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Watch Germany as Trump Trade War Erodes US Economy

Watch Germany as Trump Trade War Erodes US Economy

By    |   Monday, 07 October 2019 10:35 AM

The recent U.S. employment data had something for everyone.

The unemployment rate declined to 3.5 percent in September, which was the lowest unemployment rate in 50 years, while total nonfarm payroll employment rose by 136,000.

On the other hand, on a seasonable adjusted basis, average hourly earnings rose less than expected at 2.9 percent on a yearly basis in September, which was down from 3.2 percent the month before.

The markets, very tentatively, took the data as slightly good news. For the week, the Dow and S&P 500 both gained about 1.5 percent while the Nasdaq was up about 1.8 percent.

A bit of confusion in the numbers is probably helpful. No single data release is a reliable indicator where an economy is going.

In this context, HIS Market has released an interesting paper under the title “Explaining U.S. manufacturing PMI survey divergences” after last week's U.S. Manufacturing surveys have caused quite a lot of ‘uncertainties’ among investors as well as economists.

"Uncertainty" is therefore useful in reminding investors not to put too much faith in a single set of data.

In the real world, most U.S. consumers are probably feeling OK. The fact is that a lot of Americans had rather meaningful increases in pay last month. The weakness in the headline earnings number was due to seasonable adjustments and the economists tend to care about seasonable adjustments and weakness in the tech sector. 

Nevertheless, the trends will have to be watched, but there is no reason to panic, just yet…

Meanwhile, Fed Chairman Jerome Powell gave no indication of the direction of policy in prepared remarks. “Unemployment is near a half-century low, and inflation is running close to, but a bit below, our 2 percent objective. While not everyone fully shares economic opportunities and the economy faces some risks, overall it is — as I like to say — in a good place. Our job is to keep it there as long as possible,” Powell said Friday.

On Sunday, Kansas City Fed President Esther George, who dissented on the Fed’s interest rate cuts in July and September, said in prepared remarks that “persistently muted inflation is the result of a confluence of temporary and structural factors that are not particularly responsive to interest rate adjustments.”

Anyway, a fed-funds rate insurance rate cut of 25 basis point is still in the cards at the FOMC meeting for the end of the month. Of course, we aren’t there yet.

Nevertheless, U.S. corporates still have reason to worry as the trade tariffs and taxes keep piling up. Trade talks between the U.S. and China from Thursday of this week are in focus.

In the meantime, Vice Premier Liu He, who leads China’s trade delegation, recently told dignitaries that China will not commit to reforming industrial policies or government subsidies that are two of the Trump administration’s main complaints.

The problem for investors is trying to forecast what is inherently unpredictable. Trade policy has always been a personal prerogative of President Donald Trump. Economists are not comfortable in attempting to forecast the actions of Trump. It’s quite hard to do …

The consequences of the existing trade tariffs/taxes are already very visible in the economic data of course. Uncertainty is reducing investment. Companies are reluctant to make investments when the supply chains that were built up during the last thirty years are being challenged. Investment goods make up a disproportionately large part of global trade as well. So, trade tariffs/taxes increase the cost of investing. That than hits manufacturers who make investment goods.

In the context of all this, it is advisable for investors to keep also an eye on Germany, which is vulnerable in this area. German factory orders, which is an important indicator for Europe’s biggest economy, dropped for the second consecutive month in August, led by lower demand from domestic customers.

Today, the German Federal Statistical Office (Destatis) informed that orders in August were 0.6 percent lower compared with the previous month and 6.7 percent lower on a yearly basis.

Once again, the big question remains if the U.S. economy will be able to continue to resist sufficiently the slowdown that is observed in the other major economies in the world.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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The big question remains if the U.S. economy will be able to continue to resist sufficiently the slowdown that is observed in the other major economies in the world.
investors, germany, trump, trade war
Monday, 07 October 2019 10:35 AM
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