Economic Trends - August 2019: U.S. is First Casualty of the Trade War

Economic Trends

August 2019 | Creighton Institute for Economic Inquiry

Greetings!

Welcome to our August report covering results from Creighton's two July economic surveys. Creighton's monthly survey of supply managers and procurement experts in nine Mid-America states indicates that economic growth is in a range indicating weaker manufacturing growth and with modest inflationary pressures. The overall index from Creighton's monthly survey of bank CEOs in rural areas of 10 states indicates the Rural Mainstreet Index (RMI) is above growth neutral, but with declining farmland prices and agriculture equipment sales.

Professor Ernie Goss, Ph.D.

Creighton University

Jack MacAllister Chair in Regional Economics

From the Desk of Ernie Goss

U.S. Is First Casualty of Trade War: Tariffs Politically Popular, but Economically Damaging

The Dow Jones Industrial Average plunged by 304 points just after President Trump announced his intent to impose a 10% tariff on $300 billion of Chinese goods imported into the U.S.

Set to begin September 1, these duties are on top of his 2018 tariffs on $200 billion of imports from China. In opposition to sound economic theory and U.S. equity markets, President Trump assumes his actions against Chinese imports will reduce the nation's trade deficit and force some U.S. companies producing in China to move production back to the U.S.

Since enacting tariffs in 2018, the trade deficit has increased by almost 15% from $114 billion in the first quarter (Q1) of 2018 to $130 billion in Q1, 2019.

Contrary to President Trump's goal of reducing the trade deficit, a smaller trade deficit normally accompanies a U.S. recession. For example, in the 2008-09 recession, the trade deficit fell by 52.2% from $180 billion in Q1, 2008 to $86 billion in Q1, 2009. Over the last four decades, the U.S. achieved a trade surplus only twice, 1981 and 1991, both recession years. Thus, a U.S. recession, instead of tariffs, would be a more effective way of reducing the trade deficit.

Furthermore, instead of seeing the trade deficit with China as "bad," Chinese imports have provided U.S. consumers with high quality goods at a low price. At the same time the Chinese return the U.S. consumer dollars spent on Chinese imports by purchasing U.S. Treasury bonds, thus lowering U.S. interest rates.

It is correct that the Chinese have "stolen" U.S. patents and technology. Reducing this is a goal that could and should be pursued, not reducing trade deficit. Targeting the Chinese trade deficit with tariffs will punish U.S. consumers and producers.

But the pain of the tariffs has not been shared uniformly. Since tariffs were enacted, due to retaliation from trading partners, the U.S. export of agricultural goods has fallen by 12.2%. The U.S. market for U.S. agricultural goods and most manufactured products is not big enough for the output of the most productive firms and farmers on the face of the earth.

Furthermore, economic history points to more financial pain for U.S. consumers, manufacturers and farmers as the trade war escalates. When politics and economics collide, economics lose.

Read more articles on Professor Goss' blog Economic Trends.

Mid-America & Rural Mainstreet

Indicators Graph

Mid-America

Economy Sinks to 42 Month Low: Two-Thirds of Supply Managers Report Negative Trade Impacts

Mid-America Business Conditions Index July 2019

July survey highlights:

Overall index remains above growth neutral, but drops to lowest level in 42 months.
Business confidence slumps to 33-month low.
Two-thirds of supply managers indicated the trade war and tariffs are negatively impacting their firm.
More than half, or 54% of supply managers, indicated tariffs were making it more difficult to buy internationally.
Exports and imports orders slumped for the month.

View the complete Mid-America Business Conditions Report.

Rural Mainstreet

Index Above Growth Neutral: Bankers See Negative Tariff Impacts on Economy

July survey results at a glance:

For the seventh time in the past eight months the Rural Mainstreet Index remained above growth neutral.
Bankers reported that approximately one in 10 farm operating loans from 2018 were not repaid and were rolled into 2019 loans.
Almost nine of 10 bankers reported that tariffs and trade skirmishes have had, or will have, a negative impact on their local economy.

View the complete Rural Mainstreet Report.

The Outlook

Professor Goss' Forecast - August 2019:

Expect annualized GDP growth of 1.5% for Q3, 2019.
Year-over-year increase in U.S. housing prices (Case-Shiller) should fall below 2.5% in Q3 (and to continue to drop).
The Federal Reserve Open Market Committee (FOMC) will likely reduce short-term interest rates by another ¼ % (25 basis points) at their September 17-18 meetings.

National Association of Business Economics (NABE) - August 2019:

All survey respondents expect the U.S. economy, as measured by the change in inflation-adjusted gross domestic product (real GDP), to increase over the next four quarters. However, expectations for growth have cooled, on balance, over the past two surveys. Forty-eight percent of panelists expect real GDP growth to rise by more than 2%, compared to 53% of respondents in April and 67% in January who held that view.
Expectations for sales increases over the next three months are less widespread than they were three months ago. The forward-looking NRI (net rising index) is 35, down from 54 in the April survey.
Profit margin decreases became more prevalent during the second quarter of 2019. The NRI for profit margins in the July survey plummeted to -6, compared to 17 in April and 26 in mid-2018.
For the first time in seven years, price cuts were as common as price increases at respondent firms. The NRI for prices charged fell from 18 in the April survey to 0, the lowest reading since the second quarter of 2012.

Opportunities

U.S. nonfarm payrolls expanded by 164,000 in July with wage growth registering an okay 3.0% advancement over the last 12 months.
The nation's unemployment rate remained at a very strong 3.7% even as more and more workers entered the workforce looking for a job (i.e. the labor participation rate rose).

Bad News

Home price inflation slowed further in May as the Case-Shiller index rose 0.1% in May compared with April. Prices were 2.4% higher from one year earlier. That is the 14th straight month in which the annual rise in home prices has slowed and is the slowest growth rate since August 2012.
For the first time since the Clinton Administration, the Trump Treasury declared China a currency manipulator. The U.S. Treasury will work with the IMF to eliminate any competitive advantage that this provides China. A lower valued Chinese Yuan makes Chinese goods cheaper in the U.S.

Calculator Newspaper - image by Nick Benjaminsz

9-State

Supply Manager Report

* Arkansas

* Iowa

* Kansas

* Minnesota

* Missouri

* Nebraska

* North Dakota

* Oklahoma

* South Dakota

Read state-by-state, six-month projections (scroll down) by supply managers from nine states. Participants were surveyed about current economic conditions in their communities.