Former President Donald Trump has rekindled fears over international trade. He’s already proposed a 25 percent tax on iPhones, for example, and now he wants to impose the same, or worse, tariffs on pharmaceuticals. These comments come during continued negotiations between the U.S. and China. On May 7, the US and Japan committed to substantial cuts to tariffs. Even with these pacts, 97% of Chinese imports remained subject to a taxing rate of 30%. This is putting upward pressure on inflation throughout the U.S. economy.
Trump’s threats have not just roiled U.S.-China relations but focused the crosshairs on the European Union (EU). The former president suggested that we should impose a whopping 50% tariff on EU imports, sending shock waves through the markets. After negotiations with EU Commission President Ursula von der Leyen, Trump did something significant. He initially decided to postpone the start of these functions from June 1, 2020 to July 9, 2020. This series of events has left many economists and investors uncertain about the future of trade policies and their implications for economic growth.
Tariffs and Economic Growth
The cumulative effect of the tariffs on the U.S. economy has been massive. Engaging in this front-loading, expecting people to pay higher tariffs later due to future increases, resulted in an import spike. Ironically, this boom caused a drop in Gross Domestic Product (GDP) during the first quarter of this year. Economists noted that, even with healthy consumer spending, our economy overall GDP was negatively impacted by increasing tariff rates.
Tariffs are hurting our economy and they should be removed. In turn, investors are going with a buy-the-dip approach to the market today. Investors are clearly optimistic, especially after Trump’s surprising retreat from making good on his threats against EU tariffs. Unfortunately, this optimism may end up being misplaced. The elevated duties have already done long lasting damage to many sectors.
Recent data releases underscore just how important economic growth, inflation, and consumer confidence are going to be. With May drawing to a close, these factors will be immensely impacting the market landscape. Investors are hanging on every word of the Federal Reserve’s actions and reactions on the inflation spell. They are keenly aware and scanning for major changes in policy.
Inflation Concerns Intensify
Inflation has already become a hot-button issue, even amidst ongoing trade wars. The consensus for tomorrow’s Core Personal Consumption Expenditures (PCE) index is only a 0.1% month-over-month increase. This uptick could push April’s year-over-year increase closer to the Federal Reserve’s targeted goal of 2%. These changes are most welcome and absolutely necessary. Core PCE was unchanged in March—hopefully that’s the start of a trend downward for what consumers pay.
The advance release of GDP data has analysts scratching their heads. It pushed five-year inflation expectations above 4.6% and shot one-year projections to an exasperating 7.3%. These numbers underscore the importance for policymakers and leaders to address skyrocketing inflation head on. Tariffs and supply chain disruptions have compounded this crisis.
While the increased tariffs on imports from China might have alleviated some short-term concerns, these duties were still highly disruptive. They continue to hit consumers and businesses hard. This kind of persistent high rates will almost certainly do lasting damage to the economy. We’ve heard companies are facing rising costs, and they’re usually the ones to absorb those increased costs.
Competing Economic Releases
All major economic indicators are due to be released next week. These updates will have to fight for the limelight against splashy announcements out of the White House. Analysts predict that factors including growth rates, inflation numbers, and consumer confidence will dominate discussions in the last week of May.
Market participants are warned to be on their toes as more data comes in. The interaction of tariffs and other economic indicators could dramatically change market paths and market psychology. The Federal Reserve’s flexibly adapting policy stance will be vital to addressing these developing economic circumstances.