Welcome to a regular snapshot-review of U.S. and international economic news that aims to 1) provide a window into the challenges and decisions facing businesses today, 2) determine the direction of economic policy — such as the speed at which central banks decide to raise interest rates, and 3) assess what the impact will be for consumers.

Brai Odion-Esene

May 10, 2019·6 min read

U.S. Ramps Up Tariffs On China Exports As Talks Breakdown

The Trump administration this week announced tariffs on $200 billion worth of Chinese goods were lifted back from 10% to 25%, and the White House is said to be preparing a list of the remaining goods not yet subject to tariff to respond to China if China retaliates, which they have vowed to do.

Talks are ongoing in Washington D.C., but with faint hopes that an agreement will be reached by the time they wrap up. The increased tariffs will directly impact U.S. companies with China-based manufacturing facilities as a key part of their supply chain. Also, just like last time, any retaliation by China will focus on industries and battleground states where Trump draws his support from — such as agricultural products.

Affected U.S. businesses for the most part have avoided passing the increased costs onto the consumer in the form of higher prices, but it is only a matter of time before that changes. One can also expect the flood of companies shifting production away from China to other countries such as India and Vietnam to increase significantly.

The news comes as the U.S. Census Bureau this week released data showing an increase in the U.S. trade deficit in March, rising to $50.0 billion from $49.3 billion in February. March exports were $212.0 billion, $2.1 billion more than February exports. March imports were $262.0 billion, $2.8 billion more than February imports.

However, the trade gap with China decreased $1.9 billion to $28.3 billion in March. Exports increased $1.4 billion to $10.5 billion and imports decreased $0.5 billion to $38.8 billion.

China Takes Additional Step To Boost Bank Lending To Small Businesses, Support Economy

This week also saw another step by Beijing to support China’s small and mid-sized companies, with another cut in the reserve requirement ratio to 8% for small and medium-sized banks. It is hoped that by reducing the amount of cash these financial institutions must hold against the loans they extend, they will lend more and reduce borrowing costs of small and micro businesses.

The reduction by the People’s Bank of China will be implemented in three phases — May 15, June 17 and July 15. The PBOC said around 1,000 county-level rural commercial banks are eligible.

China’s central bank has already slashed the RRR five times since early 2018, lowering the ratio to 13.5% for big banks and 11.5% for small-to medium-sized lenders.

U.S. Banks Report Weaker Demand For Loans From Businesses

In a sign of the uncertain investment environment for many American businesses, a Federal Reserve survey of banks’ loan officers released this week showed weaker demand for commercial and industrial (C&I) loans from companies in the first quarter of 2019.

According to the report, banks reported weaker demand for C&I loans from both large and small firms. The reduced C&I loan demand was attributed to factors such as “decreases in customers’ investment in plant or equipment, decreases in customers’ merger or acquisition financing needs, and customers shifting their borrowing to other sources of credit.”

As for companies with exposure to Asia and Europe (two regions feeling the effects of increased trade tensions and the resulting global slowdown), the Fed said banks have taken steps to mitigate risk of loan losses from such exposures through stricter policies on extending new credit to exposed firms — a move that is likely to further depress business investment.

U.S. Data Roundup — Job Openings Continue to Outpace Hiring, Stable Price Inflation

The Bureau of Labor Statistics this week reported that the number of job openings rose to 7.5 million on the last business day of March, while the number of hires and separations (employees leaving or fired) were little changed at 5.7 million and 5.4 million, respectively.

Not surprisingly, the bulk of the job openings were in the private sector (+363,000). Job openings increased in a number of industries, with the largest increases in transportation, warehousing, and utilities (+87,000), construction (+73,000), and real estate and rental and leasing (+57,000). Job openings decreased in federal government (-15,000).

Meanwhile other data released this week appeared to support the Fed’s recent decision to remain on hold with regards to its interest policy, as the threat of rapid price inflation fails to materialize.

The Consumer Price Index rose 0.3% in April, down from a 0.4% increase
in March, despite the 5.7% jump in gasoline prices which was responsible for over two-thirds of the overall monthly increase. Food prices fell in April for the first time since June 2017.

Excluding food and energy, consumer prices were up 0.1%, with increases in the costs of housing, medical care, education, and new vehicles. Meanwhile, prices for used cars and trucks, clothing, and household furnishings and operations were among those that declined last month.

Consumer prices are up 2% for the 12 months ending April, and up 2.1% excluding food and energy.

UK Economic Growth Rebounds In Q1 Despite Brexit Uncertainty

The UK Parliament is nowhere close to an agreement over an orderly exit from the European Union, but there was some good news on the economic front this week.

UK GDP is estimated to have increased by 0.5% in Q1, an improvement on the 0.2% expansion recorded in Q4. In comparison with the same quarter a year ago UK GDP increased by 1.8%, up from 1.4% in the previous period.

The Office of National Statistics noted that while activity in the services sector slowed to +0.3% in Q1, “there was a noticeable pickup in growth” in the production sector — driven by growth of 2.2% in manufacturing output. Private consumption, government spending and gross capital formation contributed positively, while net trade contributed negatively to GDP growth.

European Commission Downgrades Outlook For Euro Area 2019 Growth

The EU’s governing body this week released updated forecasts with its outlook for growth collectively and among its member countries. For those countries that make up the eurozone, the European Commission predicted economic growth declining from 1.9% in 2018 to 1.2% this year before rebounding to 1.5%.

The EC staff warned that the forecasts rest on the assumption that trade and policy uncertainty (such as Brexit) will recede, or at the very least not escalate, that global demand will gradually become more supportive, and that the specific issues currently impeding growth will unwind.

“Any deviation from these assumptions could lead to a more persistent slowdown,” they said.

Germany, for example, is now expected to experience GDP growth of just 0.5% this year, compared to the EC’s winter forecast of +1.1%.

Underscoring the importance of the global economy to Europe’s manufacturing powerhouse, the EC said “Assuming a gradual recovery in foreign trade later this year and a solid expansion in private consumption … GDP growth is expected to strengthen to 1.5% in 2020.”

See here for the EC’s forecasts for other EU countries.