US PPI and Beige Book

A legitimate question for U.S. consumers and investors is: “How badly could the trade tariff increases hurt the U.S. economy?”

So far, taxing consumers with tariffs who want to buy things partially made abroad has been fairly modest. However, the speed and the extent to which the existing tariffs have been and will be passed on to consumers do matter.

There are two indications of this today.

• The first signal is producer price inflation (PPI). As with any country, producer price inflation (PPI) in the United States is the best indicator of corporate pricing power that is available.

If companies have pricing power, then tariffs are likely to be passed down the distribution chain. Companies are the first to be hit by tariffs and of course the question is whether they have the ‘ability’ to pass these tariffs on.

• The second signal is the Federal Reserve’s Beige Book. The Beige Book is a summary and analysis of economic activity and conditions, prepared with the aid of reports from the district Federal Reserve Banks and is issued by the central bank of the Federal Reserve for its policy makers before a Federal Open Market Committee (FOMC) meeting.

The Beige Book is of course by definition a survey and surveys are, as always, to be treated with considerable caution.

However, the Beige Book is probably a better-quality survey. When someone is requested to fill in, let’s say an ISM or PMI form, this may be passed on to the summer intern with instructions something like ‘say what you like’, but a conversation with your friendly local Federal Reserve bank is likely to be taken a bit more seriously.

So far, the Beige Book has been suggesting that companies are worried about all the trade tariffs, but they are not yet changing their behavior. Jobs and investment for example have not been cut so far. As the threat of more aggressive tariffs has grown, the threat of more aggressive responses by companies has also grown.

U.S.-Canada Not-NAFTA Talks

In the meantime, the U.S.-Canada Not-NAFTA talks continue with both sides saying they are making progress without demonstrating that they are making any progress.

A few days ago, key Democrats have warned that if their party wins a U.S. House majority in November, they will strongly consider rejecting any rewrite of NAFTA that doesn’t include Canada and raise wages for U.S. workers.

ECB to Lower Euro-Area Growth Outlook

The European Central Bank is set to tweak its forecasts lower for euro-area economic growth as global trade tensions damp external demand. The ECB committee that oversees the compilation of the forecasts now sees the risks to economic growth as tilted to the “downside,” which is an important change from the ECB policy makers’ latest view when they qualified the risks were “broadly balanced.”

If confirmed, this would not be a positive for the euro and ‘could’ push the dollar somewhat higher which would be another extra negative for emerging markets.

ECB President Mario Draghi, who will unveil the final projections after the Governing Council meeting tomorrow, has acknowledged the damage to confidence from protectionist threats and global uncertainties in recent months.

Since then, Turkey and Argentina have slid deeper into crisis, triggering turmoil across the emerging-markets world while risks remain of the UK breaking away from the EU without a trade agreement.

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