Trade Fight Spurs Aid to U.S. Farmers President Trump rolled out a $16 billion plan to help farmers hit by the trade conflict with China and suggested that Huawei Technologies could potentially be a bargaining chip in settling the dispute.
Never mind the farm bailout “funded with import tariffs that China is [supposedly] paying the U.S.”. What is truly incredible is that Trump could innocently announce that the “very dangerous” Huawei, officially tagged a national security threat, is actually but a bargaining chip in his trade war with China.
Meanwhile, most everybody on the planet involved in tech matters is scrambling to abide by Trump bans orders. He did the same with ZTE last year but banning giant Huawei was a much more significant and consequential decision.
Yesterday, Markit’s U.S. flash PMI report revealed that the U.S. economy slowed markedly in May: the composite PMI slumped from 53.0 in April to 50.9 in May with a similar downshift in gear in the important service sector. The effects of the trade wars are accumulating, suggesting more pain ahead. Some of Markit’s findings in May:
- Input price inflation eased for the third month running in May, despite continued comments from panellists regarding the ongoing impact of tariffs.
So, companies pay import tariffs but still see input prices softening. Sounds like pretty weak demand out there.
- Business expectations fell to their lowest since the series began in July 2012. Reduced confidence was commonly attributed to hesitation among clients and increased uncertainty, which were both often linked to global trade tensions.
- hesitancy among clients to place orders
- trade war worries and increased uncertainty dealt a further blow to order book growth and business confidence
- Business confidence has meanwhile slumped to its lowest since at least 2012, causing firms to tighten their belts, notably in respect to hiring
- Trade wars remained top of the list of concerns among manufacturers
From the Eurozone flash PMI survey:
- firms scaled back expansion plans
- Optimism about the future meanwhile slumped to a four-and-a-half year low
- companies reined-in their expectations of growth in the coming year to the lowest since October 2014. Expectations hit the lowest since 2014 in services and remained among the weakest since 2012 in manufacturing
- escalating trade wars and auto sector woes commonly cited as specific causes for concern.
And Japan’s:
- The re-escalation of US-China trade frictions has heightened concern among Japanese goods producers.
- struggling exports, which fell at the sharpest rate in four months.
- sentiment turned negative in May for the first time in six-and-a-half years.
Markit’s May surveys indicate that U.S. growth is now weaker than the eurozone’s!!! Q1 GDP was up 3.2% but Markit estimates that April was up 1.9% and May 1.2%.
In case you doubt Markit’s data, the correlation with Fed data is 89%, substantially better than any other survey.
Looking ahead, corporate uncertainty and confusion are translating into “growing inaction”: new orders are now weaker than at any time since 2009:
Markit’s flash PMI revealed that “firms put the brakes on hiring” in May as Services “employment growth dipped to a 25-month low” and Manufacturing saw a “broad-based slowdown in the rates of expansion for output, employment”.
Maybe this is what we are seeing in the apparent reversal in initial unemployment claims since mid-April. The 4-week m.a. remains within the year-long channel but a few more spikes up would push it above.
Challenger, Gray & Christmas, Inc. monitors corporate layoff announcements.
U.S.-based employers announced plans to cut 40,023 jobs from their payrolls in April, down 34% from the 60,587 cuts announced in March. This is the lowest monthly total since last August, when 38,472 cuts were announced.
Despite the monthly drop, April cuts are up 11% from the same month last year, when 36,081 cuts were announced. So far this year, employers have announced 230,433 job cuts, 31% higher than the 176,280 announced in the first four months of last year.
More troubling is the fact that job cut announcements have been concentrated in Industrial Goods and Automotive:
Business activity in Europe has cratered but employment is hanging in. For how long?
Japanese business people are totally depressed: 
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Japan Downgrades Views on Its Economy The Japanese government downgraded its view of industrial production and other key parts of the economy, highlighting concerns about the U.S.-China trade dispute ahead of President Trump’s visit to Tokyo.
If you are not also depressed yet, this may get you there:
Freight Market Shifts into Lower Gear Moderating demand, weaker prices are raising concerns among goods-haulers after last year’s red-hot U.S. shipping market
I posted about the sharp weakening in freight on May 15. The WSJ adds some good info:
(…) Prices on the spot trucking market, where businesses book last-minute transportation, were down 16% in April compared with the prior year, according to online freight marketplace DAT Solutions LLC. (…)
“I think we’ve got enough freight in the pipeline to feed us through Fourth of July weekend,” said Mark Montague, DAT’s senior pricing analyst. “I’m really afraid it could fall off in July and August,” he said, if shipping volumes fail to pick up in June and no trade deal materializes. (…)
Railroad volumes declined in each full month from February to April, according to the Association of American Railroads. (…)
U.S. New-Home Sales Fell in April
(…) Purchases of newly built single-family homes—a relatively narrow slice of all U.S. home sales—declined 6.9% to a seasonally adjusted annual rate of 673,000 in April, the Commerce Department said Thursday. This was the largest month-on-month drop since December of last year. (…)
The basic trend is up, however, particularly in the South and West:
One-Quarter of Working Americans Have Zero Retirement Savings American households remain financially fragile despite booming job market, Fed survey shows
(…) Households are also struggling to cover their day-to-day expenses, the survey found, with 17% saying they wouldn’t be able to pay all their bills during the month of the survey. In most cases, that means they expect to forgo making part of their rent, mortgage, credit card or utility payments.
Roughly a quarter of adults skipped medical care in 2018 because they were unable to pay, and about 40% have unpaid debt from unexpected medical bills incurred last year.
And almost 40% of Americans said they don’t have enough cash on hand to cover an unexpected $400 expense. In most cases, they said they would rely on credit-card balances or loans from family and friends. (…)
Three out of four respondents said they were doing OK or living comfortably, up from 63% in the 2013 survey. Nearly two out of three described their local economic conditions as “good” or “excellent.” (…)
Latest China Tariffs Will Cost $831 per Household, Report Says The latest increase in tariffs on Chinese imports is costing the average U.S. household $831 a year through higher prices and reduced economic efficiency, a paper published by the New York Fed said.
(…) The tariffs, which essentially impose taxes on imported goods, will result in higher prices paid by importers and consumers, the New York Fed’s report said.
In addition, it said, the U.S. economy stands to take a hit as companies buy more from suppliers outside China at prices higher than they paid before the tariffs. That shift means U.S. importers are paying more, but the additional money isn’t going into the U.S. Treasury. (…)
One of those reports, prepared by the same authors for the National Bureau of Economic Research in March, estimated that last year’s tariffs on Chinese imports cost the typical household $414 a year. Their latest estimate, of a cost to households of $831 a year, would be in addition to that.
The authors estimate that of the $831 in additional costs per household, $211 of that will come from tariffs paid on Chinese imports and $620 from the economic effect of buying high-price goods from other countries without a boost to U.S. tariff revenue.
In a separate report Thursday from the International Monetary Fund, economists used import data to quantify sudden jumps in U.S. prices for goods when tariffs were introduced.
“Some of these tariffs have been passed on to U.S. consumers, like those on washing machines, while others have been absorbed by importing firms through lower profit margins,” economists Eugenio Cerutti, Gita Gopinath and Adil Mohommad said. (…)
This from Schwab’s Liz Ann Sonders:
Cornerstone Macro did a detailed analysis on the impact to inflation of tariffs. It’s believed that the latest tariff hikes will begin to pressure the U.S. Consumer Price Index (CPI) next month; and combined with last year’s tariffs, they estimate peak impact on the CPI in year/year terms will be about 0.25%, likely felt in late-summer (all else equal). The threatened 25% tariffs on the remaining $325 billion of Chinese goods—if implemented all at once—would likely be game-changing for inflation and outlook for consumers.
That $325 billion basket includes $120 billion of consumer goods vs. only $50 billion in the prior rounds; and would likely boost CPI inflation by an additional 0.8%. All income levels are impacted by tariffs on Chinese goods; but of course low income households, which have less of a savings buffer, are most vulnerable.
As you can see in the chart below, the 10% tariff on the $200 billion basket of Chinese goods, which went into effect last September, was clearly passed through to consumers. The inflation rate of affected goods swung from -1.5% year/year in 2017 to more than 1.7% year/year in early 2019—contributing about 0.15 percentage points to headline CPI. If anything though, this underestimates the full impact as it does not capture tariffs on intermediate and capital goods, since their effects are more difficult to trace.
Source: Charles Schwab, Cornerstone Macro, as of April 30, 2019. *Includes foods, transportation, appliances, electronics, household equipment & furnishings, apparel & accessories, recreational goods, misc.
Cornerstone expects that the just-implemented additional 15% in tariffs on the $200 billion basket will likely cause another step-up in the inflation rate. Assuming a similar pass-through rate to last year’s, inflation on that tariff basket could accelerate by an additional 4.5 percentage points, contributing 0.2 percentage points to the headline CPI.
Worse would be if the threatened 25% tariffs on the remaining $325 billion of Chinese goods (Phase III) are implemented. The value of goods at stake is 50% larger and encompasses far more consumer goods. Cornerstone estimates that the inflation hit from the Phase III tariff basket would be about 2.5 times as large as for Phase II, for an additional impact of 0.8% on headline CPI; a true potential game-changer.