet, with RealReal Inc. shares tumbling 23% to below its IPO price of $20.

Call it an upset, given the hype that tends to follow IPOs. Among the nearly 20 freshly listed companies that reported earnings this week, the majority fell in the next session. (…)

• Uber Freezes Hiring of U.S. Tech Staff, Seeks to Cut Costs

THIS IS WHY THE CURRENT DEBATE ON HEALTH CARE IS RELEVANT:

UNINTENDED CONSEQUENCES

Section 230 Was Supposed to Make the Internet a Better Place. It Failed A tiny federal statute in 1996 transformed the web into a wildly lucrative business, and became Big Tech’s favorite liability shield. It’s now under attack from all sides.