(Bloomberg) -- President Donald Trump’s decision to impose tariffs on an additional $200 billion of imports from China drags the biggest part of the U.S. economy into the thick of the trade war, threatening to deliver a more direct hit to growth.
The 10 percent tariffs announced on Monday -- which take effect Sept. 24 and will rise to 25 percent in January -- affect everyday items including food, furniture, and clothing, making grocery shopping and holiday gifts potentially pricier. That broadens the trade fallout more directly into the realm of household spending, which accounts for about 70 percent of the U.S. economy.
Previously announced levies on $50 billion of Chinese imports, as well as metals from Europe and elsewhere in the world, already are forcing U.S. producers to pay higher input costs, which they’re trying to pass along to customers.
While data indicate the tariffs so far have had little material impact on the $20 trillion U.S. economy, the latest levies also include more manufacturing inputs and boost the risk that businesses will become more wary about investment and hiring, which along with lower taxes has been a pillar of support for household consumption in 2018.
“The more you expand the list of targeted goods, the less you can isolate the shock” and the “more there’s going to be a visible impact,” said Gregory Daco, head of U.S. macroeconomics at Oxford Economics in New York.
Higher prices will deter household spending and weigh on confidence, and companies may encounter increased prices on more inputs. As a result, “businesses might turn a bit more cautious on hiring and on employment in general, and that in turn might feed back on to consumers,” Daco said.
Tariffs that push up prices and restrain growth could also complicate the Federal Reserve’s task as officials debate how fast to raise interest rates beyond this month. Economists at UBS Group AG say even a 10 percent tariff will slow the economy in the fourth quarter by enough to stop the Fed from hiking interest rates again in December.
Assuming retaliation from China, Daco reckons that the tariffs will shave about 0.4 percent from U.S. gross domestic product in 2019, more than the 0.1 percent before the latest announcement, and the drag may even be worse given the tariffs will rise to 25 percent.
Growth Estimate
While Daco is maintaining his 2.9 percent GDP growth estimate for 2018, he now expects a slowdown next year to 2.1 percent, compared with an earlier estimate of 2.3 percent.
The latest tariff move means U.S. retailers counting on cheaper China-made merchandise could be forced to lift prices or take a hit on profits, depending on their ability to quickly flip to purchasing from U.S. companies or find sources in other nations that are ready to deliver at competitive rates.
Economists so far have seen growth as strong enough to withstand the tariff battles. The latest Bloomberg monthly survey shows GDP will advance at an annualized 3 percent pace this quarter and 2.8 percent in the final three months of the year, before easing to 2.5 percent for the first half of 2019. It expanded 4.2 percent in the second quarter.
Consumer spending, which grew 3.8 percent last quarter, is forecast to rise 2.9 percent in the July-September period and 2.5 percent in the fourth quarter, according to the survey.
The second-order effects from tariffs are a “wild card” in terms of “what the uncertainty has the potential to do,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co (NYSE:JPM). “There’s a risk you could see business sentiment, which has been quite upbeat, turn a little more cautious. That would affect hiring, capital investment and presumably the pace of economic growth.”
The outlook for household spending looked bright ahead of Monday’s news. Consumer sentiment jumped more than forecast in September to a six-month high, according to a University of Michigan report released last week, as Americans’ views of buying conditions for houses, vehicles and long-lasting goods improved.
While people are benefiting from a strong job market, and income and wealth gains supported by higher stock prices and property values, the unease about trade tensions is brewing. The Michigan report showed concerns about the negative impact of tariffs on the U.S. economy were spontaneously mentioned by nearly one-third of all consumers in the past three months, up from one in five in the prior four months.