This Week In The Economy: Brexit, Trade War Escalation, Consumer Prices Surge Again, Fierce Bank Competition for Commercial Business
Welcome to a regular snapshot-review of U.S. (and sometimes international) economic data that aims to 1) determine the direction of economic policy — such as the speed at which the Federal Reserve decides to raise interest rates, 2) provides a window into the challenges and decisions facing businesses today, and 3) assess what the impact will be for consumers.
Greetings from London, where your ‘TWITE’ host will be for the rest of August for some much-needed family time. Brexit continues to dominate the news over here, as uncertainty has spiked recently on whether the UK and European Union can reach an agreement about the future of their economic relationship by the March 2019 deadline.
Meanwhile the civil war within Britain’s Tory Party goes on, as Prime Minister Theresa May struggles to maintain the tenuous alliance between ‘Remainers’ and hardcore ‘Brexiteers’ on her side of the Commons.
Trade — End of The Trump-Erdogan Bromance? + Latest Trump Salvo Against China
In an early morning tweet Friday, President Trump announced the U.S. is doubling the tariffs on aluminium and steel imports from Turkey, declaring: “Our relations with Turkey are not good at this time!” This is not about correcting a trade imbalance, however, but to turn the screws on Turkey to release American pastor Andrew Brunson, who has been held for more than two years for alleged involvement in the coup attempt by members of the Turkish military in 2016.
The U.S. has already aimed sanctions at Turkey’s Minister of Justice and Minister of Interior for their role in Brunson’s detainment. Many believe Brunson is a bargaining chip for Turkey to ensure state-run bank Halkbank avoids a crippling penalty for violating Iran-related sanctions.
U.S. stock markets reacted badly to the news, with all the major indices (S&P 500, Dow Jones Industrial Average, and the Nasdaq) suffering losses at time of writing.
Meanwhile, trade hostilities between China and the U.S. show no sign of abating, and the Trump administration this week announced a 25% tariff on $16 billion worth of additional Chinese imports starting August 23. This follows the initial tariffs on around $34 billion of imports from China, which went into effect on July 6. The list of items targeted covers mostly industrial equipment, such as tractors and chemicals. In response, the Chinese government announced a 25% tariff on $16 billion worth of U.S. goods that will also go into effect on August 23rd.
These tit-for-tat moves could have dire consequences for the economy. A group of economists from the Atlanta Federal Reserve Bank this week warned of the negative effects on business sentiment. The bank’s Survey of Business Executives showed a majority of those polled are revisiting their capital investment plans because of recent hikes in tariffs. The Atlanta Fed noted that:
“Among firms reassessing, 67 percent have placed some of their previously planned capital expenditures for 2018–19 ‘under review,’ 31 percent have ‘postponed’ or ‘dropped’ previously planned expenditures, 14 percent have ‘accelerated’ their plans, and 2 percent (one firm) added new capital expenditures for 2018–19.”
Separately, the International Energy Agency warned in its latest Monthly Energy Outlook that growing trade tensions between China and the U.S. could result in slower global economic growth, which in turn would put the brakes on oil demand growth.
Around The Horn
U.S consumer prices jumped by a massive 2.9% in July compared to the same month a year ago, the second straight month it has risen by that much. Excluding volatile food and energy prices, the Consumer Price Index was up 2.4%, its largest jump over a 12-month period since September 2008.
Banks Easing Standards For Business Loans But Stricter On Consumer Credit Cards
The Federal Reserve’s quarterly Senior Loan Officer Opinion Survey — a report that tracks changes in the standards, terms, and demand for bank loans to businesses and households — showed banks lowered their standards and terms for commercial and industrial (C&I) loans to firms of all sizes. This underscores the fierce competition among banks to scoop up commercial business as their profit margins continue to be squeezed by the low-interest rate environment.
On the consumer side, banks reported low demand from consumers for all categories of mortgage loans — not surprising given what continues to be a sluggish housing market — while a moderate number also noted they had tightened standards and terms for credit card loans. To back this up, separate data from the Fed shows credit card debt outstanding in the United States shrank by $0.2 billion in June.
On the jobs front, the U.S. Bureau of Labor Statistics reported there 6.7 million job openings in June but there were only 5.7 million hires — underscoring the ongoing struggle for employers searching for employees with the right skillset.