Editors note: reporter Neil Irwin needs to explain why China’s 24 year trade war with US was pro-growth for them. Why did taxing consumers with tariffs, yuan devaluation, etc cause growth not harm?
There’s no question that some American companies are feeling the bite of the trade war that the Trump administration is waging against much of the world.
[Neil Irwin | July 24, 2018 | NY Times]
As others have reported, a Missouri nail factory is laying off peoplebecause of tariffs on imported steel; Harley-Davidson plans to move some production to Europe in response to retaliatory tariffs; soybean farmers face a loss of income resulting from new Chinese import taxes.
But it’s a mistake to assume that difficulties of individual companies and industries are the same as a force powerful enough to bend the overall trajectory of the United States economy.
“The direct effects on the U.S. economy are small, because the economy is really big and it is mostly domestically driven,” said Beth Ann Bovino, chief United States economist at Standard & Poor’s Ratings Services. “Still, tariffs hurt, and we’re starting to see some precursors of an impact already.”
To assess how the trade war could affect growth, the job market and inflation at the macroeconomic level, you need data. The trouble is that much economic data operates with long time lags. By the time there would be solid evidence that the trade war was doing damage, the damage would already have been done.
But certain indicators are likely to provide early signs of trouble: data that is more big picture than individual anecdotes, but more timely than things like G.D.P. and the unemployment rate.
If you want a dashboard for evidence of economic damage from the trade war, here’s what should be on it.
Business Confidence and Capital Spending: Look to Surveys
One of the key ways trade tensions can slow a nation’s overall growth is by causing businesses to pull back on capital expenditures.
The hard data on business investment tends to be released with long delays. If executives become gloomier about the future, the earliest evidence will probably come from frequent surveys of them.
For example, the Federal Reserve Bank of Philadelphia surveys manufacturers about their plans for capital spending; that measure has fallen in the last few months. Other surveys, like one of small businessesby the National Federation of Independent Business, suggest more stable capital spending plans.
But while the evidence is uneven today, these market indicators and confidence surveys could amount to the canary in the trade war coal mine if they take a decisive turn for the worse.
“I am watching business sentiment very closely,” said Nathan Sheets, chief economist of PGIM Fixed Income. “If we started to see business sentiment turn, that would be an indication that key constituencies in the business community are getting nervous.”
The Stock Market: Exporters vs. the Rest
The closest thing to a real-time indicator of the trade war’s possible effect on corporate profits is the stock market. Several household-name companies with deep exposure to global commerce, like Boeing, Caterpillar and John Deere, have become bellwethers for the trade war.
But to understand whether trade tensions are affecting the overall economy, it’s worth watching whether dips in the stock market remain limited to those companies with direct exposure to global commerce, or start to encompass even service industries and those with mainly domestic business.
“While a few small companies have been hit very hard by the tit-for-tat tariff war, in general, smaller companies are less impacted than big multinationals with global supply chains and worldwide sales,” said Blu Putnam, chief economist of the CME Group. “Hence, the Russell 2000 has been outperforming the S.&P. 500 as the trade war has intensified.”
If that changes, it will be evidence that the trade war is translating into gloomier prospects for the United States economy as a whole.
The Stock Market: Exporters vs. the Rest
The closest thing to a real-time indicator of the trade war’s possible effect on corporate profits is the stock market. Several household-name companies with deep exposure to global commerce, like Boeing, Caterpillar and John Deere, have become bellwethers for the trade war.
But to understand whether trade tensions are affecting the overall economy, it’s worth watching whether dips in the stock market remain limited to those companies with direct exposure to global commerce, or start to encompass even service industries and those with mainly domestic business.
“While a few small companies have been hit very hard by the tit-for-tat tariff war, in general, smaller companies are less impacted than big multinationals with global supply chains and worldwide sales,” said Blu Putnam, chief economist of the CME Group. “Hence, the Russell 2000 has been outperforming the S.&P. 500 as the trade war has intensified.”
If that changes, it will be evidence that the trade war is translating into gloomier prospects for the United States economy as a whole.
Prices and Inflation: What Futures Tell Us
One likely effect of a trade war is on prices — in most cases, increasing them for American consumers.
This will eventually show up in overall inflation numbers, but that could take time, especially since most of the early rounds of tariffs are aimed not at finished consumer goods but at raw materials and industrial products.
You can get some sense of what’s coming by looking at commodity futures markets for items that are affected. Many businesses, for example, have reported higher steel and aluminum prices because of tariffs on imported metals.
Futures markets offer clues as to how long traders think the higher prices will last. For example, the current price for Midwest Domestic Hot-Rolled Coil Steel is $916 per short ton — but futures prices imply that will fall to $759 by December of 2019.
In other words, for that particular commodity, the smart money seems to think that higher prices will be temporary.
The inverse of higher prices for metals is evident in lower prices for soybeans and other agriculture products — caused by Chinese and European retaliatory tariffs that depress international demand.
The price of soybeans has fallen sharply. But futures markets currently imply that they will rebound, to $9.04per bushel by early 2020 from $8.48 now.
For both goods, the market prices suggest the trade distortions will be temporary. If that changes, it will be a bigger deal for both overall price inflation facing consumers and for the incomes of farmers and other producers of commodities.
It’s also worth keeping an eye on the producer price index, calculated by the Labor Department, which captures the prices of the raw materials that companies use to make finished products. If the trade war is going to feed into broader consumer inflation, it is likely to show up there first.
Jobs: Look to the Claims
The trade war is arriving amid the healthiest labor market in at least 18 years, with the unemployment rate around 4 percent. But how will we tell if it’s starting to cause pain?
The earliest sign would probably be in the portions of business confidence surveys that ask about hiring intentions. The Institute for Supply Management’s employment index, a subcomponent of its survey of manufacturers, pulled back a bit in June, but was still at a level indicating healthy job creation.
If indicators like that one started to fall, it would be a sign that the trade war was making companies more reluctant to hire.
Similarly, if the anecdotal reports of layoffs caused by tariffs became widespread, you would expect to see the number of people filing new claims for unemployment benefits spike upward.
That data is released weekly, so it is the closest thing we have to a real-time barometer of layoffs. But so far it shows no hint of trouble; jobless claims have hovered near record lows in recent weeks — including hitting the lowest level since 1969 in the most recent report.
How do things look if you put it all together? As of mid-July, the evidence that the trade war is doing meaningful economic damage is scarce. But by keeping an eye on the right tools, it’s possible to get early warning signs if that starts to change.
