The Japan Tariffs

 Financial FAQs

“It has been clear for a while that Trump and co. don’t understand or believe in balance of payments accounting, that they want both a smaller trade deficit and more foreign investment in America. Now their basic lack of understanding is embodied in a specific deal.” Paul Krugman

FREDtradedeficit

Why not quote Paul Krugman, who won a Nobel Prize for his research on foreign trade? The just announced trade deal with Japan is another illustration of the Trump administration’s ignorance of basic economic principles that will make both countries poorer.

It’s necessary to get into the ‘weeds’ of economic principles for those that want to understand just what the Trump administration is really up to; enriching the few with tax cuts that are paid for by all Americans in the higher prices that will result.

Although Japan will be building more factories in the U.S. with its $550 billion in announced investments and be able to export more Japanese vehicles to Americans, U.S. autoworkers will be hurt because Japanese autos will be cheaper than vehicles manufactured in the U.S, even with the 15 percent tariffs levied on them.

Why so? Because the parts imported and used in U.S. manufactured autos have higher tariffs, such as the 50 percent tariff on imported steel and aluminum products that go into American-made autos. That’s why the U.S, Autoworkers Union will have something to say about such a tariff agreement that will endanger the livelihoods of Ford, Stellantis, and GM’s unionized autoworkers.

GM President Mary Ybarra just announced that $1.1 billion of its $2 billion net income from second quarter earnings will be ‘eaten’ by the higher tariff costs that GM didn’t want to pass on to consumers.

The FRED graph illustrates the historical ups and downs of the historical trade imbalance of goods and services. The downward trending red line basically tracks the negative gap between imports and exports. It has been trending down because we are a consumer-driven economy that has historically imported much more than American businesses export.

The deepest trade deficit (steep drop in red line) occurred with a surge in imports January-March 2025 to get ahead of Trump’s threatened reciprocal tariffs on April 2. But when he announced the reciprocal tariffs—China’s was 145%, for instance—imports dried up and the difference narrowed so that the graph line rose quickly to the $60 to $70 billion historical trade deficit.

It's an illustration of the incredible gyrations that such chaos injects into foreign trade with Trump’s negotiating tactics, and which hurts small businesses most that depend on imports for consumer products, as well as retail giants like Walmart and Target.

The earliest effect on tariff-induced inflation apppeared in the Consumer Price Index (CPI) I reported last week. The prices of retail goods and services rose to 2.7 percent in June from a four-year low of 2.4 percent, which is why the Fed is still on hold with further rate cuts. It fears that lowering their Fed funds short-term rate could trigger an inflation panic, since it would speed up economic activity.

This would in turn panic bond holders who fear higher inflation and demand higher rates that control mortgages and yields on Treasury securities that fund the national debt, when the annual debt payments are $1 trillion.

Consumers can tolerate some higher inflation and maintain spending if the job market is good. Retail sales just rebounded in June and initial jobless claims for unemployment benefits are down again. Should the unemployment report remain in the low 4.2-4.3 percent range, consumers can keep spending despite uncertainty. But confidence polls are showing consumers are beginning to see the ultimate cost of higher tariffs—reduced social services and a worsening climate.

And this is before the appeal by the Trump administration of the Foreign Trade Court ruling that all reciprocal tariffs must be approved by the congress is decided! How is anyone to know what the final tariffs will be, in that case?

And how can he keep his promise to lower inflation while he keeps hounding the Fed to lower interest rates sooner (that would boost inflation)? He can’t keep his promise, in a word, because of his need to cut taxes. So he will raise everyone’s cost of living to pay for tax cuts that will benefit the few.

Harlan Green © 2025

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

Second Quarter Growth Estimates Decline

 Popular Economics Weekly

“The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2025 is 2.4 percent on July 18, unchanged from July 17 after rounding. After this morning’s housing starts release from the US Census Bureau, the nowcast of second-quarter real residential investment growth decreased from -6.4 percent to -7.0 percent.” Atlanta Federal Reserve Bank

AtlantaFed

The Atlanta Fed’s GDPNow estimate of second quarter growth is why the Federal Reserve may drop interest rates at their September FOMC meeting if estimates for second quarter growth continue to decline (green line in graph). There is hope that the second quarter would look better than Q1’s negative -0.5% shrinkage. But that was based on the premise that there would be actual tariff agreements.

And now Trump is threatening Brazil with 50 percent tariffs over ex-President Bolsanaro’s criminal conviction.

We will see the first official estimate of second quarter economic growth on July 31, but most economists are warning of the uncertainty affecting growth predictions. The DOGE cost-cutting was meant to increase efficiency, but in fact is reducing it by eviscerating programs that only the federal government can do.

Much of it is being cut from scientific research that is the seed corn for the future prosperity and safety of Americans, for instance. There are large cuts in Health & Human Service for future disease cures (medical research), the USEPA in climate research, and even climate forecasting. FEMA cost-cutting made it slow to respond to the Kerrville, Texas flash flood, and unprepared to save more lives.

The Conference Board’s Index of Leading Economic Indicators (LEI) that predicts future growth is also turning negative, despite Republican touts that Trump’s just passed Terrible Tax Bill will boost growth from the many tax breaks and reduced regulations being handed to corporations.

“The US LEI fell further in June,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “For a second month in a row, the stock price rally was the main support of the LEI. But this was not enough to offset still very low consumer expectations, weak new orders in manufacturing, and a third consecutive month of rising initial claims for unemployment insurance.”

Stocks have been rallying of late on the belief that TACO Trump will ultimately relent on many of his tariff threats that would boost inflation and reduce the likelihood of lower interest rates that businesses and consumers have been hoping for.

Consumers will still be the final arbiter of Q2 growth since they make up 70 percent of GDP, and they are now timing the tariff announcements. Retail sales had declined in May but picked up in June when it looked like any tariff hikes would be delayed once more.

Lower tariffs would certainly be better for future growth, since consumers also like it that way.

Harlan Green © 2025

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

When Will Housing Recover?

 The Mortgage Corner

“Overall, I expect tariffs to boost inflation by about 1 percentage point over the second half of this year and the first part of next year,” John Williams, New York Fed President.

 

NPR

Such remarks mirror what many of the Fed Governors who vote on interest rates are saying. Expectations for higher interest rates abound as a result of the inflation expectations. It’s why the housing market may have to wait until next year to recover. The 30-year fixed mortgage rate is still hovering close to 7 percent, which is keeping first-time buyers out of the housing market and elevating rental rates.

There are other reasons to wait, of course. The housing shortage, a lingering victim of the slow recovery from the Great Recession’s busted housing bubble, is keeping home prices from declining.

And President Trump’s on-and-off attempts to bully Fed President Jerome Powell and the 12 Fed Governors to lower interest rates isn’t succeeding, despite Trump’s daily insults.

It’s another version of TACO Trump’s negotiating skills. He only knows how to bully, which is why he has left a trail of bankruptcies and lawsuits throughout his business career. But Trump keeps denying he is about to fire the Fed Chairman that he appointed in his first term.

It’s also why Trump and his allies claim tariffs are not causing inflation, and the president saying, “inflation is dead” so he can justify his push for rate cuts. Trump has called on the Fed to slash interest rates by as much as 1%, with the Fed’s benchmark rate still in the 4.25%-4.5% range.

That will ultimately happen because there is almost unanimity among economists that the tariffs will make everything more expensive, which will ultimately slow growth enough to require the Fed to act.

Realtors and some economists are also calling for lower mortgage rates to strengthen the housing market. Mark Zandi, chief economist of Moody’s Analytics is worried “Housing will … soon be a full-blown headwind to broader economic growth,” he wrote in a post on X and LinkedIn, “adding to the growing list of reasons to be worried about the economy’s prospects later this year and early next,” as cited by MarketWatch.

There is a slight hope that home sales might improve this year, according to the National Association of Realtors (NAR). Pending home sales—that are homes under contract but not closed—increased by 1.8% in May from the prior month and 1.1% year-over-year, according to the National Association of REALTORS® Pending Home Sales report.

"Consistent job gains and rising wages are modestly helping the housing market," said NAR Chief Economist Lawrence Yun. "Hourly wages are increasing faster than home prices. However, mortgage rate fluctuations are the primary driver of homebuying decisions and impact housing affordability more than wage gains.”

Existing-home sales have been stagnant for years, hovering around 4 million annual sales since January 2022 when the Fed first began to raise interest rates, but were up +0.8% from April to a seasonally adjusted rate of 4.03 million in May 2025. Sales declined 0.7% year-over-year, however.

When will builders have enough confidence to build more homes, including affordably priced homes? New home sales, which constitute approximately 13.4% of all US home sales, dropped 13.7% in May 2025 to a seven-month low of 623,000 units. This decline was the largest since June 2022.

Builder confidence in the market for newly built single-family homes was 34 in May, down six points from April, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). This ties the November 2023 reading and is the lowest since the index hit 31 in December 2022.

Interest rates must eventually come down because as Mark Zandi says, poor housing sales are already a “full-blown head wind” to higher growth and the Fed will have to act to counter the added ‘head wind’ from the tariffs.

But how long must we wait for that to happen, and will it be soon enough to prevent something even more serious from happening?

Harlan Green © 2025

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

Inflation Week is Here

Financial FAQs

“The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3 percent on a seasonally adjusted basis in June, after rising 0.1 percent in May, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 2.7 percent before seasonal adjustment.” BLS.GOV

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June is the month that the Trump tariffs are beginning to raise the price of imported goods, which is pushing the inflation rate higher.

The first inflation report is the Consumer Price Index (CPI) on retail goods and services (see graph). It rose to 2.7 percent in June from a four-year low of 2.4 percent, which is why the Fed is still on hold with further rate cuts. It fears that lowering their Fed funds short-term rate could trigger an inflation panic, since it would speed up economic activity.

This would in turn panic bond holders who fear higher inflation and demand higher rates that control mortgages and yields on Treasury securities that fund the national debt, when annual debt payments are already $1 trillion.

Gas prices and housing costs rose. Prices fell for new and used vehicles, hotels and airfares. So, the inflation problem is with goods, while the service sector price declines showed that consumers are dining out and traveling less because of the uncertainties generated by a tariff war.

Why should consumers spend more when the prices of cars and other durable goods that last more than three years, and are mostly either manufactured overseas or the parts are imported, will be hit by the tariffs? And don’t forget Trump wants to dock every country in the world that exports to us with at least a 10 percent tariff rate

This is before the appeal by the Trump administration of the Foreign Trade Court ruling that all reciprocal tariffs must be approved by congress is decided! How is anyone to know what the final tariffs will be, in that case?

There is more to come this week with wholesale inflation (Producer Price Index) and the Fed’s favorite, Personal Consumption Expenditure index (PCE), to follow.

So why are the financial markets rallying to new highs as we speak? It is blind faith, in my opinion, that TACO Trump will chicken out again on the higher import taxes just announced on the likes of Japan, the EU, and even Brazil where we already have a trade surplus from exporting more to Brazil more than we import.

Is it that Trump loves the drama and can’t resist firing broadsides at what he doesn’t like? Or, more likely he desperately needs to collect import taxes to bring down the huge national debt brought on with the tax cuts, but without causing more inflation, something he promised to bring down on ‘Day One’.

How can he keep his promise to lower inflation while he keeps hounding the Fed to lower interest rates sooner (that would boost inflation)? He can’t, in a word, because of his need to cut taxes. So he is raising taxes on everyone else dependent on imports.

Harlan Green © 2025

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

Consumers Aren't Buying It

 Popular Economics Weekly

Photo: Emma Da Silva/Getty Images

MarketWatch

“Total U.S. consumer credit growth slowed to a $5.1 billion gain in May, down from a $16.9 billion rise in the prior month, the Federal Reserve said Tuesday.

That translates to a 1.2% annual rate in May, down from a 4% rise in the prior month.” Greg Robb, MarketWatch

President Trump waited for stocks to rally before announcing his latest tariff broadsides on world markets, such as the 50 percent tariff on Brazilian imports. But the result is consumers are shopping less and less. So Trump shouldn’t be paying attention just to the financial markets if he wants to know what might happen over the rest of his term.

Retail sales fell 0.9% in May, the biggest drop in two years. Car sales spiked earlier this year as consumers sought to avoid higher prices from planned tariffs. But sales have slowed sharply since April, said MarketWatch.

The labor market is also slowing. Initial unemployment claims, an early indicator of its direction, have been increasing. The number of people receiving unemployment benefits increased 10,000 to a seasonally adjusted 1.965 million during the week ending June 28, the highest level since November 2021.

Consumer spending drives most economic growth (70%), so if they falter economic growth will slow. And stagnant growth is the component of a possible stag-flation that will result, just as it did in the 1970s with the oil shortages.

We now must wait for the other shoe to drop, which is the effect of the tariff taxes on inflation, which will surely increase later this year, given the supply shortages to follow.

Everyone now knows that TACO Trump is using the shock and awe tactics of so-called reciprocal tariffs, which are blatantly illegal per the Foreign Trade Court ruling now on appeal, to get more concessions from trading partners.

Trump’s problem is that neither consumers nor businesses like uncertainty, yet this is the only way Trump has ever known how to negotiate. His long history of lawsuits and bankruptcies have been the result. And once again he leaves it to the courts to sort out the messes he is now creating for all Americans.

Will it be worth it to those that elected Trump, and will be the most affected by their incompetence?

Harlan Green © 2025

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

Where Was FEMA?

 Financial FAQs

“On July 4, the day Trump signed the bill, flash floods devastated central Texas, leaving more than 100 people dead and about 160 still missing. Local officials immediately blamed cuts to the National Weather Service (NWS) for the disaster, but reviews showed that NWS meteorologists had predicted the storm accurately and had sent out three increasingly urgent warnings at 1:14 a.m., 4:03 a.m., and 6:06 a.m.” Heather Cox Richardson, Letters from an American

CNN

The Texas flash flood caught authorities flat-footed, but not the National Weather Service. It is GW Bush’s Katrina Hurricane response fiasco all over again.

I am re-posting excerpts from Historian Heather Cox Richardson’s Substack blog of what really happened in the Guadalupe River, Texas flash flood disaster. It is the most recent example of the cost in lives of the DOGE cost cutting frenzy and Trump administration’s mismanagement, that is also costing lives. This is apparently what we can expect from Trump and the incompetents he has picked to run our government over the next 3.5 years.

“But four hours passed before the police department in the City of Kerrville issued a warning. It wasn’t until 7:32 that the city urged people along the Guadalupe River to move to higher ground immediately. The missing link between the NWS and public safety personnel appears to have been the weather service employee in charge of coordinating between them. He took an unplanned early retirement under pressure from the “Department of Government Efficiency” and has not been replaced.

Then, as Gabe Cohen and Michael Williams of CNN reported, search and rescue teams from the Federal Emergency Management Agency (FEMA) could not respond to the disaster because Homeland Security Secretary Kristi Noem, whose department is in charge of FEMA, had recently tried to cut spending by requiring her personal sign-off on any expenditure over $100,000. That order meant FEMA couldn’t put crews in place ahead of the storm, or respond immediately. Noem didn’t sign off on the deployment of FEMA teams until Monday, more than 72 hours after the flooding started.

Tricia McLaughlin, a spokesperson for the Department of Homeland Security, told Cohen and Williams that Noem did not authorize FEMA deployment because DHS used other search and rescue teams. “FEMA is shifting from bloated, DC-centric dead weight to a lean, deployable disaster force that empowers state actors to provide relief for their citizens,” McLaughlin told CNN in a statement. “The old processes are being replaced because they failed Americans in real emergencies for decades.”

“DHS is rooting out waste, fraud, abuse, and is reprioritizing appropriated dollars. Secretary Noem is delivering accountability to the U.S. taxpayer, which Washington bureaucrats have ignored for decades at the expense of American citizens,” McLaughlin said. Noem has called for the elimination of FEMA.

Meanwhile, FEMA’s acting director, David Richardson, has been nowhere to be found, making no public appearances, statements, or postings on social media since the disaster, and not visiting the site. Former FEMA officials told Thomas Frank of Politico that Richardson’s absence suggests Noem is controlling the FEMA response. Trump appointed Richardson after his team fired his first appointee, Cameron Hamilton, for telling Congress he did not think FEMA should be scrapped.

The day after he took office in May, Richardson, who has no experience with emergency management, told staff: “Don’t get in my way…because I will run right over you. I will achieve the president’s intent…. I, and I alone in FEMA, speak for FEMA,” he said.

Even as rescuers were still at work today in Texas, DHS cancelled a $3 million grant that had been awarded in New York to make sure the NWS can communicate effectively with local officials.”

I maintain it’s what we can look forward to when our government is run by a convicted felon who only trusts those most loyal to him rather than our constitution.

Harlan Green © 2025

Follow Harlan on Twitter: https://twittter.com/HarlanGreen

No Art of the Trade Deal

 Financial FAQs

“The point is that Trump doesn’t feel bound by trade deals America has made in the past. Why should anyone expect him to honor any new deals he makes, or claims to make, now?

Huffington Post

“Obviously this behavior isn’t unique to tariffs. Many domestic institutions, from law firms to universities, have discovered that attempting to appease Trump buys you at best a few weeks’ respite before he comes back for more.” Paul Krugman

Nobel Laureate Paul Krugman won his Nobel Prize for his research in International Trade, so his remarks on Donald Trump’s behavior in negotiating trade deals is a good way to understand what Donald Trump has done his whole life—bullied people and institutions—because that’s all he knows how to do.

And Krugman fears it will mean Trump will continue his tariff wars, regardless of the outcomes. This certainly means some level of stagflation; higher inflation with slower economic growth, according to most economists and even Wall Streeters. Maybe not on the level of the 1970s stagflation induced by the OPEC Arab Oil Embargo.

It’s Trump’s paranoid personality if you can call it that. It’s the reason he is the con man who has lied and obfuscated his whole life and could only negotiate with lawsuits. He doesn’t really know how to negotiate so that both parties win, and therefore it is a stable relationship between parties. He only wants to overpower a perceived enemy, much like Putin or Xi, real dictators who torture and kill and their own people to maintain power.

I have written about Trump’s poor negotiating skills in past Huffington Post articles and elsewhere. Author Tony Schwarz was the first to seriously write about Trump in Trump: The Art of the Deal, his biography that created the myth that Trump was a skilled wheeler-dealer.

But it wasn’t real, Schwartz said later to New Yorker Magazine’s Jane Mayer in a famous 2016 interview.

“I put lipstick on a pig,” he said. “I feel a deep sense of remorse that I contributed to presenting Trump in a way that brought him wider attention and made him more appealing than he is.” He went on, “I genuinely believe that if Trump wins and gets the nuclear codes there is an excellent possibility it will lead to the end of civilization.”

The just announced reciprocal tariffs on Japan and Korea area a good example, says Krugman. President Trump sent out tariff letters to U.S. trading partners on Monday as he had promised, starting with Japan and South Korea before targeting Malaysia, Indonesia and other countries.

He has labeled them “reciprocal” tariffs because of his perceived unfairness of their tariff policies, but Japan and South Korea charge little or no tariffs on U.S. imports because of long standing agreements, says Krugman, so have little to negotiate.

“How were the South Koreans supposed to end unfair trade practices that exist only in Trump’s imagination?” says Krugman?

Then why is Trump proposing tariffs on them anyway?

“The only possible out here would be a series of fake deals, in which countries pretend to have offered significant concessions and Trump claims to have won big victories. Some people still think that will happen — the new tariffs aren’t supposed to take effect until Aug. 1. But the tone of those letters and Trump’s clear obsession with tariffs make me doubt that he’ll call the tariffs off, in part because of my last observation: Attempts to mollify Trump always end up emboldening him to demand more.”

Then why does Trump do it and cause what will be more huge financial market dips with the loss of more $trillions in equities, many trade disruptions, and alienation of our allies?

Being ‘reciprocal’ has nothing to do with it. Trump will charge at least a 10 percent tariff on the imports from all countries because he needs the import taxes to pay down the huge budget deficit that’s been generated by his Big Beautiful Bill that Congress has just passed.

Therefore his real objective, rather than fairness, is to extract as many concessions as possible from every other country in the world that is dependent on imports to the U.S, regardless of the economic consequences.

Isn’t that what he really wants, to pay for more tax cuts for Trump and the Oligarchs, which will mean the wholesale disruption of world trade, regardless of the possible destruction of our own economy burdened with an unsustainable national debt?

Harlan Green © 2025

Follow Harlan on Twitter: https://twittter.com/HarlanGreen