What's the Fed Saying?

 The Mortgage Corner

“In considering the outlook for monetary policy, participants agreed that with economic growth and the labor market still solid and current monetary policy moderately restrictive, the committee was well positioned to wait for more clarity on the outlooks for inflation and economic activity.” FOMC

Photo: Andrew Harnik/Getty Images MarketWatch

The Federal Reserve’s release of its minutes from the last FOMC meeting didn’t have much to say about the continuing tariff wars, because nothing has yet been negotiated—just some retaliatory pauses and a written understanding with the UK.

And it may take a while—could be months and years before actual trade agreements are agreed upon as they must pass congressional approval as well. The NAFTA North American Free Trade Agreement wasn’t agreed upon until 1992, though negotiations began in the late 1980s.

That puts the Fed in a very difficult position. We now know why President Trump has attempted to disguise the fact that it is an import tax. The Court of International Trade has ruled that Trump’s retaliatory tariffs are illegal.

The trade court ruled for a group of small businesses and Democratic-led states in finding that Trump tried to get around congressional approval by invoking a 1977 law that doesn’t mention tariffs.

It’s a separation of powers issue that will be fought in the courts, and may take some time, in other words.

Hence Chairman Powell’s concern that a recession may be on the horizon. “The staff viewed the possibility that the economy would enter a recession to be almost as likely as the baseline forecast.”

Why? Because higher taxes generally cause higher inflation, which trump denies will happen (it was a campaign promise), and Powell, et.al., have worked hard to get inflation down to its current level.

BEA.gov

So it was good news that the just released Employment Cost Index rose just 2.1 percent in April; the core rate up 2.6 percent without auto and gas prices figured in. But the personal savings rate (black line in BEA graph) has been rising steadily, is up to 4.9 percent from its December low of 3.8 percent, which is a sign that consumers are becoming more cautious.

We already have a decline in two of the four major components that have determined past recessions: declining employment and flat industrial production because the tariff wars are slowing supply chains. The unemployment rate has risen from 3.6 percent in 2022 to 4.2 percent in April and long-term jobless compensation claims have been steadily rising.

The two other main indicators of a recession are consumer spending that has slowed to 1.2 percent from its usual 3-4 percent annual growth, and GDP growth that went negative -0.2 percent in Q1 for the first time since the COVID-19 pandemic.

So we could already be in a recession, and the tariff wars will certainly cause even more uncertainty.

The real problem is that Trump is trying to get around the legal process with what he asserts are emergency powers to stem the flow of fentanyl and lower the trade imbalances. Only Congress has the power to tax, not the Executive Branch, unless there’s a real emergency. Historical trade imbalances and fentanyl imports aren’t considered national emergencies that require making enemies of our closest allies.

Harlan Green © 2025

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

Manufacturing Slows as Trade Wars Quicken

Popular Economics Weekly

Trade wars are not really winnable anymore—at least the way some world leaders conduct them—or any wars for that matter. This is because we no longer live in a win-lose world where the strong are able to so easily prey on or even conquer the weak and vulnerable.

The world has become too populous, and thanks to modern technologies too interlinked for modern economic bullies—like a Trump, or Russia’s Putin, or even China’s Xi Jinping—to succeed for long in their win-lose negotiating tactics based on perceived grievances.

And that is the reason Trump’s trade wars are failing. NAFTA is still NAFTA, because the U.S. depends so heavily on trade with Canada and Mexico. And now there are predictions that his China trade war will fail as well, because his policies are causing so many losses among his Midwest electorate, and now the US manufacturing sector.

Why are we even having trade wars with our allies, as well as adversaries?

We can thank UC Irvine economic professor Peter Navarro, a protectionist, anti-free trade advocate, for convincing President Trump that multi-lateral trade agreements that link us more tightly to our allies are bad for the U.S., including the 12-nation TPP, Trans-Pacific Trade Partnership, that was designed to curb China’s economic expansionism.

So Trump cancelled the TPP and began his trade wars with our allies in Europe, as well as Canada and Mexico, where the U.S. does most of its trade. The result has been slower growth everywhere, as has been cited in many studies.

“Trade growth, a key artery in the global economy, has also slowed markedly, to around 4 percent in 2018 from 5¼ per cent in 2017, said a recent OECD economic outlook report, “with trade restrictions having adverse effects on confidence and investment plans around the world. In Europe, trade growth has stalled, reflecting a slowdown in both external and internal demand. Leading indicators suggest that near-term trade prospects are weak. Survey indicators of new export orders remain low in China and continue to decline in Europe and many Asian economies.”

Econoday

The U.S. has the Chicago ISM Business Barometer of business activity to measure such activity, a survey of more than 80 economic indicators that show a general national trend. It is giving similar results to the OECD outlook; slowing US growth as well.

The MNI Chicago Business Barometer decreased by 4.5 points to 49.7 in June from 54.2 in May, marking the first sub-50 reading since January 2017, said their press release. Business confidence dipped significantly in Q2, with the Barometer averaging 52.2, down 13 percent on the previous quarter and almost 16 percent lower than Q2 2018.

This month’s special question asked firms about the impact of government-imposed tariffs on their business. 80 percent of firms said that they were negatively impacted, with tariffs raising prices of their goods leading to a pullback in orders.

The June ISM manufacturing Index also fell to 51.7, the slowest pace in more than two years, hurt by trade tensions with China and Mexico. “Backlog orders continue to contract, inventories are coming down, delivery times are improving, import buying is flat -- all signs of weakness. Another disappointment is a 0.5 point decline in new export orders which are barely growing at 50.5,” said the report.

The LA Times has reported on other damage caused by the trade wars; the sharp decline in Chinese direct investments in US manufacturing that had been growing until last year’s start of the Chinese trade war. Investments shrank to $5 billion in 2018, after $29 billion in plant and equipment in 2017 and $46 billion in 2016, which had been responsible for thousands of new, higher-paying American jobs.

Such win-lose trade tactics are designed to fail, as skilled negotiators have been saying since the end of WWII, when allies and alliances have been necessary to keep the world peace (e.g., the Marshall Plan).

“…win-win negotiation involves working to get the best deal possible for yourself while also working to ensure that your counterpart is satisfied (see also, Win-Win Negotiations: How to Manage Your Counterpart’s Satisfaction), says an article in the Harvard Law School blog. “It means making offers that are good for them and great for you, according to Massachusetts Institute of Technology professor Lawrence Susskind. And it means thinking creatively about how you can get more of what you want by helping the other side get what she wants.”

An Eye-for-an-Eye Makes the Whole World Blind was Mahatma Gandhi's famous insight, patron saint of non-violence.

Most of the western world has progressed beyond that stage, at least, in this world of super abundance. We no longer suffer from starvation or famine in the developed world.  Only by helping those underdeveloped countries still suffering from overpopulation and droughts to enter the modern world will we be able to replace the belief in cut-throat competition of the win-lose crowd that sees conflict as the only solution, with the win-win world of cooperation, and a lasting world peace.

Harlan Green © 2019

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

What Happened to Consumers' Confidence?

Financial FAQs

http://www.sca.isr.umich.edu/

Consumer sentiment declined in early January to its lowest level since Trump was elected, reported the December U. of Michigan sentiment survey. It’s down for a number of reasons—too many reasons, and economists are consequently beginning to predict GDP growth will be reduced to the 2 percent annual growth average that has prevailed since the end of the Great Recession.

“The decline was primarily focused on prospects for the domestic economy, with the year-ahead outlook for the national economy judged the worst since mid-2014. The loss was due to a host of issues including the partial government shutdown, the impact of tariffs, instabilities in financial markets, the global slowdown, and the lack of clarity about monetary policies. Aside from the direct economic impact from these various issues on the economy, the indirect effect meant that half of all consumers believed that these events would have a negative impact on Trump's ability to focus on economic growth.”

How serious are the present crises? It depends on their duration. The shutdown is easiest to solve, if the parties can unite in agreement on what exactly constitutes a border ‘wall’—would a digital wall suffice, along with better-funded courts and more Border agents?

“While the January falloff in optimism is certainly consistent with a slowdown in the pace of growth,” said U of Michigan chief economist Richard Curtin, “it does not yet indicate the start of a sustained downturn in economic activity. It is the strength in personal finances that will continue to support consumption expenditures at favorable levels in 2019. Nonetheless, consumers now sense a need to buttress their precautionary savings, which is typically done by reducing their discretionary spending. Evolving job and wage prospects, which were slightly weaker in early January, are critical to extending the current expansion.”

Consumer confidence is based on other factors, as well, such as the job market. The other confidence index, the Conference Board’s Consumer Confidence Index showed lower future job expectations.

“Consumer Confidence decreased in December, following a moderate decline in November,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “Expectations regarding job prospects and business conditions weakened, but still suggest that the economy will continue expanding at a solid pace in the short-term. While consumers are ending 2018 on a strong note, back-to-back declines in Expectations are reflective of an increasing concern that the pace of economic growth will begin moderating in the first half of 2019.”

As has been mentioned by many commentators and economists, the Trump administration isn’t equipped or staffed to handle multiple crises, much less a serious single one. Michael Lewis’ The Fifth Risk was the latest warning of what might happen with an administration that didn’t want the federal government to function well, and appointed administration officials—mainly lobbyists of industries that it regulated—whose mandate was to make sure it increased the profits of their industries rather than the welfare of the American public. That meant it would have a difficult time handling any major crisis, such as the ongoing government shutdown.

So it’s easy to see why consumers are feeling queasy and want to save more of their rising incomes, rather than spend them. Other factors that might be scaring consumers are the ongoing tariff wars, and the IMF prediction of slower worldwide growth.

Maybe doing nothing, other than re-opening the federal government for business, is the better choice for maintaining healthy growth. A revised NAFTA agreement has yet to be ratified by the Senate to take effect. And a “lack of clarity about monetary policies” probably means the Federal Reserve will stop raising short term rates for a while, which will hearten the financial markets, as well.

Harlan Green © 2019

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

What is Really Fair Trade?

Popular Economics Weekly

China is our trading partner with the largest deficit; $506 billion in exports to the US vs. $130 billion in imports from US for a -$376 billion trade deficit in 2017. Canada is the 2^nd largest partner with American consumers buying $300 billion in imports from Canada vs. $282 billion in exports for a -$18 billion trade deficit, according to the latest U.S. Census Bureau data.

Mexico is the third largest partner, with a -$71 billion trade deficit in exports vs. imports. The only partners with which the US has a trade surplus of exports over imports are Brazil and The Netherlands, ranked 12^th and 13^th, respectively, of the top 15 US trading partners.

The culprit is American consumers that now account for almost 70 percent of economic activity, versus 60 percent in the early 1980s, according to Bank of America’s Merrill Lynch analysts.

Consumers spend almost as much as they save, thanks in part to historically low interest rates that make it easy to borrow. The personal savings rate is now 6.7 percent and inflation is ticking above 2 percent, the Fed’s preferred inflation rate, so look for more interest rate hikes in coming months.

Why is President Trump picking a trade war with two of our top three trading partners that accounted for 29 percent of our trading volume in 2017? Is there a better way than a trade war to cure the deficit problem that doesn’t threaten to elevate prices further to an already escalating inflation rate?

Attempting to correct those imbalances is the major reason President Trump launched tariff wars with our largest trading partners. But he crippled himself at the same time by withdrawing from the 12-member Trans-Pacific Partnership—called TPP—at the beginning of his administration. Though it wasn’t perfect (didn’t boost US job formation), the trade alliance lowered tariffs on thousands of goods and gave US the power to oppose China’s unfair trade practices.

Obama economic advisor Austun Goolsbee tweeted recently:

“E.g. TPP cut tariffs on 18,000 us products—to zero for $90b of US autos & $35b of IT, big cuts for US beef, pork, dairy, poultry, forced fairness for US service exports, established free intl movement of data, killed regulatory barriers to us export, limited state owned enterprises.

“TPP had strongest labor rules of any agreement ever (ban forced labor, child labor, discrimination, required freedom to unionize, minimum wage, hour limits, wkr safety) & the strongest enviro (ship pollution, ozone chem, illegal fishing, illegal logging, wildlife trafficking)movement of data, killed regulatory barriers to US export, limited state owned enterprises. And Mexico and Canada signed TPP so Trump’s nafta “deal” is demonstrably worse for the US than what Canada and Mexico already agreed to,” said Professor Goolsbee.”

The trade deficit has been with US since the 1970s, when roaring inflation and several recessions meant consumers wanted cheaper-foreign-made goods over those made in the USA, due in part to several Arab oil embargos that drove up oil prices and caused long lines at gas stations due to gasoline shortages.

On the macro (national) economic level, the US made it easy for American multi-national corporations to build their factories overseas with anti-labor policies that suppressed union collective bargaining and US wages, in their quest to expand international trade by opening US borders via lower import tariffs.

So a greater fair trade world would require major policy changes to correct the trade imbalances, needless to say. American consumers would pay more for Made in USA products and not always seek discounted foreign goods, for starters, if their incomes improved. They would then pay more taxes, increasing government revenues, which would lessen demand for massive federal government borrowing to cover the huge annual federal budget deficit that is projected to reach $1.5 trillion in 10 years.

Really fair trade is understanding basic economics—which would require fairer labor policies.

Harlan Green © 2018

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

Let’s Make America More Equal Again!

Popular Economics Weekly

As defeated Democrats mull over what slogan can equal or overcome President Trump’s “Make America Great Again”, I have a suggestion, one that might even enthuse populist Republicans. Let’s make American more equal again, just as it was in the 1960s and 70s, when we had a thriving middle class in which its children could hope to exceed their parents’ station in life.

After all, it was our thriving middle class that kept the more extreme elements of both political parties and persuasions at bay, so that Republicans and Democrats actually talked to each other. And a middle class will only thrive where there is less income inequality, something that most well-meaning Americans support.

But that was then and we live in now, when most children of the baby boomers retiring do not hope to do better than their parents. Household incomes have stagnated since the 1970s, and the top income earners since the Great Recession now have garnered almost all of the increase.

Graph: Gallup poll

That is why two out of three Americans are dissatisfied with the way income and wealth are currently distributed in the U.S. This includes three-fourths of Democrats and 54 percent of Republicans, according to a recent Gallup poll.

The Great Recession was brought on by Wall Street’s excesses, and the deregulation boom of the Clinton and GW Bush presidential reigns. So why not create programs that Make America More Equal Again?

Graph: Saez-Piketty

Overall, the share of Americans living in middle-class households has declined from 61 percent in 1971 to 50 percent, reports a recent Pew Research study. The hollowing out of the middle class has been a source of consternation among many economists, politicians and the public at large, says those surveyed. They say as Americans move toward the economic extremes it is harder to find common ground, and a common sense of what it means to be an American.

Much of that inequality is in the Midwestern rust belt states that lost those blue collar manufacturing jobs during the globalization and multi-nationalization of US corporations that President Trump promised to bring back again.

So President Trump was no dummy in recognizing this fact. Then how could Democrats be so blasé and oblivious to this fact among their former supporters? Everyone saw it coming; the disenfranchisement of whole segments of working class voters that had descended into depression and drug use in those formerly blue and Democrat-voting states.

There have been many suggestions of how to bring back higher-paying jobs, but candidate Trump seems to have fastened on just three—building more infrastructure, destroying multi-lateral trade agreements like the TPP and NAFTA, as well as limiting immigration inflows to make more jobs available to those suffering American workers.

The first suggestion has been backed by both Democrats and Republicans, and now that President Trump wants it Republicans will stop opposing infrastructure spending, even if it busts the federal budget.

However, building more immigration and trade barriers won’t create greater equality, nor will opposition to minimum wage laws, such as advocated by the Trump pick for new Labor Secretary—CEO of fast food chains Andrew Puzder. Because most immigrant jobs are low-paying, jobs that Americans don’t want anyway. And higher trade barriers for the purpose of bringing jobs home will raise the prices of imported goods, cancelling out much of the income boost from higher-paying jobs.

What won’t work either is the blatant voter and collective bargaining-suppression laws enacted, or about to be enacted in the 25 all-red states with absolute Republican majorities. Such a blatant suppression of minority voters and the wages of working class Americans will suppress their wages, hardly the road to greater equality.

What also won’t work are the attempts to destroy Obama’s Affordable Care Act that have boosted the buying power of at least 20 million working class voters by reducing overall medical costs, as well as Dodd-Frank regulations that have suppressed some of the excessive profit-taking of Wall Street at the expense of State Street.

The same poll updated a long-time Gallup trend, finding that 54 percent of Americans are satisfied, and 45 percent dissatisfied, with the opportunity for an American "to get ahead by working hard."
This measure has remained roughly constant over the past three years, but Americans are much less optimistic about economic opportunity now than before the recession and financial crisis of 2008 unfolded. Prior to that, at least two in three Americans were satisfied, including a high of 77 percent in 2002.

So there are many reasons for Democrats and even truly populist Republicans to support programs that increase income equality. But they can’t be about building more walls. A robust and more politically temperate American middle class can only include Americans of all nationalities and ethnicities.

Harlan Green © 2017

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