Trump’s Tariffs Bring Beijing’s Model to Washington
(Bloomberg Opinion) -- Many Americans still think of the U.S. economy as increasingly dominated by knowledge and technology workers. In fact, when it comes to jobs growth in this decade, blue-collar industries have outpaced service industries, and the trend is accelerating. Tariffs may amplify this trend — making the U.S. economy more like China’s economic model.
Throughout the economic expansion in the 1980s and 1990s, and again during the 2000s, there was one labor market trend you could count on: services job growth outpacing job growth in goods-producing sectors like manufacturing and construction. But for the past seven years, that has no longer been the case. The June payrolls report showed that goods-producing jobs are taking share as a percentage of total employment at the fastest rate in over three decades.
The growth this decade can be understood as three different waves. The first period in 2011 and 2012 was when the housing market had hit bottom, with the construction sector no longer shedding jobs, while the energy sector boomed, with jobs and investment supported by oil prices over $100 a barrel. The second period in 2014 represented a Goldilocks environment for goods-producing jobs, as the energy, manufacturing and construction sectors all contributed modestly to job growth. And now, following the bust and recovery of the energy sector, we have all three industries going strong — with energy jobs growing again, construction ramping up to meet the rising demands of millennial household formation, and factories booming.
With labor force growth constrained by demographics, and the low unemployment rate meaning there are a dwindling number of unemployed workers to hire, the acceleration in goods-producing jobs growth has increasingly constrained job growth in the services sector.
Tariffs threaten to exacerbate that. Tariffs make consumer goods more expensive. When consumers find their consumption is getting more expensive, they’ll have to cut back their budgets, pressuring revenues and profits of the services sector and leading to layoffs.
But on the other hand, tariffs make foreign goods more expensive than domestic goods, leading to domestic producers capturing a greater share of output than before, and leading to some hiring for those domestic firms. Tariffs also nudge firms with global supply chains to shift some production back home, even if doing so would have been less efficient and profitable for them before tariffs set in.
The net effect of tariffs will be an economic environment unfamiliar in the U.S. Tariffs, by raising the cost of consumption, should lead to a suppression of "real consumption" on the part of consumers even if nominal consumption might still grow as prices go up. And they could also lead to an increase in investment as firms invest in domestic capacity to replace lost foreign capacity. Consumption’s share of the economy may fall as investment’s share may grow.
China’s centrally controlled economy has grown on just this model: suppressing domestic consumption and stimulating domestic investment. Now the U.S. is making moves in that direction.
This may give investors pause. If consumers pay more for essentials, and economy-wide resources shift to investments in domestic industrial capacity to replace lost foreign capacity, that could squeeze services economies in urban areas that had become increasingly devoted to the technology sector and discretionary consumption. It could mean second-order effects for consumer companies that have taken on debt and leverage, or for commercial real estate in cities tied to technology jobs.
For anyone wondering where the next jolt to markets might originate, this strange new economic environment is a reasonable place to look.
©2018 Bloomberg L.P.