“It’s the Economy Stupid”

Clouds of economic uncertainty loom via WaPo -Aug 14th, 2019

THE BIG IDEA: If President Trump wanted to stabilize the listing stock market, his Tuesday announcement that he will temporarily postpone the implementation of about half the tariffs on Chinese imports that he announced 12 days earlier did the trick. But only for the day. Companies whose supply chains depend on China, from Apple and Best Buy to Mattel and Nike, saw their share prices edge up. The fundamentals have not changed. In fact, they continue to worsen. And stocks tumbled this morning when the markets opened. For the first time since 2007, the yields on short-term U.S. bonds eclipsed those of long-term bonds. This phenomenon, called the inverted yield curve, has preceded every recession in the past 50 years.

Bigger picture, the United States remains engaged in a trade war with China, the world’s second-largest economy, with no end in sight. Trump’s insistence that he still plans to impose all the previously announced duties on Dec. 15 forces corporate chieftains to prepare for more troubled waters ahead. Many analysts said the delay does nothing to mitigate the ominous clouds of uncertainty that hang over the economy. “Trade wars are good and easy to win,” Trump said last year. That was wrong. Beyond the inverted yield curve, economists are pointing to a litany of other early warning signs that indicate a recession looms, despite the Federal Reserve’s recent decision to cut interest rates. There’s already been a decline in business investment, and some companies are pulling back on hiring.

Yesterday, Trump came closer than he has before to acknowledging that his tariffs on Chinese imports are really taxes on American consumers. He’s been falsely claiming that the Chinese are paying the full price of his tariffs. “We are doing this for the Christmas season, just in case some of the tariffs would have an impact on U.S. consumers,” the president told reporters, as he prepared to fly to a speech in western Pennsylvania. It’s no coincidence that the products that got a carve-out from the planned 10 percent tariff on $300 billion worth of imports are consumer goods such as cellphones, laptops, strollers and sneakers. Higher prices might have caused sticker shock over the holidays. The prior tariffs, which have gone into effect, mostly increased the price of component parts that companies use to assemble something else. These new tariffs would hit finished goods such as iPhones, which are assembled in China, making it more likely that the higher costs are passed on to consumers.

Trump wants to win reelection, and he’s sensitive to the markets. The result has been a series of erratic policy announcements that often appear to be improvisational and that cause whiplash for the markets. It sometimes feels as if Trump is practicing the “madman theory” in trade negotiations. Is he being crazy? Or crazy like a fox? For example, how seriously are we to take it when Trump threatens, as he did yesterday, to pull out of the World Trade Organization?“It’s complete manipulation,” said Kenny Polcari of Butcher Joseph Asset Management. “[Trump] threatens the market, by surprise, two weeks ago. The markets re-price. Then he says, ‘I think we are going to delay those tariffs.’ … The [algorithms] respond immediately and take the market higher,” Polcari told my colleagues Taylor Telford and Thomas Heath. “Of course the market is going to rally!” “We are all just one tweet away from significant volatility,” RSM chief economist Joe Brusuelas wrote in a note to his clients after Trump’s tariff postponement. “The idea that this is a major source of relief to the economy is not tethered to empirical reality.” “We were relieved. But does that stop the volatility and instability? No,” said Jay Foreman, chief executive of the Florida-based toy company Basic Fun. Foreman told the Associated Press yesterday that he’s still considering layoffs this fall to offset his higher costs and noted that, despite Trump’s reprieve, tariffs remain a severe threat. “The climbdown over the China tariffs does not mean a trade deal is now near, not least because China’s authorities currently face a much bigger problem, namely, the challenge to their legitimacy in Hong Kong, and that will take precedence,” wrote Pantheon Macroeconomics chief economist Ian Shepherdson in a note to investors that Tory Newmyer covered in this morning’s Finance 202. “But we can fully understand markets’ relief at the lifting of the threat of tariffs on consumer goods just ahead of the holiday shopping season.”

— U.S. businesses have begun taking down job listings because of the uncertainty caused by the trade war: “Win Cramer had big plans to hire several new employees this summer for his company, including a chief operating officer, but he took the job listings down after Trump tweeted that more tariffs would hit Chinese goods in September,” our economics correspondent Heather Long reported yesterday. “‘It’s the most frustrating time I’ve ever had running a business, and I’ve been doing this for 20 years,’ said Cramer, chief executive of JLab Audio, which makes wireless earbuds and headphones sold at Best Buy, Target and elsewhere.“The United States had 7.3 million job openings in June, down from a peak of 7.6 million in November. … While the decline is modest, economists are concerned hiring could dry up quickly as companies see no end in sight to Trump’s trade war and they look to cut costs. The reduction in job openings is also widespread across many industries, signaling how cautious companies are becoming. A decrease in job openings has tended to be a signal of economic trouble. … Job openings peaked in April 2007, for example, nine months before the start of the Great Recession. Job openings in many industries have declined since November, including the information sector, financial services, transportation and warehousing, and hotels and food service, suggesting wide concern about future growth. Actual hires also have slowed this year, with average monthly job gains falling to 165,000 a month, down from 223,000 a month last year.”

Uncertainty” is the buzzword that keeps coming up in notes from Wall Street institutions to their clients that seem to become gloomier with each passing day: “Trade’s simmer has begun to boil, business sentiment and capital spending have softened further, global growth remains weak and inflation expectations have fallen,” Morgan Stanley’s Ellen Zentner wrote on Monday. “Heightened market volatility and increased news flow on trade may soften consumer sentiment and spending.”Goldman Sachs said Sunday it does not expect a trade deal between the U.S. and China before the 2020 election. “Fears that the trade war will trigger a recession are growing,” wrote Goldman’s chief U.S. economist, Jan Hatzius, explaining why growth projections are being lowered. “Overall, we have increased our estimate of the growth impact of the trade war. The drivers of this modest change are that we now include an estimate of the sentiment and uncertainty effects … Relatedly, the business sentiment effect of increased pessimism about the outlook from trade war news may lead firms to invest, hire, or produce less.”

“We are worried,” Bank of America Merrill Lynch chief economist Michelle Meyer wrote Friday. “We now have a number of early indicators starting to signal heightened risk of recession. Our official model has the probability of a recession over the next 12 months only pegged at about 20 percent, but our subjective call based on the slew of data and events leads us to believe it is closer to a 1-in-3 chance. … Three out of the five economic indicators (auto sales, industrial production, and aggregate hours worked) which track the business cycle closely are near levels consistent at the start of the previous recessions.”

— More dark mood music:

  • Inflation in the United States was slightly higher last month than expected: The Labor Department announced yesterday that the consumer price index rose 0.3 percent in July. That’s modest but was above analyst predictions.
  • U.S. mortgage debt reached a record in the second quarter, exceeding its 2008 peak as the financial crisis unfolded. “Mortgage balances rose by $162 billion in the second quarter to $9.406 trillion, surpassing the high of $9.294 trillion in the third quarter of 2008, the Federal Reserve Bank of New York said Tuesday,” per the Wall Street Journal.
  • China’s economy is faltering: “The jobless rate in Chinese cities again rebounded in July to its highest level since regular reporting on the data began, as employers turned cautious,” today’s Journal reports. “Other key economic readings for the month, including factory production, consumption and property investment, came in much lower than expected.”
  • Germany’s economy shrank slightly last quarter. Europe’s biggest economy suffered from falling exports, and the auto industry is struggling to adjust to new emissions standards, per the AP.
  • The British economy also unexpectedly shrank, for the first time since 2012, because of uncertainties surrounding Brexit.

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