U.S. Economy This Week: U.K. Trade Deal and Good News on Inflation

Trump's trade agreement with the UK is good news. It provides a template for additional agreements which should soon follow.

Guest post by economist Robert Genetski, Ph.D.

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Last week’s main news was President Trump’s announcement of the
outline of a trade agreement with the United Kingdom. The UK’s tariff on
U.S. goods will be lowered from 5.1 percent to 1.8 percent, and the U.S. tariff will be set at 10 percent for UK imports, with some exemptions.

Trump said the agreement will increase various U.S. exports to the UK and will be finalized in the coming weeks.

The UK agreement is good news. It provides a template for other agreements. Countries can expect to face a 10% tariff on goods coming into the United States and will be expected to remove barriers to U.S. exports and lower their tariffs on U.S. goods.

Other countries will have to accept the same terms if they want to trade with the United States. We expect they will. Expect further disruptions in business as U.S. companies adjust to the new trade agreements.

The stock markets’ recovery from the April 8 low continued, with most stock indexes gaining 1 percent to 3 percent. The S&P500 and Nasdaq gained 1 percent, and caps were up almost 3 percent last week.

April business surveys for service companies were mixed. The closely followed ISM surveys show service companies improving, with readings for the overall and new order components at 52, up from 50 in March. The improvement is consistent with payroll data showing 169,000 new private jobs. The alternative S&P survey for service companies shows the service sector at 50, which is the break-even point.

As expected, the Fed kept its target interest rate unchanged. In doing so, it reiterated its objective to lower inflation further toward its 2 percent target.

Despite its steadfast stance against inflation, long-term interest rates moved higher. We suspect they would have moved even higher had the Fed decided to cut rates.

There continues to be little, if any, weekly or monthly data pointing to a downturn in the overall economy. Nonetheless, our sources indicate the tariffs could lead to significant shortages of various items in three to five weeks.

The Consumer Price Index (CPI) fell slightly in April, having been expected to show
modest increases of 0.2 percent to 0.3 percent. The U.S. Department of Labor reported the numbers on Friday:

The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.1 percent on a seasonally adjusted basis in March, after rising 0.2 percent in February, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 2.4 percent before seasonal adjustment.

Inflation is now at 2.4 percent year-over-year, heading down toward the Fed’s stated 2 percent goal.

The predicted increases would have been consistent with expectations of higher prices due to tariffs. We thought the numbers could be lower because of a 7½ percent decline in monthly oil prices. We expected the total CPI to be closer to 0.1 percent and core inflation closer to 0.2%. That would have reduced the annual inflation rate to 2.2 percent for the total and 2.8 percent for core. Instead, the CPI decreased altogether.

This Thursday the reports will include April retail sales, manufacturing, and wholesale prices, all of which should provide more insight into the state of the economy and inflation.

Retail sales data are highly volatile and difficult to anticipate. They jumped sharply in March. Year-over-year sales numbers have been consistent with gains in personal incomes, but sales during the six months ending in March were up a percentage point less than incomes. Bottom line—expect a normal increase in sales of about 0.4 percent.

The Fed’s manufacturing index posted a nice increase, up at a 5 percent annual rate in the first three months of this year, after showing no gain for the past two years. The Fed’s index, however, is inconsistent with business surveys, which show a decline in manufacturing.

As for wholesale prices, expect them to be only slightly higher. Our commodity price data show prices flat to down in April. The leveling off in commodity prices is also in conflict with the higher prices noted in business surveys.