WALL STREET WARNS: Trump's trade policies could bring the US back to an economic horror from the 1970s

From: google news
publisher: Sheeran ma
Time: 2018-08-02
Summary: In a broad effort to rearrange global trade relationships, President Donald Trump has slapped tariffs on some of the US's biggest business partners. And as effects of protectionism kick in, analysts caution against heading toward a repeat of the 1970s, when rising inflation, high unemployment levels, and stalling growth plagued the economy.

In a broad effort to rearrange global trade relationships, President Donald Trump has slapped tariffs on some of the US's biggest business partners. And as effects of protectionism kick in, analysts caution against heading toward a repeat of the 1970s, when rising inflation, high unemployment levels, and stalling growth plagued the economy.

Washington and Beijing have followed through with $34 billion worth of tariffs on each other, and Trump has threatened to impose additional duties on as many as all Chinese goods sent to the US. Trump has also started trade fights with Canada, the European Union, and Mexico.

In a recent note, Macquarie analysts wrote that protectionism "could start influencing inflationary expectations, including a potential for stagflation, as wholesale prices rise."

Tariffs so far have put upward pressure on input costs, which can work their way through the supply chain and lead firms to pass costs on to customers. In July, prices charged for goods and services rose at a record pace on the Markit purchasing managers' index.

Analysts also caution that fiscal stimulus is poised to slow down around the world relative to the US, which could magnify this effect. Trump signed into law a sweeping $1.5 trillion tax overhaul last year and a $1.3 trillion spending bill in March.

"That obviously could continue to pressure US inflation higher compared with elsewhere, not least if we add into the equation aforementioned issues concerning protectionism, oil prices and latecycle wage pressures," analysts at Nomura said in a recent note.

Stagflation, however, is also characterized by high unemployment, and that is far from the case in the US. In fact, the unemployment rate has fallen to near multidecade lows this year.

But in the face of a global trade war, that could quickly change. As tariffs raise costs, it can begin to weigh on company profit margins. For example, The Washington Post reports that one Indiana lawn-care company, Brinly-Hardy, recently cut nearly 40% of its workforce because of the trade war.

Analysts expect protectionist policies to begin chipping away at economic growth in the US and around the globe, if they haven't already. Financial reports out in recent weeks show some companies have dimmed their earnings outlooks for coming quarters, citing uncertainty around tariffs.

"No one wins in a trade war: global growth would suffer despite local inflation," Bank of America Merrill Lynch analysts wrote in a note last month. "Tariffs plus higher oil prices equal 'bad' inflation that could offset the consumption boost from higher wages/tax reform. We see stagflation as the biggest risk to equities."

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