Friday July 6, 2018, was D-Day for the tariffs. They are now official.
So far the US economy looks pretty good according to the June jobs report. Unemployment is at 4% (up slightly from the 3.8% level reached in May) and, importantly, the labor participation rate is up. Hourly wages remain weak, with the growth rate down to 0.2% from 0.3% in May but the outlook on income is upbeat.
The potential bad news is that the employment numbers are probably temporary since the impact of the imposition of tariffs has not yet hit the economy. Once the economy feels the effects of the tariffs we should see higher rates of unemployment and a decline in economic growth. Indeed, the employment numbers for June could be the last good figures we will see in a while.
It is noteworthy that the latest minutes of the Fed’s most recent FOMC meeting noted that participants had expressed concern over uncertainties associated with trade policy. Once the “trade war” is in full swing the outlook for the US economy will certainly turn negative. There is little chance that the trade conflict will be avoided since the administration is adamant about pursuing its policy. More than likely the trade war will be a lot more severe than we now envision. It is not yet clear whether we will now slither into a depression as we did in the 1930’s, but it is almost certain that we will enter into a recession sometime in 2019.
President Trump is about to embark on a trip to Europe. How successful that trip will be is hard to fathom. If he behaves as he did during the G7 meeting in Canada, the trip will be a serious flop. So far the UK has indicated it will roll out the red carpet, including a meeting with the Queen. The rest of Europe does not seem to be quite as keen to meet Trump. There is concern that Trump will impede the future of NATO and continue to hurt the Atlantic alliance. Combining the anti-alliance attitude and the just imposed tariffs has European economic leaders worried.
The gatherings with Europe’s leaders is to be followed up with a meeting between Trump and Putin in Helsinki. There is a lot riding on that meeting. The combination of the NATO conference in Brussels, the tariffs and the Russia meeting should keep everyone on tenterhooks.