Föhrenbergkreis Finanzwirtschaft

Unkonventionelle Lösungen für eine zukunftsfähige Gesellschaft

The Trade Uncertainty Principle

Posted by hkarner - 9. September 2019

Date: 07-09-2019
Source: The Wall Street Journal By The Editorial Board

New evidence that tariff shocks have put economic gains at risk.

President Trump tweeted Friday that “The Economy is great. The only thing adding to ‘uncertainty’ is the Fake News!” Sorry, sir. The economy is fair to good, but it’s no longer as great as it was last year, and a major reason is the uncertainty caused by Mr. Trump’s trade policy.

The President is right that many in the media are cheerleading bad economic news for political reasons. They want him to lose. Certainly it’s amusing to see liberal economists who denied any damage from the uncertainty of Barack Obama ’s hyper-regulation now fret about the uncertainty from trade policy.

But these columns have been consistent in pointing out the harm from both, and our goal has been to prevent economic damage and maintain the faster GDP and wage growth in 2017 and 2018 that were sparked by Mr. Trump’s tax reform and deregulation policies. Our goal is to prevent a recession, not to talk the country into one, and it does no one any good to ignore reality.

On that score, two reports this week show the trade damage. Friday’s labor-market report for August shows that job creation in the goods-producing economy has slowed to a trickle. Mining and logging lost jobs for the third month in a row while manufacturing produced a mere 3,000, after only 4,000 in July. This reflects declining demand for U.S. goods around the world due to slower growth abroad caused in part by Mr. Trump’s protectionist shock to the global trading system.

The evidence for protectionist damage has been clear for months in corporate earnings reports and the declining pace of business investment, as CEOs cite policy uncertainty for being more cautious. And now comes statistical confirmation in a study released this week by Federal Reserve economists.

The economists did a statistical analysis of newspaper articles and earnings-call transcripts to measure what they call “trade policy uncertainty,” or TPU. They then used that and other data to estimate the impact of TPU on economic growth and industrial production in the U.S. and the world.

“We find that the rise in TPU in the first half of 2018 accounts for a decline in the level of global GDP of about 0.8 percent by the first half of 2019,” the economists write. That damage would be diminishing now if trade tension had abated, the study shows.

But the economists cite the impact of a second wave of “TPU shocks” in the second quarter of this year. That’s when the China-U.S. trade talks broke down amid mutual acrimony and Mr. Trump used tariff threats to coerce Mexico to reduce the flow of migrants from Central America.

“The total drag on GDP from the two waves” of trade tensions “is expected to increase through early 2020, cumulating to an impact of just above 1 percent,” the economists write. That’s a big number and no mere abstraction. It’s essentially the difference between the 3% annual GDP growth trend following tax reform and the 2% path of recent months. The Atlanta Fed is now predicting that growth in the third quarter may be a mere 1.5%.

Slower growth means less job creation and slower wage gains. The shame for economic policy is that this also gives the political left an opening to dismiss the gains from Mr. Trump’s other policies. These should be undeniable and they are clear even in the mediocre August labor report that showed an increase of 130,000 net new jobs.

The jobless rate for black Americans fell 0.5 percentage points to 5.5%, the lowest since the Labor Department began keeping track in 1972. These monthly data can fluctuate because of relatively small sample size, but the black jobless rate is down 0.8 percentage points from a year earlier. The jobless rate for Hispanics fell 0.3 points to 4.2%, also an historic low.

The labor participation rate is up year over year by 0.5 points to 63.2%, and for prime age workers age 25-54 it has climbed back up to 82.6%, not too far from pre-recession levels. Gains in average hourly earnings are holding at 3.2% year over year and close to 4% if you include the increase in hours worked. This is the reason Americans give Mr. Trump a high approval rating for the economy.

Mr. Trump’s trade policy has put all of this laudable progress at risk. The services side of the economy, which is less dependent on trade, has been resilient, and consumer spending has held up well. This may help the economy skirt a bigger downturn that would unwind these gains and create an opening for Democratic proposals that are much further to the left than Mr. Obama’s.

But Mr. Trump and Republicans should be especially worried about the Fed’s estimate that the trade damage will continue through early 2020. He may not want to believe anything from the Fed. Then again, we predicted this result two years ago. Bad policies have negative consequences, whether they come from the right or left.

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