Photo: Creativa Images / Shuttesrtock
By Shawn Donnan (Bloomberg) — One big headline from Friday’s initial report on first-quarter U.S. gross domestic product is the boost growth received from the fallout of President Donald Trump’s trade wars. Yet below the surface are signs of how his disruptive approach to trade is also dampening growth in a way that may be more worrying for the long term.
While net exports contributed almost a third of the 3.2 percent annualized pace of growth in the first three months of 2019, there were also signs of the drag posed by what economists and businesses have for months been warning has been a slowdown in investment due to uncertainty about Trump’s trade policies.
Non-residential investment grew at a 2.7 percent pace, the weakest first-quarter result of the Trump presidency. Investment in equipment rose by just 0.2 percent while the capital allocated to non-residential structures such as factories and oil wells actually declined by 0.8 percent.
Among the softest spots: purchases of agricultural equipment, which plunged as farmers continued to deal with the fallout of tariffs that have hurt exports of products such as soybeans. The saving grace: An 8.2 percent increase in investment in intellectual property products such as software.
It has been difficult to disentangle the impact of Trump’s trade wars — good or bad — from the overall economy and worth remembering that the impact of anything related to trade on the U.S. is very different from that of export-dependent economies like Germany. Exports made up just 13.6 percent of U.S. GDP in the first quarter.
There is no doubt Trump administration tariffs on a range of products from China and more specific targets such as steel and washing machines have contributed to investment in many protected sectors, though how much remains murky with trade far from the only factor companies take into consideration when building a plant.
But harder to determine is the impact on broader investment, with economists struggling to quantify the impact of the higher uncertainty brought by Trump’s trade policies on business decisions.
Some in the Trump administration call that uncertainty the bitter medicine that the U.S. economy needs to take to unwind decades of self-harm via trade policy. But other analysts also see that uncertainty and the slowdown in investment as a drag on the U.S. economy’s long-term growth potential. Investing less today likely means less growth tomorrow.
In January the monthly Survey of Business Uncertainty led by the Federal Reserve Bank of Atlanta found that the U.S. private sector had reduced capital investment by 1.2 percent, or $32.5 billion, in 2018 as a result of the tit-for-tat tariff wars Trump provoked with trading partners.
The biggest contributor to that was manufacturing, for which the trade tensions provoked a 4.2 percent ($22 billion) reduction in capital investment. By way of comparison the Trump administration says its renegotiated Nafta, which is now awaiting congressional approval, will lead to $34 billion in new investment in the auto sector in its first five years.
Steven Davis, who studies the economics of uncertainty at the University of Chicago’s Booth School of Business and works with the Atlanta Fed on its survey, says those aren’t big numbers in the $21 trillion U.S. economy.
They also, however, represent just one impact from the trade wars that he sees as a drag on growth. “It’s very hard to see them as a net positive for the U.S. economy,” Davis said of Trump’s policies.
There are questions about how fleeting the boost to the headline growth figure from net exports will be. It was due largely to the impact of slower imports in January and February caused by the overhang of a rush of imports from China last year to get ahead of a tariff hike threatened by Trump and later shelved. With a deal between the U.S. and China now seeming nigh, many economists expect a return to more normal patterns of trade.
The first-quarter trade picture was also incomplete, with March merchandise data delayed until May 3 thanks to the government shutdown earlier this year. And there are signs March was a stronger month for imports than January and February. At the Port of Los Angeles, the largest U.S. port, March imports volume was up 12.7 percent from a year ago after contracting 2.7 percent in February.
© 2019 Bloomberg L.P
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