Weekly Economic Report
We often wait until Sunday to write this newsletter because it is interesting to watch the morning news shows for late input. This week we delayed, in part, because we were returning from Europe – and we are glad we did. This morning, President Trump has once again shaken things up with a newly tweeted threat to raise tariffs to 25% next Friday on the $200 billion in Chinese goods that are currently at 10%. He reinforced the threat by noting another $325 billion in Chinese exports are untaxed – but may be soon. Finally, Trump indicated that the tariffs collected on these goods are a reason for the great US economy and mainly borne by the Chinese. It is not hard to see why he is being so aggressive. As we have noted before, the risks in a trade war are job losses and rising prices. The US just posted its lowest unemployment rate in fifty years and inflation is testing the low side of the Federal Reserve’s range. Trump has so far been unsuccessful in either jawboning the Federal Reserve to lower rates or in packing the Board with allies. He is now returning his wrath to the Chinese – both for failing to cave in on key trade issues quickly enough and likely because he sees them as responsible for North Korea’s recent bad behavior. Europe and Japan (and investors there) should be very worried that they are next. Bottom line, unless the US equities market sells off 10% quickly, it is unlikely the President will step back from his hardline on China. In our view, the President – like many market analysts – is reading the recent economic data far too optimistically, and a harder line on China now would push growth below trend for all of 2019, as opposed to in just the first half if a trade deal is signed.