AIIS Newsletter: Market Update-April 2018

SEATTLE (Scrap Monster): As President Trump continues to march off to (trade) war, the U.S. economy is starting to show the negative effects.

Trump on March 8 announced plans to impose 25 percent tariffs on steel imports, as well as 10 percent tariffs on aluminum imports. Since then, the rhetoric has escalated and the stock market has declined.

On March 8, the Dow Jones Industrial Average closed at 24,895.21. From that point through the end of the month, it slid more than 3 percent to 24,103.11. This continued a trend that began in late January, as anticipation of the release of the Commerce Department’s reports on its Section 232 investigations of steel and aluminum imports began to have an impact. From Jan. 26 through March 29, the Dow dropped nearly 10 percent.

The concern in the markets stems largely from fears that other nations will raise tariffs on U.S. exports, resulting in a tit-for-tat targeting of various goods that could slow economic activity in the United States and around the world.

While Treasury Secretary Steven Mnuchin said on CBS that he does not expect a trade war, he acknowledged that there “could be” one coming. Trump’s new top economic adviser Larry Kudlow, meanwhile, said on Fox News that there is not “any trade war in sight” and charged that, “The whole world knows China has been violating trade laws for many years, and President Trump is the guy calling them on it. And he’s right to do so.”

Chinese officials, of course, disagree with Kudlow. In early April, China proposed tariffs on American soybeans, cotton, cars and more than 100 other products valued at $50 billion, which represents about 8 percent of all imports into the country from the United States. This followed China’s announcement of tariffs on $3 billion in U.S. goods in direct response to the levies on steel and aluminum imports and the Trump administration’s later proposal of restrictions on up to $60 billion in Chinese technology imports that it says violate intellectual property rights.

“China has never succumbed to external pressure,” China’s Vice Minister of Finance Zhu Guangyao said. “External pressure will only make the Chinese people more focused on economic development.”

On March 22, Trump announced that he would temporarily exempt Canada, Mexico, Australia, Argentina, South Korea, Brazil, and the member countries of the European Union from the tariffs – nations that account for just over half of all U.S. steel imports – because the United States has a “security relationship” with them and discussions are underway to identify alternatives to the tariffs. If an agreement is not reached with an exempted nation by May 1, though, the tariffs will go into effect.

Federal Reserve Chairman Jerome Powell fleetingly acknowledged the possible negative economic impact of a trade war in early April, saying, “Tariffs can push up prices,” but adding that, “it’s too early to say whether that’s going to be something that happens or not.” (Powell’s comments came during a Q&A session that followed a speech on “The Outlook for the U.S. Economy” that did not mention trade or tariffs.)

Other members of the Federal Reserve Board of Governors, while similarly stating that it is too soon for predictions, noted that the trade disputes “present some downside risk” and represent “a material uncertainty” in economic forecasts. The Federal Reserve Bank of Dallas forecast that the steel and aluminum tariffs, alone, could reduce the U.S. gross domestic product by a quarter-point over the long-term, though if other countries retaliate and a trade war ensues, “the effects can become much larger.”

The Fed’s Federal Open Market Committee on March 21 announced a quarter-point increase in interest rates. The target range for the federal funds rate is now 1.5-1.75 percent. Two more increases are expected this year, following three hikes last year.

“Economic activity has been rising at a moderate rate,” the committee said in its announcement. “Job gains have been strong in recent months, and the unemployment rate has stayed low.”

The Bureau of Economic Analysis in late March revised its estimate of growth in the 4th quarter of 2017 to 2.9 percent, up from a previous estimate of 2.5 percent. With growth in the preceding two quarters reaching 3.1 percent and 3.2 percent, he economy thus narrowly missed posting three straight quarters of 3 percent growth for the first time since before the Great Recession.

The economy added 103,000 jobs in March, as the unemployment rate remained at 4.1 percent for the sixth straight month, according to the Bureau of Labor Statistics.

Confidence in the economy, as measured by The Conference Board’s Consumer Confidence Index, slipped to 127.7 in March, down from an 18-year high of 130 the previous month.

“Consumers’ assessment of current conditions declined slightly, with business conditions the primary reason for the moderation,” the board’s director of economic indicators said. “Consumers’ short-term expectations also declined, including their outlook for the stock market, but overall expectations remain quite favorable. Despite the modest retreat in confidence, index levels remain historically high and suggest further strong growth in the months ahead.”

The University of Michigan recorded a 1.7-point uptick in its Index of Consumer Sentiment in March to 101.4, the highest level since 2004. Researchers, though, did note a slight dip from the middle to the end of March “due to uncertainty about the impact of the proposed trade tariffs.”

“Households with incomes in the top third cited significantly greater concerns with government economic policies than last month, especially trade policies … offsetting their positive reactions to tax policies,” researchers said.

In the manufacturing sector, the Institute for Supply Management’s Purchasing Managers Index in March recorded a 1.5-point drop from its 14-year high in February to 59.3. The chairman of ISM’s Manufacturing Business Survey Committee said that the index’s survey of supply executives identified “steel and aluminum disruptions across many industries” as one of several negative factors affecting manufacturing inputs.

Housing starts in February fell 7 percent from January and were 4 percent below the level of a year earlier, according to the Census Bureau and the Department of Housing and Urban Development. Existing home sales grew by 3 percent from January to February following two months of decreases, the National Association of Realtors reported.

“The very healthy U.S. economy and labor market are creating a sizeable interest in buying a home in early 2018,” the association’s chief economist said. “However, even as seasonal inventory gains helped boost sales last month, home prices – especially in the West – shot up considerably. Affordability continues to be a pressing issue because new and existing housing supply is still severely subpar.”

The median price for an existing home in February was $241,700, 5.9 percent higher than the average in February 2017.

Car sales in March fell 9.2 percent compared to a year earlier, but light-duty truck sales increased by 16.3 percent. Through the first three months of the year, car sales were down 10.8 percent, while truck sales were up 9.8 percent.

The dollar closed March trading at 0.81 euros, 0.71 pounds, 106.28 yen and 6.28 yuan.

Trump is famously resistant to most input from his advisers, but the stock market has often seemed to have his ear. From his election in November 2016 until February of this year, he tweeted about the market – typically about rising stock values – at least 60 times, often linking those values to his policies, as when he asserted last November that market increases showed “great confidence in the moves that my Administration is making.” Surely, then, the president can see that the “Trump bump” ended and investors became much more pessimistic about his economic plans as soon as the most prominent features of those plans stopped being tax cuts and deregulation and became tariffs and protectionism. Perhaps Trump is engaging in trade brinkmanship, expressing a willingness to go to war in order to get a better deal. But, as in all wars, the enemy gets a vote, and China and other nations are, not surprisingly, casting their ballots in opposition. “We will not start a war,” China’s commerce ministry spokesman said. “However, if someone starts a war, we will definitely fight back.” With the economy growing strongly and unemployment at or near its minimum level, Trump should apply the advice offered during a previous unwinnable war to the current needless trade conflict: Declare victory and go home.

Courtesy: AIIS