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All’s fair in a trade war

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Escalating trade tension overshadow labor market strength

Escalating trade rhetoric between the U.S. and China overshadowed positive economic data last week. The administration released a list of roughly 1300 products totaling $50 billion in Chinese electronics, aerospace, and machinery goods that could be targeted with a 25 percent tariff increase. These tariffs are intended to penalize China for what the U.S. views as discriminatory policies. Unsurprisingly, China threatened to retaliate the next day, with 25 percent tariffs on roughly 100 U.S. goods totaling $50 billion. President Trump responded to that threat by asking US. Trade Representative Robert Lighthizer to evaluate imposing tariffs on an additional $100 billion of Chinese imports. China has not yet announced any additional concrete measures, but warned that it was not afraid to engage in a trade war.

While the tariffs have not gone into effect, the tension and the risks of a trade war are clearly rising. The tariffs that have been threatened by the administration represent roughly 30 percent of the total value of imports from China.

If they are implemented and China retaliates in kind the tariffs could reduce
GDP growth in the U.S. by up to 50 basis points over the next 12 to 18 months. 

That would effectively offset the positive boost to economic growth from the tax cuts that were passed in December. These trade measures would require months to finalize if implemented and so far saber-rattling has only increased market volatility. But the risks of a trade war are clearly rising.

Labor market still solid, despite lower-than-expected job increase

The employment situation release for March displayed signs of a still-solid labor market. Job gains disappointed slightly, coming in below expectations while revisions to January and February subtracted 50,000 jobs. But the average gain for the first quarter still totaled 202,000 net new jobs per month, slightly ahead of the 182,000 net new jobs per month in 2017. We knew that February's gain of roughly 326,000 net new jobs could not be sustained so we are not too surprised by March's result. Although unemployment remained stuck at 4.1 percent for the sixth consecutive month, year-over-year wage growth ticked up slightly to 2.7 percent from 2.6 percent in February. Wage growth has slowly but inconsistently been trending upward.

As fiscal stimulus measures impact the economy this year we anticipate
 that the labor market will further tighten and wage growth will accelerate.




ISM Indexes slip, but still point to robust expansion

The ISM Manufacturing Index declined in March, slipping back to January levels. But the March level remains indicative of a healthy economic expansion. The index level has changed little over the last six months. The ISM Non-manufacturing index also declined slightly in March. But similar to the Manufacturing Index, it also remains at elevated levels, signaling that the economy should continue to expand throughout 2018.

What it means for CRE

Last week's data presents a muddled picture for commercial real estate (CRE). Anything that jeopardizes economic growth also jeopardizes commercial real estate. Industrial falls most directly in the crosshairs because limiting imports would lessen demand for warehouse/distribution space, particularly at key port markets where demand is driven by import activity. Trade restrictions should not completely derail industrial fundamentals, but they certainly will not help. The other major property types would not completely evade impact either if trade restrictions slow economic growth. The tightening labor market continues to support all major property types to varying degrees. Most directly, continued job gains have alleviated the impact that rising completions would have otherwise had on the office sector. A lack of qualified labor will continue to restrain net absorption. We expect that the office vacancy rate will drift higher over our forecast horizon of five years as net absorption lags new supply growth.


What we are watching this week

Inflation data goes under the microscope this week, even more so than usual. Although inflation has come into the spotlight in recent months, the data for March will be pivotal. As we previously mentioned, inflation has generally been increasing over time, but pulled back during the first half of 2017. Though we knew those forces would persist for a while, we also knew they would not last forever. March presents a pivotal month on that front. During last March wireless services providers' promotional pricing dampened inflation. But now that those pricing schemes are part of the base they will no longer drag on inflation. We expect headline consumer price index (CPI) to accelerate to roughly 2.5 percent on a year-over-year basis, up from 2.2 percent in February. We also expect that core CPI will jump to 2.1 percent on a year-over-year basis, up from 1.8 percent. Although the Fed prefers the personal consumption expenditures (PCE) to the CPI, they will still take note. Also, the data from the producer price index (PPI) in March should also indicate rising inflation. Impacts from enacted tariffs should begin showing up in import price data and we anticipate that headline PPI increased slightly in March.


Thought of the week

Over the last decade, the amount that the average person spends on cellular phone service doubled. In 2007 the average person spent $608 per year on cellular service. By 2016 (the most recent year available) that figure has risen to $1,124 per year, an increase of roughly 85 percent.​




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