Trump Tariffs Couldn't Come At A Worse Time

|
Includes: DDM, DIA, DOG, DXD, EEH, EPS, EQL, FEX, FWDD, HUSV, IVV, IWL, IWM, JHML, JKD, OTPIX, PSQ, QID, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RWM, RYARX, RYRSX, SCAP, SCHX, SDOW, SDS, SFLA, SH, SMLL, SPDN, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TNA, TQQQ, TWM, TZA, UDOW, UDPIX, UPRO, URTY, UWM, VFINX, VOO, VTWO, VV
by: Katchum
Summary

President Trump announces 25% tariffs on $200 billion Chinese goods and $325 billion on untaxed goods.

GDP and manufacturing PMI are likely to decline.

Capacity utilization, consumer price inflation, trade and budget deficits are likely to increase.

Last week, President Trump announced that tariffs of 10% on certain goods ($200 billion) would rise to 25%, and $325 billion of untaxed goods could face 25% duties "shortly". The Chinese stock market didn't like this news and dropped around 6%, while the U.S. stock market dropped 2%.

In my previous article on the Trump trade war, I highlighted several points.

  • U.S. GDP growth would slow down
  • U.S. dollar index would decline
  • Consumer prices would increase
  • Trade deficits would increase
  • Capacity utilization would increase

Let's go over these points and see how they progressed since my last article.

First of all, the U.S. manufacturing PMI has shown weakness since the start of the trade war last year and this will translate into a slowdown in GDP growth. The April 2019 reading of 52.6 pointed to the second softest expansion in factory activity since June 2017.

The GDP growth has shown weakness in the latest quarterly report. I expect this weakness to continue as evidence of weak U.S. export numbers have started to appear.

The following chart shows that the trade and budget deficit has increased since last year.

More signs that the U.S. is losing this trade war is the increase in consumer prices. The Fed has published a recent report that trade wars have inflationary effects on goods.

Tariffs implemented thus far may have contributed an estimated 0.1 percentage point to consumer price inflation and 0.4 percentage point to price inflation for business investment goods. If implemented, an across-the-board 25% tariff on all Chinese imports would raise consumer prices an additional 0.3 percentage point and investment prices an additional 1.0 percentage point.

I expect that the PPI and CPI will be rising in the near future when these additional tariffs go in effect. As more and more resources will need to be produced domestically (due to the tariffs), the capacity utilization rate will increase. The latest reading of the capacity utilization rate is pointing to a high of 80%, which is typically the threshold where inflation will start to accelerate. I believe this number will continue to increase due to the additional tariffs. The CPI is estimated to rise another 1% point when President Trump really goes through with the additional $325 billion in tariffs.

To summarize, these tariffs have come at possibly the worst time for the U.S. as GDP and PMI are showing weak growth. Trade and budget deficits are clearly rising and will be rising even more in the future. U.S. exports are weakening and consumer price inflation is rearing its ugly head.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.