Thread by @DianeSwonk

The mother of all front running cycles.

Late last year imports starter to pick up, notably from China. The 2018 continued through the next administration but many firms rightly bet that it would escalate via much higher tariffs w/the president’s return.

Then, those gains were turbocharged as tariff threats intensified in the first quarter. Imports soared in what could best be termed the mother of all front-running cycles. They hit a crescendo in March.

Those increase buoyed production across our trading partners. Our trade deficit widened at its fastest pace on record, by nearly double.

At the same time, the consumer became tentative and consumer spending all but froze along with the housing market.

Consumer spending rose a tepid 0.5% annualized rate in the first quarter after surging 4% in the fourth.

Some of that weakness was due to a late Easter and uneven spring breaks. Unusually cold weather in the South curbed mobility and spending, notably at restaurants.

The came the announcements of April 2. That roiled markets and imports collapsed. The trade deficit narrowed at its fastest pace on record in April and in May, imports from China dropped to their lowest share of total imports since 2001. That is the year of their ascent into WTO

Earlier gains boosted production the world over - Ireland saw a 7% surge in GDP due to a huge jump in pharmaceutical exports to the US - tariffs on those have gotten a stay but we now have a lot of drugs in inventory.

Consumers here regained some but not all of their swagger. The rebound in equity prices helped, especially in an economy where Moody’s has estimated that the top 10% of earners accounted for nearly half of consumer spending last year. It looks like spending increase ~ 1.4% rate

That is still weak but better. June retail sales rebounded after falling in May.

Problem. Inequality has a lot of knock off effects. High income households have their basic needs met. They save and make riskier investments than rest of household.

Same time, strapped low & middle income households tend to take on unsustainable levels of debt, which at times can seem a boom to lenders, until it isn’t and defaults pick up.

Delinquencies are still low in wake of pandemic stimulus but rising…

High income households, with more savings tend to make riskier investments as they can afford the losses.

That makes for fertile ground for asset bubbles.

An extreme example was the subprime crisis, which ended with the bursting of the housing bubble and ripple effects.

I don’t know all the places that bubbles are forming but a lot of asset prices look frothy.

Now add another issue. The economic data isn’t designed to capture the speed of the shifts we are seeing. A lot of inputs are estimated off of historic trends and then updated upon revision.

At the same time, budget cuts are crimping data collection..

which means more estimates are based on history or imperfect substitutes.

Nearly 1/3 of the CPI in recent months has been estimated via these methods, which would be fine if the shifts we were seeing were not so rapid.

It is unclear how/if those estimates changed the data.

We know front running mitigated the initial boost to prices due to tariffs.

Much of the goods that we are bought in the second quarter were bought by retailers ahead of tariffs.

Some retailers actually dropped prices as they ran those inventories down & shored up cash flow.

Much of what we are seeing on store shelves still reflect a pre-tariff world.

This is the same time that firms are actively mitigating the effects of tariffs by reshuffling supply chains and increasing the certification of parts that qualify for lower tariffs.

Another factor preserving cash flow is leverage of what are known as bonded warehouses in free trade zones in the US.

Goods come in and are registered as imports but tariffs are not collected until those inventories are withdrawn and drained.

The cost of carrying inventories is not cheap but it is less expensive in many cases than fronting the funds for tariffs before goods are needed.

They enable firms to wait for tariffs to drop, which occurred as many of the most prohibitive of tariffs were paused.

The result is a much smaller initial impact of tariffs and stronger global growth than one would expect.

Disinflation abroad has also helped as most major central banks have been cutting rates, the effects of which are compounding.

Bottom line: Tariffs are distorting the global economy but the effects are nonlinear and compound over time. We will not know all of the effects until later this year and into 2026.

It took year for the full effects of the 2018 trade war to show up as a blow to manufacturing.