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Markets are in correction territory, and the economy is flirting with a recession. There's a lot of concern about the impact of Trump's beloved tariffs, and the judicial system, with the help of a weakened Democrat Party, is trying its darnedest to stymie Trump's efforts to put the federal Leviathan on Ozempic.
In any event, I detect no reason to worry about inflation. I do worry because emerging economic weakness stems from several sources: the fallout from DOGE cutbacks, the fallout from tariff wars, and the ongoing weakness in the housing market coupled with unsustainably high prices and mortgage rates. Another factor may be due to the uncertainty surrounding whether Trump's 2017 tax cuts will be extended prior to year end, when they are scheduled to revert to much higher levels. Worry about growth, not inflation.
Chart #1
Chart #1 compares the year over year change in the CPI index with the same change in the CPI index ex-shelter. It's important to note that the ex-shelter version of the CPI has increased by 2.3% or less for the past 22 months (since May 2023). Only shelter costs have kept the broader CPI from long ago meeting the Fed's objective. And their impact is almost certainly fading away.
Chart #2
Chart #2 focuses narrowly on the rate of inflation in shelter costs. The one- and three-month annualized rates of increase in shelter costs have been declining since mid-2023, and the decline looks set to continue. As it continues, and without any help from the Fed, the gap between the CPI and the CPI ex-shelter (Chart #1) will also decline, and eventually approach zero. We just need to be patient. The decline in shelter cost inflation has taken quite a few months longer than I expected, but nevertheless it is occurring.
Chart #3
Today we learned that the Producer Price Index for Final Demand was unchanged in February, but is still up 3.2% over the past 12 months. Is this a problem? I've always paid more attention to the broader Producer Price Index for Finished Goods, and it has been quite well behaved, as Chart #3 demonstrates. Both the total and core versions are up only about 2% over the past year. More impressive, however, is that the PPI Finished Goods index has only increased by 1.3% since June 2022. That's an annualized rate of increase of only 0.04% over the span of 32 months. PPI inflation is on life support.
If we can make it to year end while avoiding a massive tax increase and runaway tariff wars, the long-term effects of Trump's (stupid) tariff wars and DOGE's cost- and regulation-cutting efforts should be very positive.
8 comments:
Thanks! Very good, as always. Much appreciated.
Why are Trump's tariffs "stupid" when all he is doing is saying the IS will put the same tariffs on you that you put on us?
Also you say that long-term Trump's tariffs will be good, so what is "stupid" about them?
Thank you Scott! Plenty of useful insights, as always.
Re: how can tariffs be stupid and also good. In Trump's view, Imposing tariffs on imports is a way of punishing other nations for their bad trade policies. In reality, the burden of the tariffs falls on Americans. They lower our living standards, and that's stupid. The best tariff is zero, because free trade is proven to raise living standards. What Trump really wants in the end is zero tariffs, but he thinks he needs to first raise them in order to then lower them. I see lower tariffs in coming years, and that will be a good thing.
Correct. As long as tariffs are used as a threat/reality with the true intention of negotiating them lower (to zero), I think the path we are following makes sense. With elections in numerous foreign countries trending Trumps way (Vive POILEVRE!!!!) I am optimistic over the long term. A good quick 1-2-3 punch would be (1) end the Ukraine War; (2) destroy Iran's nuclear facilities; (3) use the tariff threats to lead to a summit conference where lower (zero) tariffs and non-financial barriers would be reduced in stairstep fashion.
Any thoughts on this note? As the main reason for tariffs is more about national security? Bringing manufacturing back to USA? Trump admin is saying we couldn’t build enough ships, tanks, or drones if we had to at the moment due to China “dumping” cheap aluminum and steel?
I understand we would all prefer free trade, but that isn’t feasible. I also think the “living wage” has complicated matters in USA.
China USA
The USA helped lift China out of dire straits decades ago. The trade-off was an agreement: “We will help your country if you allow the USA to trade in China.” China accepted the deal, and it seemed to provide mutual benefits at the time.
Fast forward to today: China is now much closer to being our economic equal. Due to their reliance on what amounts to slave $2 (minimum wage in China) labor practices, they can undercut a significant portion of American manufacturing.
This trade-off is far less beneficial for the USA, especially since China doesn’t even allow many of our top-tier companies into their market.
China now has the ability to disrupt the American economy fairly easily, as we have outsourced so much manufacturing. 95% of Apple manufacturing is now in China. This is what the Trump admin is terming a national security threat. Essential we onshore manufacturing. USA manufacturing is only at 55% capacity currently.
The Trump administration’s aim is to bring manufacturing back onshore to regain control. The trade-off is that we will lose the luxury of cheaper goods produced by cheap labor, which carries a short-term cost and likely some long-term ones as well.
That said, our biggest companies, which dominate the S&P 500, probably need to be evaluated on a case-by-case basis. Apple, for instance, has significant exposure, while Meta likely has minimal exposure.
Thanks for explaining but I'm still unclear: you don't like Trump's desire to use tariffs to "punish" but how else do we get to universal zero tariffs?
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