New Tariffs May at Last Be Affecting the US Economy

The ongoing trade war, which President Donald Trump deepened last week with his announcement of expanded tariffs on China, may finally be taking a bite out of the US economy.

Certainly, a global economic slowdown is a factor, but the trade sanctions are becoming more painful. US manufacturing has slowed, with average weekly hours worked dropping to their lowest point since 2011. The nation’s gross domestic product growth ebbed to 2.1% in the second quarter, down from 3.1% in the year’s first period.

US duties on imports from China, which US consumers and businesses pay, overshadow the stimulus from Trump’s tax reduction. The tariffs on Chinese goods, including the just-imposed 10% on consumer goods imports, bring the total exacted to $138 billion in 2019, eclipsing the $122 billion from the tax cuts, according to Strategas Research Partners. Altogether, the sanctioned goods are 9% of the core Consumer Price Index.

Because the new levies are hitting consumer goods, which were mostly left out of previous tariffs, the impact will be felt increasingly by Americans, noted Bank of America Merrill Lynch global strategist Aditya Bhave. The new round, he wrote in a research report, is “a game changer.” Among the items targeted are toys, clothing, footwear, and furniture.

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The new tariffs, to kick in Sept. 1, won’t pump up prices on affected products by 10% due to a phenomenon called margin compression. That means US middlemen and retailers will accept lower profits, rather than lose market share. Pantheon Economics estimates that the price hikes will amount to between 0.3% and 0.4%.

As a result of the new tariffs, the S&P 500 and the Nasdaq Composite had their worst weeks of the year, falling 3.1% and 3.9%, respectively, as of last Friday.

In coming months, by the reckoning of High Frequency Economics, the trade actions will act as a drag on the economy, despite other positive indicators, like low unemployment and high consumer confidence.

The big question is how well the US’s solid economic strength will counterbalance the trade drag. To Brad McMillan, chief investment officer for Commonwealth Financial Network, “the solid economic foundation should limit any sustained impact.” Americans had better hope so.