The Trump Administration gave markets an early Christmas present, when it announced Tuesday that it will delay planned tariffs on a subset of the $300 billion in imports that had been announced Aug 1.
While the news caused stock markets to rally — with the S&P 500 index SPX, -2.60% , Dow Jones Industrial Average DJIA, -2.65% and Nasdaq Composite Index COMP, -2.85% all gaining at least 1.4% Tuesday — investors should be interpreting this not as an easing of trade tensions with China, but as a concession to the U.S. consumer a critically important driver of the current economic expansion and bull market.
“The U.S. consumer is like Atlas, holding the global economy on its back,” Ed Keon, chief investment strategist at QMA, told MarketWatch. “The American consumer has remained strong in a world of increasing political unrest and manufacturing weakness.”
Consumer spending accounts for roughly 70% of annual U.S. economic activity, compared with 50% for Germany and less than 40% for China. The primacy of private consumption for the American economy has helped enable it shrug off a slowdown in business spending in the global manufacturing sector, due to the historically strong financial position of U.S. consumers.
“The consumer balance sheet is terrific,” Keon said, pointing to data on household debt service payments as a percentage of disposable income that remains at historically low levels. Meanwhile, the unemployment rate sits at fifty-year lows, while the number of Americans applying for jobless benefits are at all time lows, relative to the size of the workforce.
Michael Arone, chief investment strategist at State Street, said in an interview that the delay in imposing import tariffs showed “purposeful intent to blunt the effect of rising tariffs on the consumer heading into the end of the year,” given the list of products targeted for the deferment. “The delay in tariffs coincides with the back to school shopping season and the upcoming holiday season,” he said.
Investors should therefore not see yesterday’s announcement as a move toward detente with China, in fact the opposite. While markets reacted positively to the news Tuesday, Mark Haefele, chief investment officer at UBS Global Wealth Management argued in a Wednesday research note that the move shouldn’t improve investors outlook on trade policy.
“Tuesday’s announcement makes it clearer in our view that President Trump really intends to implement the tariffs first threatened in a tweet on Aug 1,” he wrote. “Rather than a negotiating tactic, the tweet was what it appeared to be: another escalation of the trade dispute.”
Andrew Hunter, senior US economist at Capital Economics agreed in a note to clients. “The three-month delay . . . is obviously designed to avoid a politically-damaging rise in consumer prices ahead of the holiday season,’” he wrote. It’s “not an olive branch to China,” he added, and “should not be misinterpreted as a sign that trade tensions are easing.”
Yousef Abbasi, director of U.S. institutional equities at INTL FCStone, told MarketWatch that “Clearly this is a small positive for the U.S. consumer, but I struggle to see how this will help U.S. growth or global growth rebound.”
Tariffs have been a key driver of economic growth slowdowns in Germany and China, Abassi said, and have created uncertainty that has caused U.S. companies to significantly pullback on investment, which has been a drag on growth in America.
Abbasi believes that the U.S. consumer is strong enough to withstand the effects of slower growth, but other analysts like Rebecca Corbin, C.E.O of Corbin advisors have argued that we may be seeing the beginning of a cycle of business retrenchment that will ultimately lead to layoffs, as companies seek for ways to cut costs in a weak economic environment.
Investors will be delivered a key reading on the health of the U.S. consumer, when the Commerce Department issues its estimate of retail sales growth for July Thursday morning at 8:30 a.m. Eastern Time. Walmart Inc. WMT, -0.56% will issue its second-quarter earnings before the start of trade as well, giving investors another look at consumer spending trends at the country’s largest retailer.
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