The trade war morphed into a currency war last week as the Chinese yuan plunged by 1.3% (Fig. 5). It is down 3.9% since the start of the year.
That will certainly offset some of the Trump administration’s threatened 10% tariff on all goods imported from China.
Just a week ago, I wrote: “To add insult to injury, Trump could revive his attacks on China as a ‘currency manipulator.’ However, in my opinion, it is US trade policies, not Chinese intervention, that is weakening the yuan.”
On Friday, President Trump complained in a tweet that “China, the European Union and others” are manipulating their currencies. The trade-weighted dollar is up 3.0% since the start of the year (Fig. 6).
Uncertainty about US trade policy and the impact of recently implemented tariffs are a growing concern for most of the Fed Districts, according to July’s Beige Book. The word “tariff” was mentioned 31 times in the most recent report, up from 22 times in May’s report (our 7/18 and 6/5 Morning Briefings covered Fed Districts’ trade-related comments in the May Beige Book). That was down from 36 times in April’s report. March’s report didn’t mention the word “tariff” at all.
Two primary effects of the tariffs already have occurred. According to July’s Beige Book, firms are experiencing input pricing pressures and supply-chain disruptions. Another widely expected effect of the tariffs is a reduction in capital spending. Yet Fed District contacts reported either increasing or maintaining capital spending plans.
Let’s have a closer look at the 12 Fed Districts’ July comments on these three key topics:
(1) Pricing pressures rising. The key input prices, which reportedly have increased, include fuel, construction materials, freight, metals and other raw materials. In the Cleveland Fed District, for example, manufacturers and builders “commented widely that import tariffs were lifting steel and aluminum prices. … To a lesser extent, construction contacts also noted lumber price increases.” According to recent surveys in the Richmond Fed District, “manufacturers’ input prices increased sharply. In particular, prices for raw materials such as steel, aluminum, polyester, wool, acrylic, lumber, and caustic soda were on the rise.” Minneapolis “[m]anufacturing contacts reported that steep increases continued in aluminum and steel material input costs in reaction to tariff announcements.”
In some Fed Districts, pricing pressures are expected to further “intensify.” Not all of those pressures are a direct result of trade policy, although the tariffs are compounding the problem. St Louis Fed District construction contacts “lamented that rising prices pressured the industry before this tariff-induced inflation of metal costs.” Looking ahead six months, in the Philadelphia district, “manufacturing firms continued to anticipate higher prices, with two-thirds expecting increases in prices paid and over half expecting increases in prices received for their own goods.” Dallas contacts said that the “new tariffs had heightened uncertainty” around expectations for prices.
(2) Supply chains disrupted. In addition to the pricing pressure, trade uncertainty has disrupted supply chains, reported several Fed District contacts. In Philadelphia, one machinery manufacturer said that the effects of the tariffs have been “chaotic to its supply chain—disrupting planned orders, increasing prices, and prompting some panic buying.” Cleveland manufacturers “remarked that concerns about future trade- and inflation-related price increases had prompted some customers to accelerate purchases.”
(3) Capital spending strong. Despite the trade uncertainty, capital spending plans are going strong, according to July’s Beige Book. In the Philadelphia Fed District, about 40% of manufacturing firms “expected increases in future capital expenditures, which represented an improved outlook for capital expenditures since the prior period.” So too, Kansas City manufacturers’ capital spending plans “grew moderately.” Most energy firms in Kansas City reported “continued strong capital spending plans.”
The anticipated strength in capital spending is partially due to the labor shortages discussed above! In the Cleveland Fed District, one commercial builder “stated that the firm boosted spending to use drones for surveying to make up for the shortage of workers.” Further, Cleveland contacts in business advisory and software development “remarked that their services were in demand because businesses were modernizing their IT infrastructures and attempting to understand the implications of worker scarcities.”
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.
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