Tariffs 2.0

The Trump administration unveiled?the next focus of tariffs:?cars, chips and drugs. According to reports, the Trump administration?plans to impose 25% tariffs?on these sectors, although?specifics of the scale and on which countries?remain?unclear.?An announcement?is reportedly?scheduled for April 2nd.??

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Taking a step back, recall, the administration’s focus on tariffs?began with import barriers on Chinese, Canadian?and Mexican?goods. A 10% tariff was ultimately implemented on goods from China on February 4th, while the tariffs on Canadian and Mexican imports were delayed a month and set to take effect in March.

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Along the way, on January 27th, the Trump administration also threatened a 25% tariff on goods from Colombia after the country refused to accept deported migrants from the U.S. The tariff, however, was later removed after Colombian President Gustavo Petro agreed to accept the Colombian migrants.

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Last week, the focus shifted to metals. The Trump administration announced a 25% tariff on all steel and aluminum imports set to begin on March 12th.

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While the scope of tariffs continues to expand, the impact on the?economy, however, still remains uncertain.?From an inflation standpoint, a onetime price increase, while uncomfortable for consumers already burdened by years of elevated prices lacks the “inflationary” implications some fear in terms of perpetual upward momentum in costs. However, escalating trade disputes resulting in a perpetual “tit for tat” response do risk sustained price pressures that under more extreme conditions could translate into higher inflation by as much several tenths of a percentage point on an annual basis.

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Thus far, the international response has been measured.?Following the implementation of tariffs on Chinese goods, Chinese officials imposed a 15% tax on imports of $5 billion in U.S. energy and a 10% fee on American oil and agricultural equipment. Additionally, in response to the steel and aluminum tariffs, the European Union vowed to take "firm and appropriate" countermeasures, acknowledging the U.S. is the second biggest export market for EU steel and represents about 16% of total EU steel exports.

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Following a disappointing?retail sales report on Friday showing headline activity fell 0.9% in December, forecasts for Q1 GDP were revised down. GDP is expected to rise 2.3% in the first quarter, according to the Atlanta Fed GDPNow model, a notable revision from the 2.9% gain previously forecasted.?Combined with a further burden of tariffs, under the more extreme?scenarios could shave as much as several tenths of a percentage point off topline GDP, thus threatening a loss of momentum to sub 2% in the near term.?

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A further burden of tariffs?under the more extreme?scenarios could shave as much as several tenths of a percentage point off topline GDP, thus threatening a loss of momentum to sub 2%. ?

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On the economic?calendar, yesterday, the Empire Manufacturing Index rose from -12.6 to a reading of +5.7 in February, the highest reading in three months.

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In the details of the report, prices paid rose from 29.1 to 40.2, prices received increased to a reading of 19.6 from 9.3 the month prior, inventories rose from 5.8 to a reading of 8.7, and new orders increased from -8.6 to +11.4 in February, a three-month high. On the other hand, the number of employees fell from +1.2 to -3.6, and the six-month general business conditions index declined from 36.7 to 22.2 in February, the lowest reading in nine months.

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Also, yesterday, the NAHB Housing Market Index dropped five points to a reading of 42 in February, a five-month low.

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This morning, housing market activity slowed more than expected at the start of the year, reflecting unfavorable weather conditions across much of the country ranging from wildfires in California to winter storms across the mid-Atlantic and Northeast. Housing starts fell 9.8% in January, surpassing the expected 7.3% decline and pulling the annual pace down from 1.52M to 1.37M, a two-month low.?On a regional basis, starts fell in three of four regions of the country, declining 27.6% in the Northeast, 23.3% in the South, and 10.4% in the Midwest. Starts rose, however, 42.3% in the West at the start of the year. Single family starts declined 8.4%, while multi-family starts dropped 13.5% in January following a 51.8% rise the month prior. Year-over-year, housing starts fell 0.7% in January, the fifth consecutive month of an annual decline.

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Building permits, meanwhile, rose 0.1% in January, pulling the annual pace up slightly from 1.482M to 1.483M, a two-month high. According to the median forecast, permits were expected to fall 1.5% at the start of the year. Single family permits were unchanged, while multi-family permits increased 0.2% in January following a 6.0% drop in December.

Year-over-year, building permits slipped 1.7% in January, marking a full year of an annual decline

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Additionally, this morning, MBA mortgage applications fell 6.6% in the week ending February 14 following a 2.3% rise the week prior. The 30-year mortgage rate, meanwhile, declined 2bps to 6.93%.

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Later in the afternoon at 2:00 p.m. ET, the meeting minutes from the January FOMC meeting will be released.

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Tomorrow, initial jobless claims, the Philly Fed Business Outlook Index, and the Leading Index for January will be released.

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Wrapping up the week, on Friday, the S&P Global U.S. Manufacturing, Services, and Composite PMIs, the final February University of Michigan print, and January existing home sales reports will all be released.

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-Lindsey Piegza, Ph.D., Chief Economist