PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

Federal Reserve’s Beige Book: Trade Worries

By at 6 December, 2018, 8:15 am

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by Raymond J. Keating-

According to the Federal Reserve’s survey of various contacts in its latest Beige Book released on December 5, the economy from mid-October to late November grew at “a modest or moderate pace.” However, “Dallas and Philadelphia noted slower growth compared with the prior Beige Book period,” and “St. Louis and Kansas City noted just slight growth.”

As for various sectors of the economy, it was reported that:

● Consumer spending “held steady”

● Tourism kept pace with the overall economy

● Nonfinancial services grew in all districts

● Housing either held steady or declined

● Energy was either flat or grew modestly

● Farming was mixed

The overall take was still positive among businesses, but “optimism has waned in some as contacts cited increased uncertainty from impacts of tariffs, rising interest rates, and labor market constraints.”

Indeed, tariffs and threats of additional tariffs continue to weigh on business and investors, as reflected in various reports and surveys. For example, it was noted by CNBC last week:

“The Trump administration’s widening trade war will raise prices for U.S. consumers, but it won’t bring back many manufacturing jobs that have moved overseas.”

The article references a survey from IHS Markit released in late November that found that “more than 4 in 10 companies surveyed said they plan to raise prices to offset the higher cost of production. Just 1 in 10 said they plan to reduce the share of total output produced outside the U.S.  Roughly the same number said the tariffs would encourage them to move more jobs offshore.”

Another survey from the American Chamber of Commerce in South China was highlighted, noting that “more than 70 percent of U.S. firms operating in southern China are putting off further investment there and moving some or all of their manufacturing to other countries. Sixty-four percent of the more than 400 companies surveyed said they were considering relocating production lines to outside of China, but only 1 percent said they had any plans to establish manufacturing bases in North America.”

For good measure, an ImpactECON study released on November 28 served as a warning about a trade war. It estimated the economic impact of “current, proposed, and potential trade actions by the US and its trading partners,” reporting that U.S. GDP “would be reduced by a projected -1.78 percent in 2019 (or $365.1 billion in 2017 dollars) with a long run reduction of -1.25 percent in 2030 (or $331.8 billion in 2017 dollars)”; and “GDP losses are projected to cumulate to a discounted value of $2.8 trillion between 2018 and 2030.”

It is critical to keep in mind that businesses engaged in exporting and importing overwhelmingly are small firms:

● 87 percent of U.S. exporters having fewer than 50 employees

● 86 percent of U.S. importers fewer than 50 workers

In addition, at least 55 percent of U.S. imports serve as various inputs for U.S. businesses. In the end, U.S. consumers, businesses and workers get hurt by tariffs and other barriers to trade.

Lowering trade barriers and creating opportunities for small businesses in the global marketplace are critical for growth and the health of the U.S. economy. Sealing agreements with countries that the U.S. is currently negotiating trade deals with, including and especially China, would be an enormous policy boost – on top of recent tax and regulatory relief – for small businesses. Tariffs and trade barriers are creating costs and uncertainties for our consumers and small businesses, and this approach must be set aside to ensure sustainable and widespread economic growth.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

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