Tags: jobs | labor | trade | war | tariffs | investors | fed

Only One Thing Can Slow This Economy Down: A Genuine Global Trade War

Only One Thing Can Slow This Economy Down: A Genuine Global Trade War
(Saajid Abuluaih/Dreamstime)

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Friday, 06 July 2018 01:58 PM Current | Bio | Archive

INDICATOR: June Employment Report and May Trade Deficit

KEY DATA: Payrolls: +213,000; Private: +202,000; Manufacturing: +36,000; Unemployment Rate: 4.0% (Up 0.2 percentage point); Wages: +0.2%/ Trade Deficit: down $3.0 billion

IN A NUTSHELL: “If this is a labor shortage, I cannot wait to see what happens to job growth when it becomes a real crisis.”

WHAT IT MEANS: Another Employment Friday, another strong employment report. Payrolls rose strongly both in the private and public sectors. Nearly two-thirds of the sectors showed job increases, a clear indication the expansion has created hiring needs across the economy. But the real eye-opener was the sharp rise in manufacturing jobs. In particular, the metals industries hired like crazy. The tariffs are having their intended impact on jobs there, but costs are rising in those sectors that use metals. There was also a jump in the motor vehicle industry. Assemblies had cratered in May and it looks like they rebounded in June. The large gain was likely temporary.

While I like to look at the payroll data, the press will likely focus on the jump in the unemployment rate. The rise is not a worry. There was a surge in the labor force and it takes time for new entrants to the market to find jobs, so it should not be a surprise to see the rate rise periodically. The growing labor force has stabilized the labor force participation rate, which is about as good as can be expected.

Unfortunately, wages continue to grow modestly. This was surprising given the large rise in employment in relatively high paying industries. I am just not sure what is going on with this number.

On the trade front, there was a sharp decline in the deficit in May. Exports grew a lot faster than imports. This is good news for growth. On the bad news side, the deficit with China expanded, which will not make the president happy. With the trade skirmish threatening to turn into a full-fledged war, any worsening of the trade situation with China can only cause tensions to rise. So far this year, the trade deficit has widened by about 10%.

MARKETS AND FED POLICY IMPLICATIONS: Only one thing can slow this economy down: A trade war. Growth is strong, the labor market is robust and inflation, while rising, is not yet at a truly threatening level. But the tariffs with China are kicking in and the Chinese are very adept at imposing non-tariffs restrictions on U.S. companies doing business in their country. Indeed, they are already ramping up inspections and enforcement of rules and regulations. Those increase costs of operations, but they are largely invisible. Worse, the impacts spread throughout the entire economy. Businesses are becoming more cautious about investing, sectors such as agriculture and facing major adjustments as their markets are coming under attack, supply chains are becoming more uncertain as to their long-term security. The longer the battles go on, the more they will negatively affect many more sectors of the U.S. economy than they help. Right now, investors are sticking to their belief that the threats of a wider war are just that, threats. As long as the tariffs remain at a relatively manageable level, the economy will not slow sharply. The Fed, though, made it clear that they are watching things really closely. They will have to help clean up the mess if one is created.

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.
 

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JoelNaroff
Only one thing can slow this economy down: A trade war. Growth is strong, the labor market is robust and inflation, while rising, is not yet at a truly threatening level.
jobs, labor, trade, war, tariffs, investors, fed
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2018-58-06
Friday, 06 July 2018 01:58 PM
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