with Brent D. Griffiths


President Trump's trade war is crimping economic growth to the 2 percent pace he assailed as unacceptable in the Obama years. 

That's the implication of new research from a group of Federal Reserve economists. They just released a first-of-its-kind study by the central bank to attempt to quantify the impact of the trade fight on GDP. 

The researchers examined hundreds of corporate earnings-call transcripts and news stories to assess rising uncertainty spawned by the trade war and arrived at an estimated tab for it. The trade war, they estimate, will shave 1 percent off of growth through the early part of 2020.

That may not seem huge, but it's the difference between where growth has been tracking lately — bumping along at the respectable but unimpressive 2 percent level Trump blasted under President Barack Obama — and the 3 percent clip that Trump promised to deliver at a minimum. New data show further economic weakening, with the Atlanta Fed trimming its third-quarter GDP forecast to an annualized rate of just 1.5 percent. 

The Fed researchers lay some blame on Trump’s tariff escalation, writing that had he not ramped up import duties this spring, “the drag on GDP would have already started to ease in the second half of 2019.” 

And they expressed doubt that the president would wind down the hostilities any time soon. “While it is possible that negotiations will eventually lead to a more open and fair global competitive landscape, developments so far have resulted in an increase in uncertainty about the outlook for global trade,” the researchers wrote. “Higher uncertainty could lead firms to delay their investment and reduce their hiring, lower consumer confidence and spending, and ultimately curtail economic activity around the world.” 

Fed policymakers have struggled to fit the trade war — a massive, continuously shape-shifting shock to the global supply chain — into their decision-making. Moved in part by trade war uncertainty, the central bank last month cut interest rates for the first time since the financial crisis. It looks almost certain to do so again in two weeks. 

The Fed economists’ attempt to quantify the trade war damage probably will factor in what’s shaping up to be a spirited debate among central bank policymakers about what to do next. “I think the research staff is looking to keep abreast of any topical issues that would change how they would adjust their macro forecast,” Derek Tang, an economist at LH Meyer Inc., an economic-forecasting firm, tells me. “The difficulty with trade policy uncertainty is there’s no set guide as to how to incorporate it into a forecast. There are very few test cases.”

Tang said the report, which posted to the Fed’s website Wednesday, has generated a lot of buzz among policymakers. “There are lots of people very focused on how the Fed sees itself equipped to deal with this issue,” he said. 

Trump has mostly sought to blame the Fed for any economic sluggishness, criticizing the central bank for not cutting interest rates far or fast enough. But he acknowledged again this week that the trade war is imposing pain at home, arguing the Dow Jones industrial average would be 10,000 points higher if he had avoided the matter altogether. He said China’s trading abuses forced his hand. “Somebody had to do this,” he told reporters Wednesday. Precisely what “this” is — and what outcome would satisfy the president and convince him to wind down the confrontation with China — continues to befuddle forecasters, investors and business executives alike. 

U.S. and Chinese negotiators are set to meet next month to resume talks, news that sent stocks soaring Thursday. Yet two new tariff escalations are scheduled to bite in the weeks ahead: On Oct. 1, levies on $250 billion of Chinese imports will ratchet up from 25 percent to 30 percent; and on Dec. 15, all the rest of Chinese goods, a total worth $300 billion, will face a 15 percent tariff.

“Overall, the hit is hard,” says Beth Ann Bovino, chief U.S. economist at S&P Global Ratings. “While the trade dispute hurts and is causing market uncertainty, and businesses are starting to get gun-shy about investing, the domestic side of the equation is holding up rather well, which gives us a cushion.”

The Fed will get another important clue about the strength of the domestic economy, and what damage the trade war may be wreaking, with the release of the August jobs report this morning. Employers cut 10,000 jobs in August because of trade pressures, according to a new report from Challenger, Gray & Christmas, Inc. “Employers are beginning to feel the effects of the trade war and imposed tariffs by the U.S. and China,” Andrew Challenger, vice president of the company, said in a Thursday statement, per Bloomberg.


— Trump administration unveils plan to revamp housing market: “The Trump administration released a sweeping plan Thursday that could remake the U.S. housing market, starting with ending more than a decade of government control of two massive companies, Fannie Mae and Freddie Mac, that back half of the nation’s mortgages,” my colleague Renae Merle reports

“The long-awaited plan from the Treasury Department features nearly 50 proposals, including many technical changes to financial regulations, and is aimed at shrinking the government’s role in the housing market. The cornerstone of the plan would resolve the fates of Fannie Mae and Freddie Mac, which 11 years ago this week were put into government conservatorship during the global financial crisis.”

  • The future of Fannie and Freddie: “Fannie Mae and Freddie Mac represent the last major unresolved business from the financial crisis, and [Treasury Secretary Steven] Mnuchin has called them a top priority for more than two years. Under the plan, they would be turned back into private companies but would be required to pay taxpayers a fee for government protection. It would also open the market up to competitors for the first time.”
  • The plan comes as buyers are already struggling to find affordable homes: “This comes at a time when many U.S. home buyers are already struggling to find affordable homes. Prices have been rising for years, and there are not enough moderately priced homes for sale, according to National Association of Realtors data.”
  • Most of the ideas require congressional approval: “ … But the Federal Housing Finance Agency (FHFA), the regulator for Fannie Mae and Freddie Mac, could take some actions on its own. The agency is run by Mark Calabria, formerly Vice President Pence’s chief economist.” 
  • A top Senate Democrat also slammed the plan: “President Trump’s housing plan will make mortgages more expensive and harder to get. I’m urging the president: Make it easier for working people to buy or rent their homes, not harder,” said Sen. Sherrod Brown (Ohio), the ranking Democrat on the Senate Banking Committee.


— Services sector suggests economy is doing fine: “U.S. services sector activity accelerated in August and private employers boosted hiring, suggesting the economy continued to grow at a moderate pace despite trade tensions which have stoked financial market fears of a recession,” Reuters’s Lucia Mutikani reports.

“The upbeat reports on Thursday took some of the sting from data this week that showed the manufacturing sector contracted for the first time in August as the year-old trade war between the United States and China intensified. ‘It’s a tale of two cities in this economy faced with trade war uncertainty, and right now the bigger services economy is weathering the storm,’ said Chris Rupkey, chief economist at MUFG in New York.”

Japan deal far from done. Bloomberg's Jenny Leonard: "The U.S. and Japan are still thrashing out details of a trade deal that [Trump] wants to sign this month, including the crucial issue of whether he’ll refrain from imposing higher tariffs on imported cars, according to people familiar with the matter. Trump, at the Group of Seven meeting in France last month, celebrated what he called a 'major deal' that he and Prime Minister Shinzo Abe would sign on the sidelines of the United Nations General Assembly, starting later this month in New York.

"But people familiar with the talks said the leaders only agreed on the broad strokes of a trade deal. Negotiators are now finalizing many of the core elements, including how much Japan is willing to open its agriculture market to U.S. imports, cuts to industrial tariffs, and the treatment of digital trade that could impact U.S. technology giants like Amazon.com Inc. and Alphabet Inc.’s Google."


Stocks surge. CNN's Anneken Tappe: "The Dow and the broader stock market rallied sharply on Thursday, logging its best day in three weeks, after US and Chinese officials said they will resume trade talks. The escalating tensions between the world's two largest economies has weighed on markets throughout the summer. But the new talks, on the agenda for early October, are spurring optimism.

"Stocks soared in response, with the Dow rising 379 points, or 1.4%, closing at its best level since July 31. It was its best one-day percentage gain since August 13. The S&P 500 finished 1.3% higher, logging its best day since August 16, while the Nasdaq Composite climbed 1.8%. It was the index's best session since August 13."

August jobs numbers could be misleading. Bloomberg's Jeff Kearns and Reade Pickert: "U.S. jobs data due Friday may be inflated by Census Bureau hiring for the 2020 count, and economists say the underlying numbers may show that job gains are slowing. Nonfarm payrolls increased by about 160,000 in August, according to Bloomberg’s survey, a level that would be just under the prior month, but still more than enough to keep pace with growth in the working-age population.

"The unemployment rate is projected to hold at 3.7%, just above a 49-year low, though annual wage gains are seen cooling to 3%, the weakest in almost a year. But some economists said their estimates reflected an expected temporary boost from recent Census hiring."


 The corporate bond market is on fire: "Corporate America is lining up at the debt trough again," Bloomberg's Molly Smith , David Caleb Mutua , and Gowri Gurumurthy reports.

"Companies are borrowing $74 billion in the U.S. investment-grade bond market this week, the most for any comparable period since records began in 1972. Since Tuesday, corporations including Coca-Cola Co., Walt Disney Co., and Apple Inc. have sold notes as yields have dropped ... At least another $50 billion is projected for the rest of the month, and the activity is spilling over to junk bonds and leveraged loans as well. With more than $16 trillion of bonds in Europe and Asia paying negative yields, investors worldwide are snatching up debt that offers relatively higher returns, keeping demand strong in the U.S."

New business formation hits a skid. AP's Josh Boak: "Despite a decade-plus of economic growth, Americans have slowed the pace at which they’re forming new companies, a trend that risks further widening the gap between the most affluent and everyone else. The longest expansion on record, which began in mid-2009, has failed to restore entrepreneurship to its pre-recession levels, according to a Census Bureau report based on tax filings.

"Between 2007 and the first half of 2019, applications to form businesses that would likely hire workers fell 16%. Though that pace improved somewhat after 2012, it dipped again this year despite President Donald Trump’s assertion that his tax cuts and deregulatory drive would benefit smaller companies and their workers."

— Walgreens joins list of companies avoiding open-carry: “Drugstore chain Walgreens Boots Alliance Inc. asked gun owners to leave their firearms outside the store going forward, joining a number of large retailers who have in recent days said that open-carry firearms are no longer welcome at their locations,” Bloomberg News’s Polly Mosendz and Robert Langreth reports.

“In a statement Thursday, Walgreens’s biggest drugstore competitor, CVS Health Corp., said it was also requesting that customers not bring firearms into its stores. Wegmans Food Markets Inc. made a similar statement in a tweet … Earlier this week, Walmart Inc., which was for years among the U.S.’s biggest sellers of handguns and assault-style rifles, said it would stop selling bullets for some guns. It also said it was “respectfully requesting” shoppers not openly carry guns. Kroger Co., the grocery-store chain, also asked customers not to openly carry firearms.”

— GM CEO touts talk with Trump: “General Motors Chairman and Chief Executive Officer Mary Barra said her face-to-face session with U.S. President Donald Trump on Thursday was ‘productive and valuable,’ but declined to offer specifics,” Reuters’s David Shepardson reports.

“Barra, accompanied by GM general counsel Craig Glidden, declined upon leaving the White House to say if she discussed the fate of the shuttered Lordstown, Ohio plant with Trump … People briefed on the matter said Trump and Barra were expected to discuss ongoing contract talks with the United Auto Workers union, the fate of the closing plants, trade issues with China and North America and the Trump administration’s plan to rewrite fuel economy standards through 2026.”

— Hedge fund loses $1 billion on Argentina bet: “Hedge fund Autonomy Capital lost about $1 billion last month largely on investments tied to Argentina, making it one of the most prominent investors caught on the wrong side of market turmoil in that country,” the Wall Street Journal’s Rachael Levy reports.

“The wager on Argentina is one of the largest for Autonomy’s founder, 50-year-old Robert Gibbins, who is known for making concentrated bets. Last year his fund began making bullish calls on the country’s recovery, including in a wide swath of Argentinian bonds and wagers that Argentina wouldn’t default on its debt. His fund also took positions in Argentina’s 100-year-bonds, according to a person familiar with Mr. Gibbins’s thinking, who declined to detail the size of the firm’s overall investment.”


Congressional probe finds lapses in Deutsche Bank controls. Reuters's Mark Hosenball and co.: "U.S. congressional investigators have identified possible failures in Deutsche Bank AG’s money laundering controls in its dealings with Russian oligarchs, after the lender handed over a trove of transaction records, emails and other documents, three people familiar with the matter said. 

"The congressional inquiry found instances where Deutsche Bank staff in the United States and elsewhere flagged concerns about new Russian clients and transactions involving existing ones, but were ignored by managers, two of the people said. Lawmakers are also examining whether Deutsche Bank facilitated the funneling of illegal funds into the United States as a correspondent bank, where it processes transactions for others, one of the sources said."

House to vote on spending bill that would avert shutdown. Politico's Sarah Ferris and Heather Caygle: "The House will return to Washington next week with plans to swiftly pass a bill to keep the government open past Sept. 30, marking the first step to avert yet another shutdown. The House will take up the stopgap funding measure the second week they return from the August recess, Majority Leader Steny Hoyer announced in a letter to the caucus on Thursday... 

"But it’s unclear whether Senate Republicans are willing to accept a stopgap measure, which would not include a single additional dollar for [Trump’s] border wall, which is likely to be the administration’s top priority in the funding talks."


Fed proposes changes to bank capital rules. WSJ's Lalita Clozel: "The Federal Reserve is weighing whether to activate a dormant tool to combat credit crunches in a downturn as part of a broader overhaul of big-bank-capital and stress-testing requirements. Fed Vice Chairman for Supervision Randal Quarles, in remarks Thursday in Frankfurt, proposed integrating the tool, the countercyclical capital buffer, into pending revisions to the annual stress tests faced by the nation’s largest banks.

"The countercyclical capital buffer would allow the Fed to require banks to hold more loss-absorbing capital should the economy show signs of overheating or to keep less of it during bad economic times."



  • The Bureau of Labor Statistics releases the August jobs report this morning.