May 27, 2019

Strong growth in US economy?

According to employment and GDP indicators the US economy is currently growing strongly.

As at April 2019, unemployment is at 3.6 percent, 263,000 new jobs were created in the month, and GDP for the year to December 2018 was estimated at 3.1 percent.

Bureau of Economic Analysis
Bureau of Labour Statistics

But despite this strong growth in employment and GDP, there is one major question that we need to ask about the US economy.

Can its growth continue throughout 2019, given the brakes being applied to the economy via increased tariffs on imports?

This question arises from the fact that the US, since January 2018, imposed tariffs on solar panels, washing machines, steel and aluminium from most countries.  In addition, the US administration, imposed tariffs on Chinese goods worth US$50 billion in July 2018, with more tariffs announced in May 2019 on a further US$200 billion worth of goods.  In retaliation to these tariffs Canada, Mexico, China and the European Union all imposed tariffs on a variety of American exports.

How do tariffs affect the domestic economy?

Tariffs imposed on imports normally result in the price of goods increasing as the import business pass on the cost of the tariffs to the consumer.  Therefore, the consumers either purchase less of the affected goods, substitute the imported good for a domestically produced good or purchase less of other goods and services in order to pay the increased price for the imported good. 

As a result of tariffs being imposed on the US, the US administration announced in 2018 that US$12 billion in federal payments would be made to farmers affected by the tariffs, to help make up for some of the losses expected.  Though the limitations and red tape of the program resulted in only US$838 million being paid out by the end of 2018.

Overall, given the size of the US economy, the tariffs imposed by the US and those imposed in retaliation have so far not had a significant impact.  As time continues and the tariffs are not lifted, or as signalled in May 2019 actually increase, it will start to trickle through the economy and impact negatively on future growth.