New Trump Trade Threat Yanks U.S. Economy Back Into Uncertainty

(Bloomberg) -- Just as the U.S. economy appeared to turn the corner after a shaky stretch, President Donald Trump’s resurgent trade-war threats cast a fresh shadow on the outlook.

Trump on Sunday pledged to boost existing tariffs on $200 billion of Chinese goods this Friday. He also threatened 25 percent levies “shortly” on a further $325 billion of imports -- or just about everything the world’s largest trading nation sends to the U.S., from iPhones to sneakers.

The added costs could put more pressure on American consumers who drive the bulk of growth, dimming the nearby milestone of an expansion about to become the longest in U.S. history. Trump’s jolt to global markets came just as trade negotiators from Beijing and Washington had appeared poised to reach a fresh accord in coming days, and after reports showing April job gains and first-quarter economic growth were both stronger than forecast.

The shock might also force a re-evaluation by Federal Reserve Chairman Jerome Powell, who said days ago that it appeared risks to the economic outlook -- including uncertainty around trade talks and weak global growth -- remain concerns though they “have moderated somewhat.” Fresh tariffs might also provide unexpected support for Powell’s assertion that some of the factors keeping inflation below the Fed’s 2 percent goal are “transitory.”

“It’ll hit the pocketbooks of the working class hard,” said Mary Lovely, a Syracuse University economics professor who focuses on trade with China and supply chains. “It’s not that it’s going to bring the U.S. economy to its knees, though the effects could be much larger through market expectations and uncertainty with estimates of future profits.”

Treasuries rallied, as traders increased bets that the Fed will lower interest rates in the first half of 2020. The S&P 500 Index was down almost 1 percent at 1:15 p.m. in New York, on pace for the biggest loss since March though paring earlier losses.

What Bloomberg’s Economists Say

“We believe the tariff impact could be worth about two-tenths on GDP -- depending, of course, on what Chinese retaliation looks like. The economic cost could be sufficient to impact the course of monetary policy over the medium term. The ‘economic confidence effect’ could ultimately be as large as the direct impact from tariffs.”
-- Carl Riccadonna and Yelena Shulyatyeva, economists

The outlook may dim even more should China-U.S. talks stall. China’s trade delegation was considering delaying a Washington trip this week after Trump’s tariff threat, according to people familiar with the matter. About 100 officials had been scheduled to arrive Wednesday for what was shaping up to be the final round of negotiations.

While the gross domestic product impact of existing U.S. tariffs on $250 billion of Chinese imports will likely be a modest drag of 0.1 percentage point this year, greater trade tensions “would more than double the hit on the economy,” Gregory Daco, chief U.S. economist at Oxford Economics, wrote in a note. “The tariff threat represents a non-negligible risk for the U.S. economy at a time when the fiscal stimulus is dissipating and activity is cooling.”

Tariffs so far have been largely absorbed by American businesses and left households feeling little pain, but Trump’s threat to introduce tariffs on everything from China could pinch the very pocketbooks he most needs to keep growth humming. It could also introduce inflation pressures that, if sustained, would complicate the Fed’s decisions on interest rates. Trump has asserted that the central bank should reduce rates because of subdued inflation.

“It hurts lower income people because they spend a larger share of their income on things like clothing,” Lovely said.

Concern earlier this year that a recession could be brewing faded with the first-quarter GDP report showing a 3.2 percent advance that topped all expectations and further eased Friday with a 263,000 April payroll gain and the unemployment rate falling to the lowest since 1969.

Economists surveyed by Bloomberg already expect a deceleration in growth this year -- in part because of the slowing Chinese economy -- and put the odds of recession over the next 12 months at 25 percent. And behind the strong GDP number, more than half the gain came from the volatile trade and inventories components that may soon reverse.

Cummins Inc. Chief Executive Officer Tom Linebarger said Monday in a Bloomberg Television interview he hopes the threat is just a “bump in a road,” adding that the Indiana-based maker of diesel engines and equipment has paid significant costs for tariffs.

“I’m still hopeful that negotiations are continuing,” he said. “It’s really important, it accounts for a lot of jobs in the U.S. A lot of farm livelihoods depend on having a relationship with one of the other biggest economies in the world.”

--With assistance from Katia Dmitrieva.

To contact the reporter on this story: Jeff Kearns in Washington at jkearns3@bloomberg.net

To contact the editors responsible for this story: Scott Lanman at slanman@bloomberg.net, Sarah McGregor

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