The booming economy trumps Trump’s trade battle with China

Trump’s trade war with China, blasted by pundits and economists, is not rattling investors. That was the message from traders Tuesday, who sent stock averages soaring in the face of the latest round of American tariffs on Chinese imports and Beijing’s retaliatory response.

How can that be? How could stocks go up in the face of a clear escalation of trade tensions? Three answers:

• The tariffs could have been worse;
• the Trump economy is still on fire; and
• some analysts may be cheering the White House’s efforts to curb Beijing’s unfair trade practices.

First, the imposition of a 10-percent tax on $200 billion of goods flowing in from China was less than the 25-percent tariff that had been threatened by President Trump.

The lower fee will be in place through year-end, and then it will increase to 25 percent if no progress has been made on the issues at stake: China’s theft of intellectual property, its subsidies of domestic businesses and its illegal dumping of commodities in global markets.

China’s response was also not as severe as expected. The 5-10-percent taxes levied on $60 billion of U.S. imports into China were less than the anticipated charges, which ranged up to 25 percent.

In addition, as Commerce Secretary Wilbur Ross noted on CNBC, Americans will not be much impacted by the new 10-percent tariffs: “Nobody is going to actually notice [prices hikes] at the end of the day,” he said. They will be “spread across thousands and thousands of products.”

Overall, there was some relief that both countries appeared willing to take a more tempered path and that neither ruled out further talks. It wasn’t just U.S. markets that advanced; Asian markets rallied, too.

Second, the economic news is simply too upbeat to be sideswiped by a modest hike in tariffs charged on products coming into the U.S.

Goldman Sachs recently issued a report in which it stated the chances of a recession occurring over the next three years is “low” and, indeed, below the historical average. This, as the expansion is in its 10th year and will soon be the longest ever recorded.

Ed Hyman, at ISI Evercore, published a report for clients reviewing several indicators that typically forecast a recession — everything from average hourly earnings to housing starts, leading indicators, S&P earnings and more — and concluded that according to those traditional signals, a downturn is 2.5 to 7 years in the future.

What will keep it going? Consumer optimism and spending, for one thing. The University of Michigan recently reported that its index of sentiment surged unexpectedly in September, to 100.8 from 96.2 in August, considerably higher than the 96.7 expectation. The reading is the second-highest since 2004, trailing only the level recorded in March of this year.

On an even more positive note, the data point for respondents’ feelings about the future was the best since 2004. One item causing the improved sentiment was reduced concerns about inflation.

Optimism about jobs and incomes guides consumer spending, which is on the uptick. Retail sales last month were up 6.6 percent, year-over-year, and are likely to climb higher as we approach the end of the year. That’s the bet retailers are making as they staff up for what they clearly expect to be a booming holiday season.

The Wall Street Journal reported there are some 757,000 retail jobs open across the country, up about 100,000 from a year ago. For example, Target recently announced that it planned to hire 120,000 seasonal workers, a rise of 20 percent from last year. 

It’s not just the consumer sector doing well. Industrial production increased 4.9 percent, year-over-year, last month — the biggest jump since 2010.

Not all segments of the economy are prospering. Homebuilding has been a laggard, having posted a slowdown in the first half of this year. Housing starts have been disappointing, running most recently at an annual rate of 1.168 million units last month, according to the Commerce Department.

Analysts had forecast a 1.260-million-unit rate and attributed the shortfall to rising mortgage rates and higher homebuilding costs.

A recent survey of homebuilders suggested the sector may be about to turn up. A report from the National Association of Home Builders/Wells Fargo showed confidence among participants unexpectedly holding steady, reflecting solid demand and declining costs.

A reading of the group’s six-month sales outlook increased for first time since February, while an index of current sales gained modestly.

This improving outlook comes against a backdrop of rising household formations, as millennials enter the pool of would-be home buyers and growing incomes. The Census Bureau reported that owner-occupied households rose to a record-high last quarter. This sector could be a plus to growth in 2019.

A problem for homebuilders, shared by other sectors, is the difficulty finding qualified workers. The tight employment market is considered a headwind for growth, but the continued low worker participation rate suggests that rising wages could lure more job seekers into the marketplace.

The labor force participation rate in August stood at 62.7 percent, down slightly from the month before.

As recently as 2008, that figure was above 66 percent. If we got back to that level, with a civilian workforce of 258.1 million, we would be adding another 8.5 million workers. That would allow considerable further expansion.

There will definitely be speed bumps ahead. For now, this economy is humming and can absorb some pressure from President Trump’s trade battles.

The White House cites, as have previous administrations, egregious intellectual property theft by Chinese actors, estimated to be costing between $225 billion and $600 billion per year. That seems rationale enough for tough measures; now is the time to push back.