Weekly Economic Release Summary: Placing Too Much Emphasis On the Effects of Import Duties

U.S. Treasury revenue growth has continued to accelerate. What portion of this revenue is due to import duties?

The graph below shows that the rolling averages (red line) for U.S. Government tax revenues are at a three year high.

Year-over-Year Change in US Government Receipts - Monthly (blue line) and Three Month Rolling Average (red line)

The following graph shows the jump in revenue from custom's duties.

For the fiscal year-to-date, Customs Duties collected are $44,866 million, whilst the last fiscal year for the same period was $24,809 million, This means:

  1. Duties are currently 2.0% of the federal receipts;
  2. Federal tax receipts for this fiscal year to date have grown $50,376 million;
  3. Duties have increased $20,057 fiscal year-to-date.
  4. Duties therefor account for 39.8% of the revenue increase in the current fiscal year.

The bottom line is that even without the increase in duties, there is still an increase in revenues - just proportionally smaller.

Many economists and pundits say that the consumer pays for import duties. Yet, this has not been the case - there has been NO overall increase in the cost of imported goods.

Year-over-Year Change - Import Prices (blue line) and Export Prices (red line)

Common economic wisdom concerning tariffs never envisioned the value-added supply chains that are evident in the 21st century. Economic theory is based on the world that existed at the turn of the 20th century - and the world economies ran on the gold standard.

Economists will continue to be wrong on tariffs as there are so many ways tariffs are mitigated in the process including currency devaluations, source swapping, and business eating the increase.

Another point is that half the proceeds of government revenues (black line on the graph below) are returned to the consumers in the form of transfer payments.

Common wisdom places too much emphasis on the effects of duties. They are a tool in any country's bag-of-tricks to be used to even the playing field. All countries have a duty and regulation wall which prevents free trade - some much more than others. Most trade walls are implemented to try to give domestic businesses a leg up over foreign competitors.

Economic Forecast

The Econintersect Economic Index for July 2019 long term decline began in July 2018 - and continued this month. Our forecast is approaching closer to the zero growth line. There currently is a disconnect between GDP and the Econintersect Economic Index. Because inventories rise and trade falls going into economic slowdowns [which increases GDP]- one can suggest that GDP is a lagging indicator to the underlying economy.

The fundamentals which lead jobs growth are now showing a slowing growth trend in the employment growth dynamics. However, we expect jobs growth over the next six months to exceed the growth needed to maintain participation rates and the employment-population ratios at the current levels.

Economic Releases This Past Week

The following table summarizes the more significant economic releases this past week. For more detailed analysis - please visit our landing page which provides links to our complete analyses.

Economic Release Summary For This Week

ReleasePotential Economic ImpactComment

May Construction Spending

very much into contraction

The headlines say construction declined month-over-month. Our analysis shows the rolling averages declined - and this sector is now deep in contraction. The rolling averages declined. Also note that inflation is grabbing hold, and the inflation-adjusted numbers are deep in contraction.

June ADP Employmentemployment confirming slowing economy

ADP reported non-farm private jobs growth at 102,000 which was well below the range of expectations. A quote from the ADP authors:

The job market continues to throttle back. Job growth has slowed sharply in recent months, as businesses have turned more cautious in their hiring.

This month the rate of ADPs private employment year-over-year growth is well below the tight range seen over this year. The rolling average of the year-over-year rate of growth declined for the last two months after being unchanged for the previous 8 months. Last month's employment numbers were revised up (but they are still terrible).

May 2019 Sentier Median Household Incomesuggests median income growing much slower than GDP

New data from the monthly Current Population Survey (CPS), indicate that median annual household income in May 2019 was $63,799, down $353 or 0.6 percent from April 2019.

The median is now 3.4 percent higher than the median of $61,722 in January 2000, the beginning of this statistical series.

The May 2019 median of $63,799 is 0.9 percent higher than that for May 2018, when the median stood at $63,257.

May CoreLogic Home Pricessome improvement

CoreLogic's Home Price Index (HPI) shows that home prices in the USA are up 3.6 % year-over-year (reported up 0.9 % month-over-month). CoreLogic HPI is used in the Federal Reserves' Flow of Funds to calculate the values of residential real estate. The quote of the day was in this data release:

.... buyers feel that high prices are forcing them to spend more than they'd expect on a home ....

May Trade Datanegative effect on GDP as trade balance worsened

Trade data headlines show the trade balance grew - and both exports and imports grew.

The data in this series wobbles and the 3-month rolling averages are the best way to look at this series. The 3-month averages slowed for exports but accelerated for imports.

Headlines said Imports of goods were up month-over-month - import goods growth has positive implications historically to the economy. Econintersectanalysis shows unadjusted goods (not including services) growth accelerated 0.1 % month-over-month (unadjusted data) - up 2.0 % year-over-year (up 2.1 % year-over-year inflation adjusted). The rate of growth 3-month trend is accelerating (rate of change of growth improved).

Headlines said Exports of goods were up month-over-month, and Econintersect analysis shows unadjusted goods exports growth decelerated (not including services) 0.2 % month-over-month - down 1.7 % year-over-year (down 1.0 % year-over-year inflation adjusted). The 3-month rate of growth trend is decelerating.

May Factory Ordersinflation-adjusted sales in contraction

US Census says manufacturing new orders declined month-over-month. Our analysis shows the rolling averages declined, and inflation-adjusted growth is in contraction year-over-year.

According to the seasonally adjusted data, it was civilian/military aircraft which caused the decline. The data in this series is noisy so I would rely on the unadjusted 3 month rolling averages which declined.

June BLS Employmenton surface strong growth

The headline seasonally adjusted BLS job growth was well above expectations. BLS reported: 224K (non-farm) and 191K (non-farm private). The headline unemployment rate worsened 0.1 to 3.7 %.

The establishment and household surveys reasonably correlated. This was a rather well-balanced jobs report. Jobs growth in 2019 is worse than any year since 2010.

The following chart compares the jobs gains this month with the same month historically:

The trends clearly continue to show a slower growing employment picture. Clearly, the Federal Reserves continued statements about an improving jobs situation is bogus.

The economically intuitive sectors were positive.

Surveyssurveys this week showed very weak growth

June Markit and ISM Manufacturing Index - The ISM Manufacturing survey declined but continued in expansion. The key internals slowed. The Markit PMI manufacturing Index remained barely in positive territory but insignificantly improved. Based on these surveys and the district Federal Reserve Surveys, one would expect the Fed's Industrial Production index growth rate to be around the same level of growth as last month. Overall, surveys do not have a high correlation to the movement of industrial production (manufacturing) since the Great Recession. The ISM and Markit manufacturing surveys were similar this month.

June Markit and ISM Services Index - The ISM non-manufacturing (aka ISM Services) index and the Markit PMI Services Index continued their growth cycle but both declined. Both services surveys are in expansion. The Markit Services index is near no growth.

Weekly Rail CountsDefinitely not positive news

Rail so far in 2019 has changed from a reflection of a strong economic engine to contraction. Currently, not only are the economic intuitive components of rail in contraction, but the year-to-date has slipped into contraction.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Economy

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