The Tariff Toll

All right, one more time. Tariffs raise costs for U.S. consumers and business, disrupt supply chains, invite retaliation, and undermine business fixed investment. Is the impact of tariffs showing up in the data? Some, but we haven’t fully felt the impact of the May 10 escalation. Anecdotal evidence suggest a greater impact – enough to slow the economy more significantly, but not enough to push us into a recession. However, the economic outlook, and in turn Fed policy, hinges on what happens in trade policy from here.

Don’t look for evidence of a tariff impact in the quirky merchandise trade data. Import and export figures are notoriously volatile (on a monthly and a quarterly basis). A narrowing of the trade deficit added 0.9 percentage point to GDP growth in 1Q19 (as Fed Chair Powell noted, inventory and trade data “are not generally reliable indicators of ongoing momentum.” Advance figures for May showed a widening of the trade deficit. While we’re missing June data (and May figures are subject to revision), it appears likely that net exports will subtract from 2Q19 GDP growth.

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Trade policy uncertainty is a negative factor for capital spending. Businesses will be less likely to expand and hire new workers. Orders for nondefense capital goods ex-aircraft have slowed. This may partly reflect issues in energy explorations and problems at Boeing, but it is consistent with increased uncertainty in the global economic outlook. The monthly payroll figures (a coincident economic indicator), while choppy, suggest a slower trend in job growth. Some of that could be trade-related, but it more likely reflects tighter labor market conditions. Jobless claims are a leading economic indicator, and are still trending at a low level. However, job layoff announcements have been trending somewhat higher this year.

Anecdotally, tariffs and trade policy uncertainty appear to be undermining confidence. Consumer and business surveys have noted increased anxiety about tariffs. The Conference Board’s Consumer Confidence Index fell to 121.5 in the initial estimate for June, down from 131.3 in May and the report noted that “the escalation in trade and tariff tensions earlier this month appears to have shaken consumers’ confidence.” The Chicago Business Barometer edged into contraction territory in June. The survey included a special question about the impact of tariffs, and “80% of firms said that they were negatively impacted, with tariffs raising prices of their goods leading to a pullback in orders.”