U.S. Economy in Peak Condition, but Here Come the Tariffs

Friday, June 15, 2018

Market participants were hopeful for another strong week as of Thursday’s close, which brought fresh new highs to the Nasdaq and Russell 2000 Small-Cap Index. But we woke up this morning with futures down triple-digits, including the Dow looking to open -170 points from where it ended yesterday.

The reason? The Chinese tariff feud is on; President Trump plans to bring 25% in tariffs to $50 billion worth of Chinese imports, and he agreed on a second-wave of Chinese tariffs worth $100 billion in goods.

Neither has a specific timetable as of yet, though elsewhere tariffs on U.S. goods will be forthcoming as soon as next week from the European Union (EU), as well as an extensively covered trade spat between Trump and Canadian Prime Minister Justin Trudeau that may lead to further taxes on U.S. exports with our biggest trading partner. In other words, it’s not just trade with the Chinese that concerns economists and investors in the U.S. right now.

We’ve been seeing absolutely phenomenal economic reads of late — Import/Exports and Retail Sales yesterday were far and away better than estimates and historical averages. But if these tariffs begin to take a bite out of domestic trade metrics, we may well be seeing the peak of growth in this arena right now. Then again, we may be half a year away from seeing these numbers affected, and there’s seemingly always room to cut a more accommodating deal in the weeks and months ahead. Indeed, our trade situation will eventually demand some smoothing out.

Ahead of the bell today, we see new a Empire State Index headline for the month of June, which rose nearly 5 points month over month to 25, its highest read in nine months. Expectations were for this survey to glean around 19 points (anything above 0 is growth). Results were led by a very high Prices Paid Index: 52.7. These numbers are consistent with other U.S. economic data illustrating an economy running hotter than it has in more than a decade; ergo the U.S. running at peak conditions, and the market eyeballing new all-time highs.

New Industrial Production numbers for May have just been released this morning as well, and these look to offer something of a counter-narrative: -0.1% on the headline compares to an estimated +0.1% for the month, and much lower than the upwardly revised +0.9% read in April. Factory output fell 0.7% for the month, following 0.6% growth in the previous month.

Capacity Utilization reached 77.9% last month, in line with estimates and following a 78.0% read from April, so basically in-line. This figure does tend to bounce around a lot, but since 2000 — and discounting things like the bottoming-out during the Great Recession — 78% very much looks like the median utilization rate. This means there is room for improvement, for sure — that median was a lot higher in the ‘80s and ’90s — but right now we’re not seeing it.

Mark Vickery
Senior Editor

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