Trade tariffffffffffffs could dent consumer spending

Trump’s moves may also delay any Fed interest rate hikes.

President Donald Trump’s decision to impose tariffs on an additional $200 billion of imports from China drags the biggest part of the U.S. economy into the thick of the trade war, threatening to deliver a more direct hit to growth.

The 1 0 pe rc e nt t a r i f f s announced on Monday — which take effffffffffffect Monday and will rise to 25 percent in January — affect everyday items including food, f ur ni t ure , a nd c l ot hi ng , making grocery shopping and holiday gifts potentially pricier. That broadens the trade fallout more directly into the realm of household spending, which accounts for about 70 percent of the U.S. economy.

China pledged to retaliate, a move that Trump said would lead to tariffffffffffffs on an additional $267 billion of imported goods. Previously announced levies on $50 billion of Chinese imports, as well as metals from Europe and elsewhere in the world, already are forcing U.S. producers to pay higher input costs, which they’re trying to pass along to customers.

While data indicate the tariffs so far have had little material impact on the $20 trillion U.S. economy, the latest levies also include more manufacturing inputs and boost the risk that businesses will become more wary about investment and hiring, which along with lower taxes has been a pillar of support for household consumption in 2018.

“The more you expand the list of targeted goods, the less you can isolate the shock” and the “more there’s going to be a visible impact,” said Gregory Daco, head of U.S. macroeconomics at Oxford Economics in New York.

Higher prices will deter household spending and weigh on confifidence, and companies may encounter increased prices on more inputs. As a result, “businesses might turn a bit more cautious on hiring and on employment in general, and that in turn might feed back on to consumers,” Daco said.

Tariffffffffffffs that push up prices and restrain growth could also complic ate the Federal Reserve’s task as offifficials debate how fast to raise interest rates beyond this month. Economists at UBS Group AG say even a 10 percent tariffff will slow the economy in the fourth quarter by enough to stop the Fed from hiking interest rates again in December.

Assuming retaliation from China, Daco reckons that the tariffffffffffffs will shave about 0.4 percent from U.S. gross domestic product in 2019, more than the 0.1 percent before the latest announcement, and the drag may even be worse given the tariffffffffffffs will rise to 25 percent.

While Daco is maintaining his 2.9 percent GDP growth estimate for 2018, he now expects a slowdown next year to 2.1 percent, compared with an earlier estimate of 2.3 percent.

The l a t e s t t a r i f f move means U.S. retailers counting on cheaper China- made merchandise could be forced to lift prices or take a hit on profifits, depending on their ability to quickly flflip to purchasing from U.S. companies or fifind sources in other nations that are ready to deliver at competitive rates.

Economists so far have s e e n g r o w t h a s s t r o n g enough to withstand the t a r i f f b a t t l e s . The l a t e s t Bloomberg monthly survey shows GDP will advance at an annualized 3 percent pace this quarter and 2.8 percent in the fifinal three months of the year, before easing to 2.5 percent for the fifirst half of 2019. It expanded 4.2 per- cent in the second quarter.

C o n s u m e r s p e n d i n g , which grew 3.8 percent last quarter, is forecast to rise 2.9 percent in the July-September period and 2.5 percent in the fourth quarter, according to the survey.

The second-order effffffffffffects from tariffffffffffffs are a “wild card” in terms of “what the uncert a i n t y h a s t h e p o t e n t i a l to do,” said Michael Feroli, chief U. S. economist at JPMorgan Chase & Co. “There’s a risk you could see business sentiment, which has been quite upbeat, turn a little more cautious. That would affffffffffffect hiring, capital investment and presumably the pace of economic growth.”

U.S. Commerce Secretary Wilbur Ross said Tuesday on CNBC that the latest tariffff list, which left out some previously included items such as smartwatches and high chairs, was aimed at being the “least intrusive on the consumer.”

“We really went item by item trying to fifififigure out what would accomplish the punitive purpose on China and yet with the least disruption in the U.S.,” Ross said.

The U.S. tactic of pressuring China on tariffs won’t work and will backfifire to hit the U.S. economy, which isn’t as resilient as people think, Fang Xinghai, vice chairman of the China Securities Regulatory Commission, said Tuesday.

The outlook for household spending looked bright ahead of last Monday’s news. Consumer sentiment jumped more than forecast in September to a six-month high, according to a University of Michigan report, as Americans’ views of buying conditions for houses, vehicles and long-lasting goods improved.

While people are benefifiting from a strong job market, and income and wealth gains supported by higher stock prices and property values, the unease about trade tensions is brewing. The Michigan report showed concerns about the negative impact of tariffffffffffffs on the U.S. economy were spontaneously mentioned by nearly one-third of all consumers in the past three months, up from one in fifififififive in the prior four months.

Higher prices will deter household spending and weigh on confidence, and companies may encounter increased prices on more inputs.