GDP: Trump tariff, trade war hit to economy

President Donald
Trump
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• The US economy grew by 3.5% in the third quarter, according
  to Friday’s GDP report.
• Ther GDP report also showed major distortions because of
  President Donald Trump’s tariffs on Chinese goods and metals.
• Trade took a major bite out of growth, dragging down GDP by
  1.78 points, the worst number in 33 years.
• Companies also built up inventories in a rush to import goods
  before they were subject to tariffs.

There’s mounting anecdotal evidence that President
Donald Trump’s trade war is causing trouble for the US
economy and businesses. But Friday’s third quarter GDP report may
be the best hard evidence yet that the tariffs are causing major
disruptions in the economy.

Headline third
quarter GDP came in at 3.5%. But the contribution of net
exports of goods and services to GDP — the measure of how much
trade added or subtracted to GDP growth — was a dismal minus-1.78
percentage points:

• The drag on GDP was the largest negative contribution to GDP
  growth for trade in 33 years — trade subtracted 1.91 points from
  GDP in the second quarter of 1985.
• In other words, if trade was a net neutral, neither adding
  nor subtracting from GDP, third quarter GDP would have been a
  dynamite 5.3%.
• If trade matched its average contribution since 2015, a 0.33
  point drag, GDP would have come in at 5%.

Uncertainty over trade policy may have also contributed to muted
growth in capital expenditures by businesses. Nonresidential
fixed investment — spending on large-ticket items like equipment
— added only 0.12 points to GDP, the lowest in seven quarters,
while overall fixed investment was a 0.04-point drag, the worst
in 10 quarters.

Companies have said trade policy uncertainty and the possibility
of tariffs will
push up costs elsewhere will curb
capex spending.

But the tariffs may have also helped prevent the GDP report from
coming in softer than expected. Similar to the second quarter’s
sudden surge in exports (mostly soybeans), inventories surged in
the third quarter and added 2.2 percentage points to GDP.

Michael Feroli, an economist at JPMorgan, surmised that many
businesses imported goods before they were hit by tariffs which
helped boost the inventories number.

“This may have reflected front-loading of imports (which
increased at a 9.1% rate) ahead of scheduled tariff increases —
imports which then end up temporarily in stockpiles,” Feroli
said.

That could mean companies rushed to import goods from China
that were about to get hit by tariffs, stockpiling those items
before they got more expensive.

But the sudden inventory build is unlikely to last. Ian
Shepherdson, chief economist an Pantheon Macroeconomics, said the
huge drag from trade may lessen slightly going forward, but the
counterbalancing inventory build is even more likely to
reverse.

“Trade likely will be a drag in Q4, though much less than
Q3,” Shepherdson tweeted Friday. “But there’s zero chance
inventories will repeat their Q3 add, so jointly they’ll be a
drag on growth.”

The GDP report follows a series of surveys and anecdotal
evidence from companies that suggest the tariffs are causing
trouble.

The Federal Reserve’s Beige Book, a collection of interviews with
business executives from each of the Fed’s 12 districts, was
chock full of concern about possibly costs from the tariffs. And
many major corporations — from Tesla to 3M — have warned that the
tariffs will added tens of millions of dollars to their costs
going forward.