Macro Weekly – Steel and aluminium to follow washing machines and solar panels

by: Han de Jong

  • President Trump announces tariffs on US steel and aluminium imports
  • Equities did not like Powell’s testimony to Congress but bonds were OK
  • Global growth momentum appears to be softening…
  • …but various distortions in the US and Asia make it hard to read the indicators
180302-Macro-Weekly.pdf (99 KB)

US President Trump has said he is soon going to sign an order to impose import tariffs of 25% on steel imports and of 10% on aluminium imports. Details of how the new tariffs will actually work are not known at the time of writing. It would appear the president has taken a decision in a debate within his own ranks. Allegedly, Gary Cohn, chief economic advisor to the president, does not support these measures, while Wilbur Ross, the Commerce Secretary, and Peter Navarro, trade advisor to the president, are in support.

A fascinating experiment in economic policy

According to conventional economic thinking imposing trade restrictions implies a negative supply shock to the economy. While they may have positive effects on particular domestic industries, they are thought to have a negative impact on the economy at large and add to inflation. Economic nationalists such as Ross and Navarro do not subscribe to that line of thinking. In other countries, too, economic nationalism is finding more support. From a theoretical perspective, this is an interesting experiment as it puts conventional thinking on trade and economic nationalism to the test. Don’t expect a clear-cut verdict any time soon.

While the impact on the overall US economy will also depend on possible responses from other nations and whether or not protectionism stops here or continues, we think the macro effects on the US will be limited. The newly announced tariffs follow similar action just over a month ago against imports of solar panels and washing machines.

Is this clever?

I must admit that I am somewhat confused. During the election campaign, Trump promised protectionism, particularly in relation to China. However, China exports little steel or aluminium to the US. Canada, Brazil and South Korea are the biggest exporters of steel to the US. The US market is particularly important to Canadian exporters who sell almost 90% of their exports to the US. In the case of Brazil it is just over a third and in the case of Korea it is some 12%. Canada may be exempted from these measures as a member of NAFTA. For the other countries, the tariffs will be a big nuisance, but it will not have major macro effects.

Steel imports meet roughly a third of total US steel consumption. Pushing up prices of a third of total supply is likely to have a significant impact on the domestic steel market. It may be nice for US steel producers, but less so for the users of steel. While we do not think these tariffs will have big macro effects on the US economy, I cannot help wondering if the US are shooting themselves in the foot here, doing themselves more harm than others. But then, I am a free-trader, so what do I know?

Recent US macro data is interesting against this background. When the then candidate Trump launched his protectionist agenda he highlighted the (bilateral) trade deficit. A good year into his presidency, the US trade deficit is widening. The monthly deficit averaged USD 65bn during the first nine months of 2017, but it has widened to USD 74.4bn in January. This may strengthen Trump’s determination to implement more protectionist measures.

Powell’s debut

The new Fed chairman testified to Congress for the first time a few days ago. The big question was whether or not the Fed is going to tighten more aggressively than they have indicated in December and if so, by how much. Bond markets responded calmly, but equities sold off. Perhaps this is a sign that markets for risky assets were looking for an excuse to reverse the trend that started on 9 February. Powell did not say things that surprised us. Yes, he indicated he is more optimistic on the economic outlook. So are we. We have raised our growth forecast in recent weeks. Powell did not sound the alarm over the inflation outlook. So while the March FOMC may reveal that members expect four instead of three rate hikes this year, this is not a game changer.

Data was released last Thursday on the Fed’s favoured inflation gauge. The PCE deflator rose 0.4% mom in January, in line with expectations. The yoy rate was stable at 1.7%. The core PCE deflator was up 0.3% mom and 1.5% yoy, unchanged from December. This latter rate is set to move higher in the months ahead due to base effects as the monthly increases during the months ahead were very subdued last year.

Global growth momentum softening

Global growth momentum strengthened materially in the course of last year. While we were on the optimistic side of the debate we were also pleasantly surprised. And we have been on the look-out for signs that momentum may be softening. Most recent cyclical indicators suggest that is now happening. The European Commission’s index of Economic Sentiment, for example, fell in February for the second month running: 114.1, against 114.9 in January and a cyclical peak of 115.3 in December which was the highest level since 2000. There is no reason to believe that confidence will fall sharply in the months ahead. The picture of softening sentiment from very high levels is not uniform. In the Netherlands, for example, a country very exposed to the global cycle, producer confidence continued to strengthen in February, reaching a record level.

US: mixed data, but mind the distortions

Cyclical indicators in the US have been somewhat mixed recently. The most important gauge of business confidence, the ISM, rose to 60.4 in February, the highest since 2004. The regional data was a little mixed with confidence stronger in Dallas and Richmond, but softer in Chicago. So called hard data has been softer. New home sales were soft in January as they had been in December. Car sales have also been soft for a couple of months and durable goods orders were weak in January. Personal spending is growing nicely, albeit unspectacularly. The problem with hard US data is that parts of the US were hit by mud slides in December and adverse weather in January. That makes it more difficult to read the tea leaves.

Asia difficult to read due to Chinese New Year

Gauging cyclical developments in Asia isn’t much easier this time of the year due to the timing of Chinese New Year. The holiday period fell fully in February this year while it was partly in January last year. Chinese business confidence series show an interesting divergence. The national PMI for the manufacturing sector fell sharply in February: 50.3 versus 51.3 in January. The rival Caixin PMI did not fall at all, it actually rose to 51.6 in February versus 51.5 in January. As my colleague Arjen van Dijkhuizen pointed out here we think this may be due to the threat of protectionist action from the US as the national PMI covers more companies that may be vulnerable to protectionism.

South Korean export data provides an interesting insight into what is going on in the region. Exports were up 4.0% yoy against 22.2% in January. I think this is a reflection of the timing of Chinese New Year. The average of the two months is close to the recent trend. We also have to bear in mind that Korean export prices are falling quite rapidly at the moment. They were down 3.5% yoy in January, while they rose by just over 6% on average last year.

No change in view

On balance, I see little reason to change our underlying views. Global growth is not strengthening, but neither is there reason to think it is or soon will decelerate materially. There are no signs of a worrying acceleration of inflation. Central bank policy is unlikely to deviate much from our base line scenario. And last, while protectionism is a threat, measures announced so far are not a serious threat to the global economy.