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Tariffs starting to slow U.S. economy, data show

September 28, 2018

Fresh data on the U.S. economy show President Donald Trump’s escalating trade war is shaping up as a clear drag on growth this quarter.

The merchandise-trade deficit unexpectedly grew in August to $75.8 billion, the widest in six months and close to a record, as exports of food, industrial supplies and autos declined, Commerce Department data showed Thursday. A separate report from the department signaled corporate investment took a breather, with business-equipment orders at U.S. factories falling in August following a run of strong gains, while shipments of those items slowed.

Economists at JPMorgan Chase & Co., Amherst Pierpont Securities and Capital Economics trimmed their estimates for third-quarter gross domestic product growth. Before Thursday’s data, the median estimate in a Bloomberg survey was for 3 percent expansion.

While analysts said the trade deficit partly reflected an expected reversal of the second-quarter’s surge in soybean exports before Chinese-imposed tariffs, and GDP growth is seen remaining solid, the numbers illustrate how the trade war is spurring volatility in the data. In addition, the widening deficit runs contrary to Trump’s aim of a narrower gap and underscores the challenges of achieving that goal amid strong domestic demand – which tends to boost imports – and retaliatory tariffs from abroad.

“The data are grim,” Ian Shepherdson, chief economist at Pantheon Macroeconomics Ltd., said in a note, referring to the August goods-trade gap. “The administration’s narrative, that the second-quarter drop in the deficit was a result of their trade policies, has now fallen apart, as it was always likely to do.”

Another report on Thursday showed global trade is continuing to lose a little steam amid the tariff battle between the U.S. and China, the world’s two biggest economies. Freight and logistics company DHL said its trade barometer weakened in September, dropping to the lowest since 2016 and indicating a slower pace of growth in the months ahead.

Also Thursday, the World Trade Organization cut the outlook for global commerce through 2019 and warned that tension between major trading partners increasingly threatens economic growth.

While economists say it may be too early to detect the exact U.S. impact from trade disputes, the data bear watching as the headwinds and uncertainty look unlikely to dissipate soon. Thursday’s reports come after the U.S. and China imposed tariffs on each other in late August, which followed others implemented in early July. The U.S. added tariffs on another $200 billion of Chinese imports this week – the largest escalation of the trade war so far.

Non-military capital goods orders excluding aircraft fell 0.5 percent in August while shipments of such goods cooled to a 0.1 percent advance. Bloomberg Economics wrote that “the slowdown is likely due in part to trade tensions and is a sign that production levels are set to moderate in the fourth quarter.”

The wider trade gap reinforced estimates that overall net exports will be a drag on third-quarter GDP growth after providing a 1.22 percentage-point boost in the previous period. Conversely, August figures released Thursday signaled inventories will give a large boost to growth this quarter, after subtracting 1.17 percentage point from the second-quarter GDP advance. Some economists said the gains at wholesalers’ inventories last month may also have been a sign of possible stockpiling of imported goods ahead of the threat of tariffs.

“Net exports will be a drag” in the July-September period, “but inventories will be a positive,” said Paul Ashworth, chief U.S. economist for Capital Economics, who trimmed his GDP growth forecast to 3 percent, from a gain of between 3 percent to 3.5 percent. That amounts to a pace of expansion that is “still very good, just not very, very strong like the second quarter.”

The wider merchandise-trade deficit also reflected a 0.7 percent August increase in imports, as shipments of autos and consumer goods increased.

Revised second-quarter data on Thursday showed GDP posted a 4.2 percent annualized pace of expansion – the fastest since 2014. Stephen Stanley, chief economist at Amherst, cut his third-quarter GDP growth estimate to 2.8 percent, from 3 percent. Net exports may subtract as much as 1.5 percentage point from this quarter’s GDP advance, according to Omair Sharif, an economist at Societe Generale SA.

After the Thursday reports, Michael Feroli, chief U.S. economist at JPMorgan, cut his GDP growth estimate for this quarter to 3 percent, from 3.5 percent, saying in a note that the economy was looking “less boomy, more noisy.”

The latest figures come on the heels of Federal Reserve Chairman Jerome Powell’s remarks Wednesday that the economy is having a “bright moment” and the trade tensions haven’t caused a noticeable downdraft in broad data.

On the heels of the Thursday data, the Atlanta Fed’s GDPNow tracking estimate for third-quarter growth was reduced to 3.8 percent, from last week’s projection of 4.4 percent.

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