Trade spat, housing could curtail U.S. growth
The U.S. economy is booming this quarter as tax cuts power consumers and businesses. Yet risks are mounting that the high will be short-lived.
The housing market is struggling to build on its progress thanks to supply constraints and soaring property values, with data Tuesday showing an unexpectedly large drop in construction permits. Manufacturing is coming off the boil amid lengthening order backlogs and accelerating input prices, particularly for oil and partly due to tariffs on metals. On top of that, President Donald Trump has brought the U.S. to the verge of a trade war with China that could see levies on hundreds of billions of dollars in goods.
It all amounts to increasing headwinds on economic growth that has a fair shot this quarter at reaching 4 percent, the fastest since 2014. While the Trump administration said such strength makes it a good time to tighten the screws on U.S. trading partners, markets gave a less-sanguine judgment this week, and economists caution that prolonged pain from trade will complicate the path for companies and consumers.
With the U.S. economy about to enter the 10th year of expansion any slowdown would arrive just as the rest of the world shows signs of losing steam.
U.S. growth “is close to a peak” and momentum will be “cooling from here,” said Gregory Daco, head of U.S. macroeconomics at Oxford Economics in New York. The trade risks “come at a point when the economy itself is in the late stage of the business cycle, it’s already close to capacity, where you can’t easily substitute for imports, and businesses are worried about trade tensions.”
The U.S. pledged Friday to push ahead with tariffs on $50 billion of Chinese imports. Trump delivered another jolt Monday by asking the administration to identify $200 billion in Chinese products for additional tariffs of 10 percent, plus another $200 billion after that if the Asian nation retaliates. Beijing vowed to respond “forcefully.”
Further clouds arrived in U.S. data showing mixed progress on housing in May. While groundbreaking on homes jumped to the strongest in more than a decade, it was largely due to a surge in the Midwest and helped by conducive weather. Permits — a proxy for future construction — fell for a second month.
Sales of previously owned homes unexpectedly fell in May for a second month, reflecting a lack of inventory and elevated asking prices, National Association of Realtors data showed Wednesday.
Federal Reserve officials are taking note of the trade tensions. Chairman Jerome Powell on Wednesday reiterated there’s a “strong” case for raising interest rates, while also saying that “in principle, changes in trade policy could cause us to have to question the outlook.”
“Those concerns seem to be rising, for the first time, we’re hearing about decisions to postpone investment, postpone hiring,” Powell said at a European Central Bank forum in Sintra, Portugal.
That follows similar remarks by Atlanta Fed President Raphael Bostic.
“I began the year with a decided upside tilt to my risk profile for growth, reflecting business optimism following the passage of tax reform,” Bostic said Monday in Savannah, Ga. “That optimism has almost completely faded among my contacts, replaced by concerns about trade policy and tariffs. Perceived uncertainty has risen markedly.”
The Atlanta Fed’s GDP Now tracking estimate for the current quarter stands at 4.7 percent, following a reported 2.2 percent growth pace in the prior three months. While hardly anyone expects the rate of expansion to hold at secondquarter levels, the various risks make such rapid gains even less likely in the future.