Tariffs and Signals From the Economy

Dean Foreman
Posted August 7, 2018

Recently, we discussed how natural gas and oil production and energy exports were major contributors to robust second-quarter growth by the U.S. economy – by themselves generating nearly half of the increase in U.S. real exports in Q2.

Yet, there’s concern that escalating U.S. trade restrictions and looming disputes could threaten global trade and economic growth. We’ve talked about tariffs and quotas directly impacting the natural gas and oil industry – China last week announced a 25 percent tariff on U.S. liquefied natural gas – but the potential effect is broader than just our industry, as indicated in last week’s post on possible food price impacts. Consider these important economic clues:

• The Consumer Price Index in June rose to 2.8 percent in June compared to June 2017 – well above the Federal Reserve’s 2 percent annual target.
• The Fed has increased interest rates while signaling it likely will continue raising them – impacting the economy via prices and higher borrowing costs. The yield curve – the relationship between long-term and short-term interest rates – now shares similarities with the lead-up to the 2008 financial crisis.
• The U.S. dollar’s foreign exchange value is near decade highs, which tends to hurt the competitiveness of U.S. exports and historically has led to more imports.

Again, these affect the U.S. energy renaissance – tending to raise the cost of capital needed for projects while also affecting the competitiveness of U.S. exports of energy, petrochemicals and finished goods. From local to global communities, so much begins with the energy industry, and the stakes for U.S. energy dominance have never been higher.

More broadly, Americans could see higher interest rates for mortgages and on credit card debt and more stress on retirement savings through financial markets.

The fact is that a number of important economic factors are rooted in U.S. economic and trade policies. While second-quarter economic growth was the strongest in years, the trajectory of prices and interest rates so far in 2018 has been concerning.

The stakes are high, and the economy has weak spots, because much of its growth has depended on strong credit expansion, free trade and abundant low-cost energy. Now, tightening credit and more protectionist trade policies threaten two of these three elements. 

For the energy renaissance, U.S. supply growth has risen to meet virtually all global oil demand growth through the first half of 2018, compensating for production losses in some OPEC nations. When pain points become apparent, as they increasingly are with increased inflation and interest rates as well as higher input and capital costs, these conditions can invariably affect energy markets at home and abroad.

To further our progress toward the administration’s goal of U.S. energy dominance, we need policies that recognize how the economy, energy and financial markets are intertwined.