Economic Briefing

At the time of writing a Federal Court had ruled that the reciprocal tariffs imposed by the Trump Administration under the International Emergency Economic Powers Act of 1977 were illegal and ordered the immediate reversal of those orders. The ruling was being appealed and will likely end up at the Supreme Court. At this time, there was not enough information to change the tariff landscape. If anything, it was adding more uncertainty at the time.

In other news, the first trade “deal” was announced in May, and it was the UK that claimed the headline trade agreement. Reportedly, 17 more trade agreements with the US’ top trading partners will follow this one between now and the early part of July. The remaining 110 countries will likely see a base tariff applied, but no specific time will be taken to strike specific trade agreements. There are two key components in these trade agreements, namely tariff negotiations and removal of non-tariff trade barriers. In the tentative agreement with the UK, a 10% base tariff will be imposed on many UK products being exported to the US. Exclusions are currently being granted to steel and aluminum among other items. But it appears that this 10% base tariff could be the standard applied to all trade partners (a universal base tariff).

Non-tariff trade barrier components could increase US exports to the UK by an estimated $23 billion and generate $6 billion in tariff tax income for the US. But the impact on most prices in the US is estimated to be less than 2.3% to 2.5% after currency exchange differences, discounting, and absorption up and down the supply chain. Sectors mentioned in the trade agreement that should see expanded trade activity between the two countries include agriculture, defense, high-tech, pharma, chemicals, industrial supplies, and machinery. In addition, the countries will streamline logistics and customs procedures to speed up trade and increase efficiency.

This initial trade agreement was perhaps the easiest among the 18 countries that are expected to get specific bilateral “deals”. The US has a trade surplus with the UK, and it is one of the US’ top allies, with deep integrated ties in intelligence and defense sectors. The first trade deal struck with a partner that has a trade deficit with the US will provide a more accurate blueprint for what the remaining 17 trade agreements could look like. Again, the administration expects to have most tentative agreements secured by July 7^th or shortly thereafter.

The Atlanta Federal Reserve is currently showing Q2 GDP growing at a 2.2% rate of growth. This is well ahead of expectations for growth of just 1.0% in the quarter. Stronger consumer spending activity and corporate investment in technology and automation continue to be key drivers of growth. That is currently being offset by weaker housing market and a trade deficit (which detracts from GDP).

GDP could continue to adjust in the coming weeks as new data from the quarter is processed. This stronger GDP reading will give the Federal Reserve sufficient reasons to continue to pause on interest rate reductions. Concerns over tariff-induced inflation on the negative side of the equation and positive signs in macroeconomic growth, a stable job market, above average wage growth, and prospects for faster growth in the future are likely to keep it on pause.

Short term borrowing rates for automobiles, credit cards, and other short-term instruments will continue to be higher. And with the bond market moving in opposite direction to the Federal Reserve, key 5- and 10-year interest rates also remain high. Five year bond rates affect corporate investment and spending and the 10 year US Treasury is keeping mortgage rates higher.

US ports are likely to go through a “feast and famine” experience over the next several weeks. There was a 59% drop in container bookings scheduled to be hitting US ports by the middle of June. But in the wake of the announcement in early May of the reduction in tariffs between the US and China for 90 days is creating a surge in outbound freight. According to Vizion, bookings outbound from China to the US were up 70.6% W/W during the week of May 5^th and 157.6% higher the week of May 12^th. On a year-over-year basis, these rates are 28.4% higher in the latest week. Given the timing of these inbound shipments, they should arrive in mid to late June.

The cause of this wave of shipments is interesting. Many purchasing managers had “shipping ready” orders placed with Chinese manufacturers and when surprise reciprocal tariffs hit in early April, those shipments were delayed, and many were put into temporary storage in China. Upon the announcement that tariffs would be reduced to 30% for 90 days, many purchasing managers immediately had those shipments released to try and beat potentially higher tariffs at the end of this negotiating period. Maritime capacity was diverted to other regions of the globe and some reported ship capacity shortages showed in the last few weeks.

From a pricing perspective, Drewry is showing the container spot rate reacting slowly, rising by just 2% week-over-week through May 25^th on Shanghai to LA routes and they are up 4% on Shanghai to New York lanes. Year-over-year, rates are still well below last year’s levels for this time of the year. Rates are still 39% and 30% lower respectively. That could change as capacity is absorbed in the coming weeks.

After this initial wave of ‘shipment ready’ products are sent outbound, questions remain about future order volumes. Surveys suggest that many purchasing managers are still taking a wait-and-see approach to future new orders and are basing their orders more on demand dynamics than tariff avoidance, and this surge of inbound containers that will hit in the next 4-6 weeks could be a short-lived wave.