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The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

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November 1, 2019

New Evidence Points to Mounting Trade Policy Effects on U.S. Business Activity

Trade worries remain at the forefront of economic news. Average tariffs on Chinese imports now stand at 21 percent, up from 3 percent in March 2018. Earlier this month, President Trump suspended plans for further tariff hikes on Chinese goods. Also this month, the U.S. is rolling out new tariffs on $7.5 billion worth of imports from Europe. On another front, fears are growing that Congress may not approve the U.S.-Mexico-Canada Trade Agreement, the intended successor to the North American Free Trade Agreement. Data from the folks at say that articles about trade policy uncertainty in U.S. newspapers were more than 10 times as numerous in the third quarter of 2019 as the average from 1985 to 2010.

Trade policy worries extend beyond the newswires. We hear concerns about trade policy in reports from Main Street firms in the Sixth District collected through our Regional Economic Information Network and, more broadly, in the Federal Reserve's Beige Book. Amid reports of softening manufacturing conditions in the U.S., slowing growth in payroll employment, and a drop-off in business investment, it's natural to wonder whether trade policy is at least partly to blame. Professional forecasters seem to think so. For instance, the International Monetary Fund (IMF) forecasts that the U.S.-China trade dispute will shave roughly three-fourths of a percent from global output by 2020, which, as the IMF's managing director noted, is "equivalent to the whole economy of Switzerland."

Over the past year and a half, we have been keenly interested in how trade policy worries affect business decision making. In August 2018, we reported that trade concerns prompted about 1 in 5 firms to re-evaluate their capital investment decisions. At the same time, only 6 percent of the firms in our sample had then decided to cut or defer previously planned capital expenditures in response to trade policy developments. Early this year, we noted that the hit to aggregate investment from trade tensions and tariff worries was modest in 2018, but firms believed the impact would increase in 2019.

As U.S.-China trade tensions escalated during the third quarter of this year, we went back into the field, posing another set of trade-related questions to panelists in our Survey of Business Uncertainty (SBU). This time around, we asked both backward- and forward-looking questions about the perceived effects of trade policy, and we expanded the scope of our questions to cover employment and sales in addition to capital expenditures.

Overall, our results say that the negative effects of trade policy developments on U.S. business activity have grown over time, particularly for firms with an international reach. Trade policy effects on the business sector as a whole remain modest but larger than we saw six or 12 months ago.

Twelve percent of surveyed firms reported cutting or postponing capital expenditures in the first six months of 2019 because of trade tensions and tariff worries (see exhibit 1). That's twice the share when we asked the same question a year earlier. Given the capital-intensive nature of manufacturing, it is perhaps more concerning that one in five manufacturing firms now report cutting or postponing capital expenditures because of trade policy tensions.

Exhibit 1: Share of Firms that Cut or Postponed Capital Expenditures in the First Half of 2019 Because of Tariff Worries

We also find that tariff hikes and trade policy tensions now exert a larger negative impact on gross U.S. business investment. Exhibit 2 uses SBU data on whether firms changed their capital expenditures due to trade policy tensions and, if so, by how much and in which direction. Column (1) reports the average percentage impact in the sample, where we weight each firm's response by its capital stock value. To estimate the dollar impact of trade policy developments in column (2), we multiply the weighted-average percent change by actual U.S. business investment in the first half of 2019, which yields an estimated effect on U.S. business investment of about minus $40 billion.

This estimated trade policy hit to aggregate investment is modest but roughly double what we previously found for the second half of 2018. Our results say that investment is hardest hit in manufacturing and construction, though perhaps for different reasons. The larger response for manufacturing is likely due to its higher international exposure, both in direct goods trade and across the supply chain. For construction, the impact is likely due to an increased cost of imported materials and equipment.

Exhibit 2: Estimated Impact of Tariff Hikes and Trade Policy Tensions on Capital Investment Expenditures by U.S. Businesses in First Half of 2019

Exhibit 3 reports the estimated effects of tariff hikes and trade policy tensions on private sector employment and sales in the first half of 2019. According to our results (reached by using the same procedure as in Exhibit 2), these developments subtracted about 40,000 jobs per month from nonfarm payrolls and about $259 billion in sales over the first half of the year. Though this employment impact is sizable, it is not estimated very precisely (one standard error corresponds to about 24,000 jobs per month). The estimates for the impact of tariff hikes and trade policy tensions imply about $110,000 in lost sales per lost job.

Exhibit 3: Estimated Impact of Tariff Hikes and Trade Policy Tensions on Employment and Sales Growth in the First Half of 2019

Notes on Exhibit 3: In Panel A, column (1) reports the employment-weighted mean response to questions about whether tariff hikes and trade policy tensions caused the firm to alter its employment level in the first half of 2019 and, if so, by what percentage amount. We deleted three questionable responses to the employment question that we could not verify. To obtain the aggregate employment impact in column (2), we multiplied the column (1) value by the average nonfarm private sector payroll employment in the first half of 2019. The "Reweighted" row reflects a re-weighting of the SBU data to match the one-digit industry distribution of private sector payroll employment. In Panel B, column (1) reports the sales-weighted mean response to questions about whether tariff hikes and trade policy tensions affected the firm's sales in the first half of 2019 and, if so, by what percentage amount. To obtain the aggregate sales impact in column (2), we multiplied the column (1) value by Nominal Gross Output: Private Industries. According to the U.S. Bureau of Economic Analysis, gross output is, "principally, a measure of an industry's sales or receipts. These statistics capture an industry's sales to consumers and other final users (found in GDP), as well as sales to other industries (intermediate inputs not counted in GDP). They reflect the full value of the supply chain by including the business-to-business spending necessary to produce goods and services and deliver them to final consumers." The "Reweighted" row reflects a re-weighting of the SBU data to match the one-digit industry distribution of private sector gross output. Standard errors are reported in brackets.

We also asked forward-looking questions to assess whether firms think trade policy worries will continue to dampen their business activities in the second half of 2019. Exhibit 4 summarizes our findings in this regard. SBU respondents anticipate that the impact of trade policy on their second-half sales revenue will be similar to what they reported for the first half of 2019, but they anticipate somewhat larger negative effects on their capital expenditures and employment. Across the private sector as a whole, SBU respondents see their capital expenditures as down by 3.8 percent in the second half of 2019 due to tariff hikes and trade policy tensions.

Exhibit 4: Estimated Percentage Impact of Tariff Hikes and Trade Policy Tensions on Outcomes in the Second Half of 2019

In sum, as trade policy tensions escalated in the first half of 2019, our results say that businesses took a hit to their sales and backed off on hiring and investment. Moreover, firms anticipate that the negative effects will continue during the second half of 2019. Our estimated impact magnitudes are rising over time but remain modest.

We should also note that our estimates do not capture certain effects. For instance, they don't capture the pass-through of tariff hikes to American consumers in the form of higher prices or to American companies in the form of compressed margins and lower profits. Tariff hikes and trade policy tensions also slow growth in the global economy, with negative effects on the U.S. economy. These blowback effects are also outside the scope of our investigation.


February 25, 2019

Tariff Worries and U.S. Business Investment, Take Two

Last summer, we reported that one fifth of firms in the July Survey of Business Uncertainty (SBU) were reassessing capital expenditure plans in light of then-recent tariff hikes and retaliation concerns. Roughly 6 percent had already cut or deferred capital spending as a result of tariff worries.

Since then, tariff hikes and trade policy tensions have continued to mount, as recounted in the Peterson Institute's Trade War Timeline. U.S. stock market volatility also rose sharply in the last four months of 2018, partly in reaction to trade policy concerns. These developments led us to pose another round of questions about trade policy and investment in the January 2019 SBU.

We first asked each firm if tariff hikes and trade policy tensions caused it to alter its capital expenditures in 2018 and, if so, in which direction and by how much. We use the responses to estimate the net impact of tariff hikes and trade policy tensions on U.S. business investment in 2018.

Exhibit 1: Estimated Impact of Tariff Hikes and Trade Policy Tensions on Gross Capital Investment Expenditures by U.S. Businesses in 2018

We estimate that tariff hikes and trade policy tensions lowered gross investment in 2018 by 1.2 percent in the U.S. private sector and by 4.2 percent in the manufacturing sector. The larger response for manufacturing makes sense, given its relatively high exposure to international trade. In constructing these estimates, we consider firms that raised and lowered investment due to trade policy, and we weight each firm by its size.

To estimate the dollar impact of trade policy developments, we multiply the percentage amounts by aggregate investment values. The resulting amounts for U.S. business investment in 2018—minus $32.5 billion for the private sector and minus $22 billion for manufacturing—are modest in magnitude, in line with our forward-looking assessment last summer.

In January, we also asked forward-looking questions about the potential impact of trade policy worries on business investment. As reported in Exhibit 2 below, 20 percent of firms said they are reassessing their capital expenditure plans in 2019 because of tariff hikes and trade policy tensions, a share very similar to what we obtained in our forward-looking question last July. As before, manufacturing firms were more likely to reassess their capital spending plans due to trade policy concerns.

Exhibit 2: Share of Firms Reassessing Capital Expenditure Plans due to Tariff Hikes and Trade Policy Tensions

Exhibit 3 below speaks to the question of how firms have reassessed their capital expenditure plans. Here, too, results are similar to what we reported last summer, with one important exception. Among firms reassessing, more than half have either postponed or dropped some portion of their capital spending for 2019, compared to just 31 percent in July 2018. Thus, it appears that firms anticipate somewhat larger negative effects of trade policy developments on capital expenditures in 2019 than they did in 2018.

Exhibit 3: How Firms Are Reassessing Capital Expenditure Plans

All told, our results continue to suggest that tariff hikes and trade policy tensions have had a rather modest impact on U.S. business investment. Of course, tariffs and other trade barriers affect U.S. and foreign economies through multiple channels. Even if the near-term business investment effects of trade policy developments are modest in magnitude, trade barriers can disrupt supply chains, raise input prices, and lead to higher prices for consumer goods. That's important to keep in mind as the trade policy outlook remains murky.

August 7, 2018

Are Tariff Worries Cutting into Business Investment?

"Nobody's model does a very good job of how uncertainty and hits to confidence affect behavior," says Deutsche Bank's Peter Hooper in a recent Wall Street Journal article. Count us as sympathetic to his viewpoint.

That's one reason why a few of us at the Atlanta Fed created a national survey of firms in collaboration with Nick Bloom of Stanford University and Steven Davis of the University of Chicago Booth School of Business. Our Survey of Business Uncertainty (SBU) elicits information about each firm's expectations and uncertainty regarding its own future capital expenditures, sales growth, employment, and costs.

A pressing issue at the moment is whether, and how, firms are reassessing their capital investment plans in light of recent tariff hikes and fears of more to come. By raising input costs, domestic tariff hikes undercut the business case for some investments. They can raise domestic investment in newly protected industries. Retaliatory tariff hikes by trading partners can also affect domestic investment by curtailing the demand for U.S. exports. An uncertain outlook for trade policy can cause firms in all industries to delay investments while they wait to see how trade policy disputes unfold.

Last month's SBU (previously known as our Survey of Business Executives) sheds some light on these matters. We first posed a simple question: "Have the recently announced tariff hikes or concerns about retaliation caused your firm to reassess its capital expenditure plans?" Yes, said about one-fifth of our respondents.

As exhibit 1 shows, the share of firms reassessing their capital plans because of tariff worries is higher for goods-producing firms than service-providers. It's 30 percent for manufacturers and 28 percent in retail & wholesale trade, transportation and warehousing. In contrast, it's only 14 percent among all service providers in our sample. These sectoral patterns make sense, given that manufacturing firms, for example, are more engaged in international commerce than most service providers.

Exhibit 1: Share of Firms Reassessing Capital Expenditure Plans Because of Tariff Worries

We also asked firms how they are reassessing their capital expenditure plans in light of tariff worries. Exhibit 2 provides information on this issue. Among firms reassessing, 67 percent have placed some of their previously planned capital expenditures for 2018–19 "under review," 31 percent have "postponed" or "dropped" previously planned expenditures, 14 percent have "accelerated" their plans, and 2 percent (one firm) added new capital expenditures for 2018–19.

Finally, we asked firms how much tariff worries affect their previously planned capital expenditures. Among firms re-assessing, an average 60 percent of their capital expenditure plans are affected. The predominant form of reassessment is placing previously planned capital expenditures "under review."

Exhibit 2: How Firms are Reassessing their Capital Expenditure Plans

Let's sum up: About one-fifth of firms in the July 2018 SBU say they are reassessing capital expenditure plans in light of tariff worries. Among this one-fifth, firms have reassessed an average 60 percent of capital expenditures previously planned for 2018–19. The main form of reassessment thus far is to place previously planned capital expenditures under review. Only 6 percent of the firms in our full sample report cutting or deferring previously planned capital expenditures in reaction to tariff worries. These findings suggest that tariff worries have had only a small negative effect on U.S. business investment to date.

Still, there are sound reasons for concern. First, 30 percent of manufacturing firms report reassessing capital expenditure plans because of tariff worries, and manufacturing is highly capital intensive. So the investment effects of trade policy frictions are concentrated in a sector that accounts for much of business investment. Second, 12 percent of the firms in our full sample report that they have placed previously planned capital expenditures under review. Third, trade policy tensions between the United States and China have only escalated since our survey went to field. The negative effects of tariff worries on U.S. business investment could easily grow.


October 14, 2016

Cumulative U.S. Trade Deficits Resulting in Net Profits for the U.S. (and Net Losses for China)

The United States has run trade deficits for decades (1976 is the last year with a recorded surplus). To illustrate this, chart 1 depicts the cumulative U.S. trade deficit since 1980, which now surpasses $10 trillion. As a result, a drastic deterioration in the U.S. net foreign asset position—the difference between the amount of foreign assets owned by U.S. residents and the amount of U.S. assets owned by foreigners—has occurred. That is, as Americans borrow from the rest of the world to finance the recurring trade deficits, the national net worth goes deeply into the red. Not long ago, many commentators predicted that as a result of this increasing U.S. foreign debt, the U.S. dollar was set to collapse, which would trigger a stampede away from U.S. assets. Of course, this has not happened.

Much of the rising U.S. deficit is the by-product of deficits with one country in particular: China. Chart 2 shows that U.S. bilateral trade deficits with China have been growing steadily during these years. In 2015, the total U.S. goods trade deficit was about $762 billion, and the goods deficit with China alone made up nearly half of that total ($367 billion). This situation is not unique to the United States, as many countries find themselves in similar trade positions with China. During the last few decades, China has been running protracted trade surpluses with the rest of world and has accumulated a positive and sizeable net foreign asset position.

Yet, despite accumulating a positive and sizeable net foreign asset position, China is facing increasing losses in net income on its foreign assets. Put differently, China has been accumulating negative returns on its increasingly large portfolio of foreign assets. Chart 3 shows this observation, made in a paper by Eswar Prasad of Cornell University at a recent conference cosponsored by the Atlanta Fed and the International Monetary Fund.

The net income on foreign assets measures the return a nation receives from the foreign assets it owns minus the return paid on domestic assets held by foreigners. In sharp contrast to China, however, the U.S. international net financial income has remained positive and has even increased. This increase comes despite the fact that the United States has consistently run trade deficits, and its net foreign asset position has deteriorated. Chart 4 shows the U.S. income from foreign assets and foreigners' income on U.S. assets, which is reported as a negative number for this series because it is regarded as a liability for the United States. The difference between these amounts is depicted by the middle line, which shows the net foreign income of the United States.

How is this possible? Ricardo Hausmann (Harvard University) and Federico Sturzenegger (currently, the chairman of Central Bank of Argentina) came up with an explanation more than ten years ago: the United States gets a far higher return on its foreign assets than the other way around. Indeed, U.S. foreign direct investments (FDI) often generate a relatively high rate of return. In part, U.S. FDI are benefiting from business expertise, brand recognition, and research and development in new product and service lines. Comparatively, foreigners tend to earn substantially less return on the American assets they own. Foreigners often desire to hold their dollar assets in the form of safe, liquid assets, which—following the "low-risk, low-return" principle—have relatively low returns.

To see this, chart 5 shows the sources of the net financial income of the United States. The U.S. government net income is negative—mostly the by-product of interest payments in government debt held by foreigners. The U.S. gets most of its financial return from FDI. Although much has happened in the world economy during the last decade, the implications of Hausmann and Sturzenegger's analysis remain intact. In sum, the differential return from these foreign assets and liabilities appear to largely compensate for the trade deficits.

Eswar Prasad also showed that China is in a starkly different situation. Most of its foreign liabilities are in the form of FDI, while the vast majority of the foreign assets are reserve assets and foreign exchange reserves—not surprisingly, largely U.S. dollars and U.S. Treasury securities. The rate of return foreigners make on Chinese assets is around twice the rate of return China gets on its foreign assets.

This analysis suggests that focusing on a country's net foreign asset position conveys an incomplete picture of the profitability of foreign assets because it fails to account for the differences in rates of returns that countries earn on their foreign assets. Overall, the United States makes a sufficiently high return on foreign assets that it maintains positive net income on foreign assets. The situation is similar to role leverage in investing; debt can be profitable if you can devote it to purposes that earn a higher rate of return than your cost of borrowing it. Therefore, when viewed in terms of the net income earned on foreign assets the United States holds, the sizable U.S. trade deficits may not be as much of a concern as commonly thought.