The Business News Week In Review

Policy moves by the Trump administration, both tariffs and tax cuts, are beginning to shape changes in economic data. Yet one thing that has yet to change is inflation which is still subdued in a marginally climbing trend. This week we'll offer some new graphs to help inform us for the upcoming debates, whether on trade or fiscal policy.

The economy

As background on President Trump's move to impose 25 percent tariffs on imported steel and 10 percent tariffs on aluminum, it's important to consider the effect of trade on GDP -- an effect that has been deeply negative. The second estimate of fourth-quarter GDP was released in the week and showed the trade gap running at an annualized $652.6 billion during the quarter. This is a record and, if extended through the course of a year, comes out to $1.8 billion leaving U.S. shores each day for foreign accounts. This gap, compared to the pace of the third quarter, accelerated by more than $50 billion and ended up pulling down fourth-quarter GDP by 1.1 percentage points. This means that without the trade gap, the quarter's 2.5 percent overall GDP rate would have been well over 3 percent.

The week also included trade data for the month of January, specifically goods trade which is where the U.S. deficit is centered. The goods gap deepened another couple of billion dollars in the month to $74.4 billion and of course another unwanted record. Unless this is reversed by much smaller deficits in February and March, trade will once again hold down GDP, this time first-quarter GDP.

Only a small portion of the goods gap is to blame on primary metals, which is the subcomponent that the steel and aluminum tariffs would directly hit. This gap totaled $3.8 billion in the latest data for this reading which is November. But here it's important to note that this deficit isn't only one way. U.S. firms actually exported a very sizable $4.0 billion in primary metals to foreign buyers in the month as tracked in the blue columns of the graph, a sum that could be at risk should a trade battle for metals begin to open up. What the administration is of course aiming to reduce is the graph's red columns, the roughly $8 billion in monthly imports of primary metals.

But metals could just be the shot over the bow. The deepest zone for the deficit is consumer goods, this includes everything from apparel to household goods with this deficit increasingly running deeper below the $50 billion per month line, at $54.3 billion in advance data for January. Here exports make up an especially small margin, well under the $20 billion line at $18.0 billion in January. This deficit alone totaled $36.3 billion in the month. If the administration wants to cut the drag from GDP, perhaps no other target is richer than narrowing the consumer products gap.

The nation also runs a major deficit for vehicles. This gap is also lopsided against exports, at only $13.9 billion for exports in January vs $30.9 billion for imports. The balance, at minus $17.0 billion, is another rich target. Stepping back and looking at the whole of January's trade report, the results are clearly not positive. Total goods exports fell 2.2 percent in the month with total imports down 0.5 percent in a cross-border combination that hints at a slow start for 2018 global demand.

Taxes also made their appearance in the week's data. The personal taxes component of the personal income & outlays report posted a monthly decline of 3.3 percent in January. This is a rare drop last approached back in January 2016 at 2.1 percent and offers an explanation for the latest surge in consumer confidence. The drop in taxes is not only good for confidence but it's good for income as disposable income, the blue line in the graph, jumped 0.9 percent in the month. This is more than double the strength of its recent run.

And what's good for income should prove to be good for spending. The graph tracks the blue line of disposable income, this time on a year-on-year and inflation-adjusted basis, against the green line of inflation-adjusted consumer expenditures. The blue line, even before the tax cut, was on the ascent and would make a coming shift higher for the green line less than a surprise. Note that real disposable income has been supported the last two years by a very low rate of inflation. Should inflation begin to pick up, gains in nominal income would have to outstrip the inflation rate for the blue line to continue to move higher.

But inflation right now is subdued, the verdict of Federal Reserve Chairman Jerome Powell who made his debut on Capitol Hill during the week. But core inflation, as tracked by the dark blue columns, did post its highest reading, at just under 0.3 percent in January, since January last year. And though Powell also said that wage inflation isn't yet accelerating, average hourly earnings, the light columns, have been showing noticeable pressure, including December at just over 0.3 percent and just over 0.4 percent in January. Note that going out two decimal places is common for monthly inflation readings given their importance.

And there was more news on inflation, news that curiously contrasts with all the concerns in the financial markets over price pressures. Inflation expectations have yet to show any lift at all with the blue line of the consumer stuck at 2.7 percent and the green line for business holding at 1.9 percent. The pink line is the actual CPI which is stalled at 2.0 percent. Markets, that is the sum of investors, are famously believed to anticipate future shifts in the economy, but here investors appear to be anticipating a future lift that consumers and businesses have yet to concede.

The week also included updates on housing, manufacturing and the consumer, all less than inspiring. Slowing is the call for resales as the pending home sales index fell sharply and is pointing to trouble for final sales of existing homes where the year-on-year rate for January had already fallen back below the zero line to minus 4.8 percent. New home sales also disappointed in January, sinking below the zero line on a year-over-year basis to minus 1.0 percent. The rise underway in interest rates is a negative for housing as is a lack of available supply for buyers to choose from, a factor that is especially severe in the resale market.

Disappointment also hit the factory sector as the durable goods report showed wide declines throughout including for the key core capital goods group. Core orders have fallen for two straight months with shipments of capital goods visibly weaker than they were through the middle of last year. The heart of capital goods is machinery and lack of investment here will not only hold down business investment as tracked in the GDP account but will limit future productivity growth.

The first February indication on consumer spending, which has been proving soft lately, doesn't point to any new strength. Vehicle sales could not improve on a subdued January, slipping slightly to a 17.1 million annualized rate in February. Since October's hurricane-replacement boom, vehicle sales have not been showing much life, posting steep declines and significantly holding down growth in two of the last three retail sales report.

But there's one last update that does point to strength and for the most important economic indicator of all -- the monthly employment report. Initial jobless claims fell 10,000 in the February 24 week to 210,000. This was not only lower than expected but it's the best reading in 49 years. The 4-week average is at 220,500 and is trending roughly 15,000 lower than the month-ago comparison which points to increasing demand for labor. Another hint of employment strength comes from the February consumer confidence report where those who describe jobs as currently hard to get fell very sharply. However mixed housing or manufacturing or consumer spending may be, employment is not to blame.

Markets: First rate hike worries, then tariffs

The week opened with focus on Powell and whether he would hint at a fourth rate hike this year vs the three that are already expected. In his first appearance on Tuesday, Powell stressed the strengths of the economy which, whether a hint or not, raised expectations for that fourth hike. On Thursday morning Powell turned the emphasis around, that the strength is not excessive and that overheating isn't a risk. Stocks rallied Thursday morning on the comments before Trump's tariff bombshell at midday gave the market's something new to worry about. Posting major declines on Tuesday through Thursday, the Dow ended the week at 24,538 for a 3.0 percent dip on the week and a year-to-date decline of 0.7 percent.

Markets at a Glance	Year-End	Week Ended	Week Ended	Year-To-Date	Weekly
	2017	23-Feb-18	2-Mar-18	Change	Change
DJIA	24,719.22	25,309.99	24,538.06	-0.7%	-3.0%
S&P 500	2,673.61	2,747.30	2,691.25	0.7%	-2.0%
Nasdaq Composite	6,903.39	7,337.39	7,257.87	5.1%	-1.1%
Crude Oil, WTI ($/barrel)	$60.15	$63.55	$61.46	2.2%	-3.3%
Gold (COMEX) ($/ounce)	$1,305.50	$1,333.30	$1,322.00	1.3%	-0.8%
Fed Funds Target	1.25 to 1.50%	1.25 to 1.50%	1.25 to 1.50%	0 bp	0 bp
2-Year Treasury Yield	1.89%	2.25%	2.24%	35 bp	−1 bp
10-Year Treasury Yield	2.41%	2.87%	2.86%	45 bp	−1 bp
Dollar Index	92.29	89.88	89.96	-2.5%	0.1%

The bottom line

One outcome of rising tariffs is inflation, that the charges will be passed along to domestic buyers. This was actually cited by respondents to February's Chicago PMI report who blamed prior increases in imported steel tariffs for current upward pressure on input costs. And that was before any new tariffs. But for now inflation is a theoretical threat, not an immediate one. And as far as GDP goes, a very direct way to give it a major boost is to narrow the nation's import/export gap.