Please disable your Ad Blocker to better interact with this website.

Image Image Image Image Image Image Image Image Image Image

Affluent Christian Investor | May 22, 2019

Select a Page:
Select a Page:
Scroll to top

Top

Email Featured
No Comments

Consumption Is America’s Achilles’ Heel In A Trade War

US household budgets are so stretched that relatively small price increases cause a reduction in spending. That already is clear from consumer response to rising oil prices.

If the Trump administration’s tariffs on Chinese and other imports turn into noticeable price increases, consumer spending could crumple in a matter of months, and US economic growth could fall to close to zero from an estimated 2.8% to 4% for the second quarter.

Tariff-driven price increases on big-ticket household items – such as the 8% year-on-year jump in the price of washing machines last month – would provoke consumer pushback and lower consumer spending.

The Trump recovery would begin to falter before the end of 2018. Nothing like the 2008 crash is in the offing, to be sure, but a disappointed consumer economy means an angry electorate, and political blowback against the administration’s tariff policy.

Let me spell it out in a few charts.

First, the 2.7% annual growth in hourly earnings is now equal to the annual rate of increase in the Consumer Price Index. By this measure, employment growth has brought no real increase in spending power.

Secondly, consumers are saving barely 2.5% of their personal income. That’s equal to the low savings rate registered in 2007, when households still sat on a decade’s worth of capital gains in home prices. With real wages stagnant, consumers are spending virtually all their personal income.

Third, consumer debt service as a percentage of disposable income has risen back to the levels we last saw just before the 2008 crash.

Nonetheless, households continue to use their credit cards to pay for consumption. During the past year, we observed a tick-for-tick correspondence between changes in credit card debt outstanding and changes in retail sales.

I observed in a June 30 report for Asia Times that household consumption already shows a worrying sensitivity to oil prices. Monthly changes in consumption move inversely with monthly changes in the oil price. In other words, when the cost of a tank of gas goes up, US consumers immediately cut back on purchases of something else.

For the past 20 years, falling inflation has been a bifurcated story. The cost of services is up 80% in the past two decades, while the cost of durable goods has been by 20%. That’s because the price of smartphones, consumer electronics and household appliances has fallen due to cheap imports from China and other low-cost producers.

 

Tariffs will raise the price of consumer goods, adding to the already-noticeable impact of oil prices on consumption. China’s exports to the US go straight into the US consumption basket.

President Trump’s political base of middle-class households will feel the pain almost immediately. Americans have come to expect low prices for consumer durables, and they won’t like it if they have to pay more at a moment when household budgets are already squeezed by zero real wage growth and rising debt service costs.

A trade war will be painful for both China and the United States. Americans aren’t used to this particular kind of economic pain. That makes the United Stats more vulnerable than China.

A trade war is a lose-lose proposition, but the administration should not operate under the illusion that China is more fragile than the United States.

 

 

This article originally appeared on Asia Times.

 

Join the conversation!

We have no tolerance for comments containing violence, racism, vulgarity, profanity, all caps, or discourteous behavior. Thank you for partnering with us to maintain a courteous and useful public environment where we can engage in reasonable discourse.

Trending Now on Affluent Christian Investor

What We’re Looking At Today

  • Full video: Jordan Peterson on the Channel 4 Controversy and Philosophy of "How to be in the World"
    January 28th, 2018
  • Be Grateful for the Intelligent Design of Your Eyes
    December 23rd, 2017
  • TAX REFORM: The Most Important Things You Need to Know
    December 22nd, 2017
  • What Is 6th Gear? » Intermittent Fasting And Keto
    December 18th, 2017
  • DiscoveryInstitute
    December 7th, 2017
  • The King’s Choice – SAMUEL GOLDWYN FILMS
    October 12th, 2017

    • Follow Us

    Facebooktwittergoogle_plusrss

    Like us on Facebook

    Affluent Investor

    The Affluent Mix

    Become An Insider!

    Sign up for Affluent Investor's free email newsletter and receive a free copy of our report, "How the Trump Impeachment Crusade Costs you Money ."

    Send this to a friend