Real Time Economics: Tariffs on Mexico Threaten Economic Disruption


This post is by Jeffrey Sparshott from Real Time Economics


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The Trump administration is readying tariffs against Mexico, China’s economy is looking shakier and the U.S. expansion will soon be the longest on record. Good morning. Jeff Sparshott here to take you through key developments in the global economy. Send us your questions, comments and suggestions by replying to this email.

South of the Border

President Trump threatened tariffs on Mexican imports unless the country does more to curb migration from Central America. The president said levies on one of America’s largest trading partners would begin at 5% on June 10 and grow steadily, hitting 25% on Oct. 1, Louise Radnofsky, William Mauldin and David Luhnow report.

  • Fallout: Bond yields and stocks fell—auto makers were among the biggest losers—Mexico’s peso slumped and approval of a revamped North American deal got a lot more complicated.
  • Mexico’s economy contracted 0.2% in the first three months of the year. Tariffs could deepen the downturn: Mexican exports, the vast majority of which go to the U.S., account for about 37% of its overall economy.
  • U.S. importers would pay more for Mexican products due to the tariffs, and likely pass a significant portion of the price hike on to consumers.
  • Deutsche Bank notes that about two-thirds of U.S.-Mexico trade is between factories owned by the same company. “In other words, trade with Mexico is basically all about the supply chain, which essentially is all about cars,” says chief economist Torsten Sløk.

WHAT TO WATCH TODAY

Germany’s consumer-price index for May is out at 8 a.m. ET.

U.S. consumer spending for April is expected to rise 0.2% from the prior month, and personal income is expected to rise 0.3% from the prior month. (8:30 a.m. ET)

The U.S. personal-consumption-expenditure price index, excluding food and energy, for April is expected to rise 0.2% from the prior month and 1.6% from the same month a year earlier. (8:30 a.m. ET)

The Chicago purchasing managers index for May is expected to tick up to 53.0 from 52.6 a month earlier (9:45 a.m. ET)

The University of Michigan consumer sentiment index for May is expected to slip to 101.0 from a preliminary reading of 102.4. (10 a.m. ET)

The Atlanta Fed’s Raphael Bostic speaks on the global economy at 9:15 a.m. ET, and the New York Fed’s John Williams speaks on monetary policy theory and interest rates at 12:00 p.m. ET.

The Baker-Hughes rig count is out at 1 p.m. ET.

TOP STORIES

U.S. Tariffs on China: Ouch

Activity in Chinese factories slumped in May. The latest data, from May’s purchasing managers index for manufacturing, is both ugly and worrying, Nathaniel Taplin writes. The headline index fell back into contraction—returning to the same level as December. And a decline in new export orders deepened, likely reflecting trade tensions with the U.S. Most concerning of all from Beijing’s perspective, the employment subindex hit its lowest level since 2009.

Happy Anniversary, American Expansion

June marks the 10th anniversary since the end of the last recession. In July, the current expansion will become the longest on record. Signs are pretty good we’ll make it: U.S. economic growth remained robust in the first quarter, though overall the latest stretch of growth has been subpar by historical standards.

There are some immediate clouds on the horizon. The latest government data from the first quarter showed a slowdown in business investment, a decline in corporate profits and muted consumer spending. The outlook for the rest of the year is murky: Manufacturers worldwide are hitting a soft patch, U.S. trade spats with China and Mexico are escalating, the global economy is decelerating and the bond market is relaying investor worries about a U.S. slowdown.

Despite the warning signs, few economists expect an imminent recession. Many are forecasting the expansion to deliver pretty much what it’s been doing for years: growth around 2%, strong job gains, slow but steady advances for wages and a Federal Reserve prepared to intervene if stock and credit markets stumble.

What Else We’re Following

Federal Reserve Vice Chairman Richard Clarida said the U.S. economy is in good shape but that central bank officials would consider interest-rate cuts should data reveal a material risk of a sharper slowdown than expected. “Let me be very clear that we’re attuned to potential risks to the outlook,” Mr. Clarida said.

The Trump administration has decided to approve expanded use of ethanol fuel. The move will help corn farmers hurt by the trade conflict with China. Oil companies and environmentalists say the decision could lead to higher prices at the gas pumps and increase air pollution during the summer months.

Enrollment at colleges and universities fell for the seventh year in a row. There are winners and losers: Enrollment at four-year, for-profit colleges dropped 19.7% while four-year, private nonprofit colleges saw a 3.2% increase. Larger, more academically elite institutions are thriving.

India’s ruling party is planning gradual changes to the economy after winning back-to-back majorities. Prime Minister Narendra Modi is expected to focus on on streamlining rather than large overhauls many economists and executives say would put the country on a higher growth trajectory.

TWEET OF THE DAY
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WHAT ELSE WE’RE READING

Alibaba is China’s most valuable firm. “For the past five years it has also been a hybrid that straddles the superpowers, because its shares are listed only in America. Now it is considering a $20bn flotation in Hong Kong, according to Bloomberg. The backdrop is a rising risk of American retaliation against Chinese interests and the growing clout of Hong Kong’s capital markets. A listing there would be a sign that Chinese firms are taking out insurance to lower their dependence on Western finance,” the Economist writes.

President Trump’s Mexico tariffs are borderline crazy. “Clearly, any such move on tariffs would rip apart the complex web of manufacturing supply chains that crisscross the Mexican border, many of which are as beneficial to U.S. jobs as Mexican ones. … More importantly, though, the sudden and unexpected announcement of tariffs rising as high as 25% deals hard-to-reverse damage to America’s image as a reliable partner,” David Fickling writes at Bloomberg Opinion.

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