|04 September, 2019

U.S. manufacturing slump is a self-inflicted wound

The Trump administration escalated its tariff battle with Beijing over the weekend by imposing a 15% levy on an additional $125bln of Chinese goods

Engines assembled as they make their way through the assembly line at the General Motors (GM) manufacturing plant in Spring Hill, Tennessee, U.S. August 22, 2019.

Engines assembled as they make their way through the assembly line at the General Motors (GM) manufacturing plant in Spring Hill, Tennessee, U.S. August 22, 2019.

Reuters/Harrison McClary

NEW YORK - U.S. manufacturers can’t get a break. American factory activity fell for the first time in three years in August as President Donald Trump’s trade war with China, ostensibly being waged on their behalf, hit home. Fresh tariffs could compound the woes. At least manufacturing’s role in the economy has shrunk. But that underscores the futility of White House policy.

The Trump administration escalated its tariff battle with Beijing over the weekend by imposing a 15% levy on an additional $125 billion of Chinese goods, including smartwatches and footwear. JPMorgan estimates the tariffs adopted to date will cost American households on the order of $1,000 a year in higher prices. At present Washington intends to impose the tax on another $150 billion worth of Chinese imports in December.

Those moves have put a big damper on U.S. manufacturers because they raise the cost of vital parts and the like and chill global trade. China’s retaliatory tariffs have also crimped demand for U.S. goods. In addition to contracting, the Institute of Supply Management’s index showed new orders falling to the lowest level since 2012.

In the past, that would have set recession alarm bells ringing, just like the recent yield-curve inversion as the rate on 10-year U.S. Treasuries fell below that on 2-year notes. Investors didn’t ignore the data, with the S&P 500 Index dropping nearly 1% and U.S. Treasury yields falling on Tuesday. Fortunately, manufacturing is a smaller part of the U.S. economy these days. Goods accounted for just under a quarter of GDP in the second quarter, barely half as much as services, and the sector employs fewer than one in 10 workers, compared with one in six in 1990.

That makes Trump’s obsession with trade and tariffs even more inexplicable. The president deems trade deficits rob Americans of wealth, even though most economists contend they increase consumers’ well-being. The trade war is supposed to be helping manufacturers, yet they are the first to feel the pain. So far the damage has been contained, but the odds of a U.S. recession grow the longer the war is waged. Talk about self-inflicted damage.

CONTEXT NEWS

- Economic activity in the manufacturing sector contracted in August, the first such decline in three years, the Institute of Supply Management reported on Sept. 3. The ISM’s purchasing managers’ index, or PMI, for manufacturing fell to 49.1 in August from 51.2 in July. A reading below 50 indicates the sector is contracting.

- The United States imposed a 15% tariff on $125 billion of Chinese imports including footwear, smartwatches and flat-panel televisions on Sept. 1. The administration of President Donald Trump has proposed increasing duties on an additional $250 billion of Chinese goods on Oct. 1, and imposing a 15% levy on a remaining $156 billion of imports not yet hit with tariffs on Dec. 15.

- China on Sept. 1 put a 5% tariff on imports of U.S. crude oil.

(Editing by Antony Currie and Leigh Anderson)

© Reuters News 2019

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