Manufacturers Hit the Pause Button

We see increasing evidence that business decision makers are taking a wait-and-see approach on the economy, putting investors and the Federal Reserve on edge. The President’s inimical trade tariffs have the potential to reverse policies that have been in place for the last 40 years, undercutting industrial companies that have optimized their global supply chains based on free trade flows. Trump’s trade tariffs threaten nearly $260 billion of imported goods, most of which arrive from China. The impact will be largely borne by consumers, since we import mostly finished goods from China.

The most recent trade threats against Mexico, however, would have a bigger impact on the industrial economy than does China, since Mexican trade tends to be in intermediate goods, like automobile parts, energy and agriculture. Trade between the US and Mexico amounted to $575 billion last year.  Auto parts & accessories imports accounted for $115 billion, of which Michigan imported $56 billion, more than 10 per cent of the state’s GDP, according to a recent report in The New York Times. An agreement was reached on Saturday in which the US suspended tariffs set to take effect on June 10 in exchange for Mexico’s pledge to help stem the flow of illegal Central American immigrants into the US. However, the tariff threat will be revisited if Mexico does not keep its end of the bargain; many observers believe it will be unable to do so.

Manufacturers have hit the pause button on hiring. Employers have added only 5,000 net new manufacturing jobs since March, according to the Bureau of Labor Statistics. Moribund manufacturing will undoubtedly have an impact on growth this quarter. It will be interesting to see how a petulant president grapples with self-inflicted economic deceleration going into the 2020 election season.