Trade Wars Kill Future Growth—Part II

Popular Economics Weekly

The sad reality is that in initiating trade wars with allies and opponents alike, President Trump could be bringing on the next Great Recession. Because breaking up trade alliances with our allies means less leverage in any negotiations with, say, China. For instance, our (former?) allies can now sell their products to the remaining 11 Asian members of the Trans-Pacific Partnership (TPP) that the US abandoned immediately after Trump took office, or China can sell to them rather than US.

The European Union would also be free to sell its products to others rather than suffer the tariffs Trump is levying on them. And Canada will also purchase more from them, replacing many of the products formally bought from US companies.

Nobel economist Paul Krugman is considered one of the most knowledgeable about foreign trade. He won the Nobel Prize for formulating just why countries and regions trade with each other, and trade protectionism died out after WWII.

It’s called the theory of comparative advantage, because more benefit if those that produce things most efficiently (the cheapest) get to export them to countries that can’t produce them so cheaply, and the modern trading system was formed.

China manufacturers are capturing more of the solar panel market because it can make them cheaply. Canada’s lumber prices are cheaper, so it exports lumber to the U.S. The National Association of Realtors reports that tariffs on Canadian lumber imports is already raising the cost of construction on an average-priced American home $9,000 at a time when fewer Americans can afford a home.

“The U.S. currently exports about 12 percent of GDP, says Professor Krugman. “Not all of that is domestic value added, because some components are imported. But there’s still a lot of the economy, maybe 9 or 10 percent, engaged in production for foreign markets. And if we have the kind of trade war I’ve been envisaging, something like 70 percent of that part of the economy – say, 9 or 10 million workers – will have to start doing something else. And there would be a multiplier effect on many communities now built around export industries, which would lose service jobs too.”

Graph: NYTimes

Krugman also believes if this becomes a prolonged trade war, “we’re talking about a really big rollback of world trade. Figure 1 shows world trade (exports plus imports) as a share of world GDP back to 1950; a 70 percent reduction would bring us roughly back to 1950s levels. If Trump is really taking us into a trade war, the global economy is going to get a lot less global.”

Does anyone realize what 1950 levels of trade would mean in today’s world? That’s before the baby boomers became consumers with the huge increase in demand for consumer goods. Modern day consumers would now be competing for less than half the number of imported products, which means soaring prices, which leads to higher inflation and interest rates, which are the sign of an overheating economy.

And this is happening just when Trump’s avowed goal is to bring back more manufacturing jobs that mostly depend on exports to other countries. It’s a solvable conundrum. The loss of manufacturing jobs because of foreign tariffs on US goods could cancel out whatever benefits protectionism would garner for American steelworkers, or auto manufacturers.

And where will the trade war hurt first? Tariffs on exports like Kentucky Bourbon, Wisconsin dairy products, Iowa pork, and soybeans were the first to be raised by the EU and China, because they come from Trump territory.

It’s much better to work with our allies than attempt to bully them.

Harlan Green © 2018

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

Trade Wars Not Good For Future Growth Either

Popular Economics Weekly

The Conference Board Leading Economic Index® (LEI)for the U.S. increased 0.2 percent in May to 109.5 (2016 = 100), following a 0.4 percent increase in April, and a 0.4 percent increase in March.

This monthly announcement of the LEI is a good predictor of future economic growth because it reports on 12 items that measure trends on everything from interest rates, to housing permits, to stock prices, and hours in the work week. It is slowing, surely not a coincidence with the talk of a worldwide trade war.

“While May’s increase in the U.S. LEI was slower than in recent months, the improvements in a majority of its components offset the declines in leading indicators of labor markets and residential construction,” said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board. “The U.S. LEI still points to solid growth but the current trend, which is moderating, indicates that economic activity is not likely to accelerate.”

That’s because raising tariffs on imported goods and services is raising taxes, which Republicans aren’t supposed to do, and all reputable economists agree slows growth.

Here’s another reason why it not good to raise taxes on imported goods. Firstly, some 80 percent of what consumers buy is imported. And consumers overall incomes haven’t been rising at all in 2017 when inflation is subtracted from the total.

Graph: Marketwatch

Marketwatch economist Rex Nutting reports that although GDP growth in Q2 could be as high as 4.5 percent, 2014 was a much better year when average nominal wages were rising 1.3 percent above the inflation rate. And that is really what determines consumers’ demand for goods and services.

With consumers already skating on thin ice with their finances; so much so that their personal savings rate has sunk to a decade low 2.3 percent; raising taxes could well bring us to a tipping point. Let’s not forget a recession starts when economic activity has peaked, and can go no higher, and starts an inevitable decline.

Another economic indicator just out is the IHS Markit US Manufacturing PMI, which fell to 54.6 in June from 56.4 in May, well below market expectations of 56.5. The reading pointed to the slowest expansion in factory activity in 7 months, preliminary estimates showed. New work rose the least since September, partly reflecting a slight drop in export sales.

 

Was the drop in exports because of the tariff wars? The Great Recession began in December 2017 with the US still at full employment. Job losses didn’t accelerate until it dawned on the public in mid-2008 that Wall Street and the banks were in big trouble.

The unemployment rate fluctuated wildly, from a low of 4.7 percent in 2008 to a peak of 10.1 percent in 2009, after the U.S. housing bubble burst and Wall Street saw collapses unlike those seen since the Great Depression in the 1930s.

Future economic growth seems to be trending downward, so the effects of this trade war will loom sooner or later.

Harlan Green © 2018

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

Housing Construction Booming For How Long With a Trade War?

The Mortgage Corner

How is it possible the 10-year Treasury yield has fallen back to 2.88 percent, and the 30-year fixed conforming rate is again 4.0 percent for 1 origination point in California? It’s all because the Trump trade wars that are supposed to be “easy to win” have alarmed financial markets so much that investors are fleeing back to the safe haven of Treasury bonds. Really? Why should this bother financial markets when trading partners reciprocate with higher import taxes of their own on American-made goods?

That’s right, a tariff is a tax on goods made or bought by Americans, whether it’s exports or imports. So much for the Republican’s promise of no new taxes, which even Republican orthodoxy says raises prices and reduces demand for those goods and services.

The housing market doesn’t seem to mind, at the moment. Privately-owned housing starts in May were at a seasonally adjusted annual rate of 1,350,000, said the US Census Bureau today. This is 5.0 percent above the revised April estimate of 1,286,000 and is 20.3 percent above the May 2017 rate of 1,122,000. Single-family housing starts in May were at a rate of 936,000; this is 3.9 percent above the revised April figure of 901,000. The May rate for units in buildings with five units or more was 404,000.

Graph: Econoday

The gain for completions is entirely centered in the key single-family category, up 11.0 percent to 890,000 to offset a 13.8 percent decline for multi-units.The May reading of 1.35 million is the number of housing units builders would begin if they kept this pace for the next 12 months, said the NAHB press release. Within this overall number, single-family starts rose 3.9 percent to 936,000 – the second highest reading since the Great Recession. Meanwhile, the multifamily sector -- which includes apartment buildings and condos -- rose 7.5 percent to 414,000 units.

"Ongoing job creation, positive demographics and tight existing home inventory should spur more single-family production in the months ahead," said NAHB Chief Economist Robert Dietz. "However, the softening of single-family permits is consistent with our reports showing that builders are concerned over mounting construction costs, including the highly elevated prices of softwood lumber."

And that leads us back to Trump’s problem with “easy to win” trade wars. The NAHB leadership just met with Commerce Secretary Wilbur Ross to discuss the growing problem of escalating lumber prices that are being exacerbated by tariffs on Canadian lumber imports into the U.S.

"Today, we discussed with Secretary Ross our mutual concern that lumber prices have risen sharply higher than the tariff rate would indicate,” said NAHB Chair Randy Noel, “and this is hurting housing affordability in markets across the nation. Rising lumber prices have increased the price of an average single-family home by nearly $9,000 and added more than $3,000 to the price of the average multifamily unit.”

I wonder who is promising that prices in the free market are predictable when a trade war is initiated? It is the height of folly to promise beneficial results when past history has said trade wars harm almost everyone involved.

Harlan Green © 2018

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

Boom Times with Rising Retail Sales, Inflation

The Mortgage Corner

Retail sales jumped 0.8 percent in May which easily tops economists’ estimates. And the results include an upward revision to April which now stands at a 0.4 percent gain, according to Econoday. It is in part due to rising inflation, as the retail Consumer Price Index also jumped and retail sales make no corrections for inflation.

This illustrates just what a booming economy should look like after many years of low or no inflation since the end of the Great Recession. Consumers increased their demand for goods and services because they felt more prosperous, and also see prices rising or about to rise. It’s not abnormal to see 4 to 5 percent retail inflation when an economy is booming—something that hasn’t been the case for any stretch since the end of the Great Recession.

Graph: Econoday

“The retail report shows balanced gains including a 1.3 percent jump at restaurants and a 0.5 percent increase for motor vehicles, both pointing to rising discretionary demand. Building materials,” said Econoday, “which have been soft, surged 2.4 percent in what will be a plus for residential investment. Department stores have been very weak but have now put together back-to-back gains of 1.5 percent in May and 0.7 percent in April. Clothing stores, at 1.3 and 1.2 percent, have likewise bounced back with sizable gains the last two months.”

Graph: Econoday

Year-on-year consumer prices are up 2.8 percent, and core inflation without gas and energy fluctuations is up 2.2 percent. The overall culprit was rising gas prices, as a barrel of oil is now in the mid-$60 price range. Gasoline jumped 1.7 percent in the month outside of which most other readings are modest-to-moderate. Rent rose 0.3 percent in the month as did owners' equivalent rent while medical care, outside of a spike for related commodities and hospital services, remains largely flat.

There are other factors that cause prices to rise faster, such as plentiful jobs, and consumer confidence, which has been soaring for a year. The Conference Board’s Consumer Confidence Index came in at a very strong 128.0 in May which is just below expectations but up from a downward revised 125.6 in April. 

Significantly more consumers say jobs are currently plentiful, at 42.4 percent vs April's 38.2 percent, and about the same say they are hard to get, at 15.8 vs 15.5 percent. Expectations also moved higher, up 1.3 points to 105.6 with sizably more, at 19.7 percent vs April's 18.6 percent, seeing more jobs opening up in the next six months, reports the Conference Board.

“Consumer confidence increased in May after a modest decline in April,” said Lynn Franco, Director of Economic Indicators at The Conference Board. “Consumers’ assessment of current conditions increased to a 17-year high (March 2001, 167.5), suggesting that the level of economic growth in Q2 is likely to have improved from Q1. Consumers’ short-term expectations improved modestly, suggesting that the pace of growth over the coming months is not likely to gain any significant momentum. Overall, confidence levels remain at historically strong levels and should continue to support solid consumer spending in the near-term.”

This is the picture of a booming economy, with all cylinders firing. But inflation is rising sharply and a trade war will create even more inflation. So what happens with the Fed and interest rates, if inflation continues to rise? The Fed Governors are saying at least 2 more rates hikes may be necessary, if inflation continues to rise more than moderately.

Harlan Green © 2018

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

The Price of Incompetence in Foreign Policy and Trade

Financial FAQs

The Trump administration’s foreign policy is becoming obvious after the Singapore Summit with North Korea—Make Russia, N Korea, China (and almost every other authoritarian government in the world) Great Again at the expense of America and its closest allies and friends.

The Singapore Summit showed more of Trump’s naiveté on foreign policy with the 8-point communique that gave Kim Jong Un what he wanted—U.S. recognition of the legitimacy of his regime and promise by President Trump of some kind of security blanket (including possible withdrawal of American troops from S Korea) with no concessions of his own that hadn’t already been agreed to with South Korea in April—such as N Korea’s many-times stated intention to de-nuclearize the Korean peninsula in some way.

This is after POTUS dissed the G-7 summit, while insulting Canada’s Prime Minister, and suggesting that Russia be re-admitted to the G-7 without atoning for its many sins; such interfering in American and European elections, withdrawing its troops from the Ukraine, and support of Syria’s genocide of its own citizens.

The so-called master of the Art-of-the Deal once again revealed his true weaknesses. He only knows how to deal with those that mirror his own bully mentality. Trump only began to succeed in his real estate empire after Mafia figures and Russian Oligarchs put their laundered funds into his projects.

It’s as if his own limitations prevent him from even understanding western democratic leaders, or the complexities of western democracies, in general. His statement that “winning trade wars is easy” tells us exactly what he doesn’t know. Every trade war in history has been damaging to all sides—such as the Smoot-Hawley Tariff Act of 1930 that worsened the Great Depression with an almost 70 percent reduction of mainly agricultural exports.

The Trump administration is now raising tariffs on steel and aluminum, which risks a full-blown trade war and another stock market crash. We have a very unsteady stock and bond market that is being whipsawed by inconsistent policies and Presidential Tweet rants—in the ninth year of this business cycle. Actually, it’s looking more and more like the end of this prosperity cycle.

Today’s wholesale Producer Price Index already showed the effects of the steel and aluminum tariffs—higher prices for both parts and finished products. Prices for steel mill products surged a monthly 4.3 percent following a 3.2 percent gain in April. Prices for aluminum mill shapes came in at an even hotter 5.0 percent monthly gain that follows April's 1.8 percent climb.

Graph: Econoday

On an unadjusted basis (without seasonal variations), the final demand index moved up 3.1 percent for the 12 months ended in May, said the BLS, the largest 12-month increase since climbing 3.1 percent in January 2012.

And the Federal Reserve today announced they will be raising their short term rates another 0.25 percent, from 1.75 percent to 2 percent, raising the costs of consumer borrowing even higher, which is sure to slow down spending. This is after consumers reported a record first quarter borrowing binge.

The Federal Reserve Bank of New York’s Center for Microeconomic Data just issued its Quarterly Report on Household Debt and Credit, which shows that total household debt increased by $63 billion to $13.21 trillion in the first quarter of 2018. It was the 15th consecutive quarter with an increase, and the total is now $536 billion higher than the previous peak of $12.68 trillion, from the third quarter of 2008.

The consumers’ personal savings rate has dropped to 2.8 percent from an already extremely low 3 percent. As Roosevelt Fed Chair Marriner Eccles once said of the Great Depression, “…The other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped."

We are already seeing the inflationary effects of trade wars that President Trump believes are “easy to win”.

Harlan Green © 2018

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

Record Income Inequality + Trade War = Recession?

Popular Economics Weekly

The Smoot-Hawley Tariff Act, so called, was imposed in 1930 when the Hoover administration raised tariffs on 20,000 foreign, mostly agricultural, imports in an attempt to protect American farmers as we were entering the Great Depression.
Sound familiar? I mean the part about raising tariffs after the heady prosperity of the Roaring

Twenties followed by the Great Depression. Tariffs were raised after the 1929 Black Friday stock market crash, which panicked investors. It was also a time of record income inequality, when the top 10 percent of income earners owned more than 40 percent of our national wealth, as they do today.

The Trump administration is raising tariffs on steel and aluminum after another 9 years of uninterrupted prosperity, which risks a full-blown trade war and another stock market crash. We have a very unsteady stock and bond market that is being whipsawed by inconsistent policies and Presidential Tweet rants—in the ninth year of this business cycle. Actually, it’s looking more and more like the end of this business cycle.

No reputable economist attributes the Great Depression solely to Smoot-Hawley tariffs, or Black Friday, or the record income inequality of that time, but these events certainly exacerbated its affects, as factories and banks folded like dominoes in 1930-32, until Roosevelt enacted the New Deal legislation in his first 100 days that put millions back to work and saved the day.

And economic history teaches us the very interdependent trading world we live in today was set up to reduce the costs of production to levels that would allow consumers to benefit from cheaper prices, and cheaper prices meant a larger consumer market, which now powers two-thirds of economic activity in the U.S.

So what can happen when our trading partners reciprocate by boosting their own tariffs on our exports? The cost of everything goes up—not just everything made from aluminum and steel, but soybeans going to China (if they continue to buy them), and Kentucky whiskey popular in Europe.

It’s a No-win situation for American exporters, in the name of national security. In fact, the Trump trade policies are a clear and present danger to U.S. national security, since by breaking up western alliances in order to make alliances with our adversaries and enemies that seek to undermine western democracies, we are breaking away from the only friends that would protect us in the event of a war, as western democracies have done ever since World War II.

Now we have to live with tax cuts that former Fed Chair Ben Bernanke just warned were done at the wrong time for the wrong reason. Pouring more gasoline on already red-hot markets may cause a larger conflagration, but then markets will burn out that much sooner, as happened with the most recent Great Recession after years of easy money busted the housing bubble.

The economic effect of President Donald Trump's $1.5 trillion tax cut and $300 billion bump in federal spending will wear off in two years and then "in 2020 Wily E. Coyote is going to go off the cliff," according to former Federal Reserve Chairman Ben Bernanke.

The stimulus is coming at "the very wrong moment," Bernanke said during a panel discussion at the American Enterprise Institute, as reported by Bloomberg. "The economy is already at full employment." Congressional Budget Office forecasts have the stimulus lifting economic growth this year to 3.3 percent and then 2.4 percent in 2019. But it slows to 1.8 percent in 2020.

And this was a Republican Fed Chairman appointed by GW Bush with the nickname “Helicopter Ben” for his multiple Quantitative Easing programs that showered money on the U.S. economy in order to prevent the Great Recession from turning into the Great Depression.

The national debt is on track to approach 100 percent of gross domestic product (GDP) by 2028, said the nonpartisan CBO, which analyzes legislation for Congress. “That amount is far greater than the debt in any year since just after World War II,” CBO said, adding that the debt is now about 77 percent of GDP, a measure of the size of the economy.

The Republican tax legislation, passed by Congress without Democratic support, along with a recent bipartisan $1.3 trillion spending package, are expected to drive economic growth faster than initially expected, CBO said.

Now is not the time to shower more money on the U.S. economy that the Congressional Budget office has also said will benefit just the top 10 percent of income earners, and actually reduce wealth and benefits for the rest of US.

Why does this look like 1929 is happening all over again?

Harlan Green © 2018

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

JOLTS Report Suggests Workers Holding Out for Higher Pay

Financial FAQs

 

 Graph: Econoday

“For the first time in nearly 20 years of existing records, the number of job openings, at 6.698 million in April, is exceeding the number of unemployed actively looking for work, at 6.346 million in April (subsequently falling in last week's employment report to 6.065 million in May),” said Econoday on Tuesday’s release of the Labor Department’s JOLTS report.

Also, the gap between openings and hires in the JOLTS report, at 1.120 million, is the second largest on record next only to March's 1.147 million, reported Econoday.  It suggests employers are having a hard time finding people to fill the jobs. That is the understatement of the year. There are still 6 million working adults not happy; who are either looking for work or who work part time but want fulltime work, as I reported in the May Unemployment Report.

It means in fact employers will have to pay more to fill those job vacancies. The full name of the JOLTS report is Job Openings and Labor Turnover Survey, which also measures the Quits rate, the percentage of workers voluntarily leaving a job. And that is at the high end in this cycle, which means more are quitting and probably finding better-paying jobs.

Average hourly earnings are still rising just 2.7 percent per year, when they should be in the 3 to 4 percent range at this late stage of the recovery. That’s barely above the Fed’s preferred Personal Consumption Expenditure price inflation figure of 2 percent. Workers’ wages are barely keeping up with rising prices, in other words, hence they are extremely stretched and borrowing more than they are spending.

Hence, the record job openings. Those openings aren’t enticing enough to bring more workers back into the workforce. And that is of major concern; as tax revenues aren’t even close to covering the added federal debt of more than 2.2 trillion over the next 10 years according to the latest analysis of the recent tax cuts.

Consumer spending on consumer goods in April is picking up for a second straight month, pointing to a pickup in the U.S. economy in the spring. Spending jumped 0.6% after a revised 0.5% gain in March, the government said Thursday. But that is at the cost of drawing down their savings to dangerous lows.

Several Wall Street firms upped their GDP forecasts due to the spending uptick, but consumers’ personal savings rate dropped to 2.8 percent, only the third time since 2009 to drop below 3 percent.
Amherst Pierpont Securities raised its estimate of second quarter GDP growth to 4.5 percent from 4.2 percent. Macroeconomic Advisers increased its forecast to 4 percent from 3.6 percent. Barclays also upped its estimate, but it was near the low end of forecasts, raising its Q2 target to 3.3 percent from 3 percent.

GDP has only topped 4 percent three times since the end of the Great Recession in mid-2009; mostly due to the very poor growth in household incomes since its end in mid-2009. Why don’t corporations raise their workers’ wages enough to fill some of those job openings, even with the recent huge tax cut windfall? That’s a story for another time.

But we know what causes recessions, and depressions. Roosevelt’s Fed Chairman Marriner Eccles spelled it out in the 1930s:

"As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth ... to provide men with buying power. ... Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. ... The other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped."

Harlan Green © 2018

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

Strong May Employment, But Uncertain Future

Popular Economics Weekly

Graph: Marketwatch

The unemployment rate edged down to 3.8 percent in May, and the number of unemployed persons declined to 6.1 million, reported the Bureau of Labor Statistics this morning. Over the year, the unemployment rate was down by 0.5 percentage point, and the number of unemployed persons declined by 772,000.

This shows a strong economy, but not for long if the Trump administration’s trade war lasts. Because it means our trading partners will retaliate with their own tariffs, boosting costs and lowering the demand for US products.

The manufacturing and construction sectors added 18,000 and 25,000 jobs respectively in May yet have complained they can’t find enough skilled workers. Hourly pay rose by 8 cents, or 0.3 percent to $28.92 an hour in May. As a result, the 12-month increase in wages rose to 2.7 percent after holding at 2.6 percent for three months in a row.

Wages are barely rising, which makes the Fed happy, as wages make up two-thirds of products costs. It means there is very little inflation on the horizon, which should keep interest rates at the low end; another boost to continued growth. But this also means in fact there are still a lot of unemployed workers that are available for work, if wages continue to rise enough that would draw them back into the workforce.

For instance, the number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) was essentially unchanged at 4.9 million in May. And the number of persons marginally attached to the labor force, at 1.5 million in May, was little different from a year earlier. These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.

This jobs picture means we are near full employment, but it looks like the Trump administration’s new trade war with our allies could mean full employment may not last. Canada, Mexico and the European Union have already announced they will retaliate with tariffs of their own on US products.

It means a substantial rise in product costs, and reduction in the demand for American products, as I said. It could therefore cancel out all the benefits to businesses of the recent tax cuts, since Canadian Prime Minister Justin Trudeau said the fallout from US moves would be “more significant” than it realizes. Ottawa will impose billions of dollars of tariffs on steel, aluminum and a wide range of other U.S. goods, including some food and agricultural products.

The EU said it is also planning to hit back with billions of dollars of levies on U.S. exports which could go into effect staring June 20 and launch a case against American measures at the World Trade Organization on Friday. “This is protectionism, pure and simple,” the EU’s top executive, European Commission President Jean-Claude Juncker, said Thursday. “We will defend the Union’s interests, in full compliance with international trade law.”

If the US isn’t bluffing and carries out these tariff hikes on our closest allies—which would endanger rather than increase our national security—then look for a slowing economy and rising unemployment ahead.

Harlan Green © 2018

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