A day after Fed Chair Jerome Powell said that trade policy tensions had been reduced to a simmer, President Trump ratcheted up the heat to what cooks might call a “slow boil.” Last Thursday, Trump tweeted that as of September 1, the U.S. would impose a 10 percent tariff on the remaining $300 billion worth of Chinese goods imported into the U.S. Unlike the existing 25 percent tariff on $250 billion of Chinese imports, which are mostly industrial, this next round would impact consumer goods like, cell phones, laptops, tablets, video game consoles, toys and sneakers.
The escalation puts the Fed in an awkward position. Powell noted that the quarter-point rate cut announced last week was a “mid-cycle adjustment” and not necessarily “the beginning of a long series of rate cuts.” However, with the situation coming back to a boil, the Fed may have to consider another cut to reduce the heat sooner rather than later. Of course there’s also a chance that between now and September 1, the U.S. and China turn their “constructive” conversations into a trade deal, but businesses, especially those in the retail sector, are not counting on that to save them.
The ongoing trade war was already impinging on manufacturing activity. Last week, the Institute for Supply Management Index showed that U.S. manufacturing slowed for the fourth consecutive month and dropped to its lowest level in nearly three years. Separately, the Commerce Department reported that U.S. imports from China fell 12 percent in the first six months of 2019 from a year earlier, while exports fell 18 percent. For the first time in more than a decade, the total value of trade with China in the first half of the year was less than that with both Canada and Mexico.
As a result, manufacturing hours worked were down 0.7 percent in July, which “is the largest drop since 2015,” according to Grant Thornton Chief Economist Diane Swonk. She notes “manufacturers have scaled back in response to tariffs and weaker growth abroad. The next shoe to drop will be employment in the manufacturing sector.”
Considering that manufacturing accounts for about 11 percent of the U.S. economy (50 years ago, the share was more than twice that level, or 25 percent) and 8 percent of employment, maybe the new tariff fears are overblown for a mostly service-based economy. That might be a faulty assumption, says Andrew Hunter, Senior U.S. Economist at Capital Economics. “The new tariffs are likely to have a more significant impact on real incomes [that is, incomes after inflation].” In other words, companies impacted by the next round may not be able to eat the cost of tariffs, and instead will than pass them on to consumers, in the form of higher prices.
JULY JOBS REPORT: In the aftermath of the Fed meeting and the trade war escalation, the Labor Department released the July jobs report, which showed the economy added 164,000 jobs and the unemployment rate remained at 3.7 percent, in line with expectations. Average monthly job creation stands at 165,000 in 2019, a downshift from last year’s 223,000, but still solid for the 11th year of an expansion. There was one milestone from the monthly report: the broad measure of unemployment (“U-6”, which includes unemployed; discouraged and marginally attached workers; and those who are working part-time, but seek full time) dropped to 7 percent, the lowest since Dec 2000.