Given President’s Trump unprecedented using of executive authority over tariffs policy, it was only a matter of time before the judiciary started to weigh in. The president has claimed these powers under a variety of laws. There are several cases working their way through the courts, and the legal journey is likely to be long and meandering. This will add an additional layer of uncertainty to those already facing businesses and consumers.
In late May, a three-judge panel of the Court of International Trade invalidated major parts of the Trump Administration’s tariffs policies. The ruling struck down the tariffs imposed under the International Emergency Economic Powers Act. This law had been invoked to justify the “reciprocal” tariffs announced in early April as well as others against China, Canada, and Mexico on grounds they that these country’s leaders were not doing enough to slow the flow of fentanyl into the United States. The judges ruled that the “emergency” grounds for those tariffs did not exist and set them aside. Other tariffs, based upon other parts of the legal code, were unaffected by the ruling. However, those too are subject to litigation and will likely undergo a long period of scrutiny by the courts.
The ultimate judicial outcomes of these cases are unclear. This Court of International Trade’s ruling has already been stayed while an appeal is being considered. This is an additional component of the increased uncertainty businesses and consumers are facing. Ultimately, it is likely that this uncertainty will be the force having the greatest effect on the economy, not the direct effects of the tariffs themselves. Data in coming months are likely to show an economic slowdown in the face of the heightened uncertainty. This slowdown is likely to strengthen the case for an easing of monetary policy in the second half.
Awaiting Q3 Data
So far, the economic data has not shown much damage to the economy. In part, this is due to the fact that many businesses and consumers acted on a precautionary basis earlier this year to get ahead of the tariffs. Consumer spending, for example, has held up well with consumers moving up purchases on foreign goods in the expectation that there would soon be changes in their prices and availability. The data on business investment show a similar pattern.
However, there are some early indications of damage being done to the economy. Initial claims for unemployment benefits averaged 222,000 per week during January and February. In May, they have averaged 231,000 per week, with the most recent week coming in at 240,000. While layoffs have been rising, job openings have been declining. It is likely that this combination will soon manifest itself as a deceleration in job growth.
Housing sector data have also given hints of weakness, with existing home sales volumes and prices coming in soft in recent months. This has pushed up the inventory of unsold homes to a 4.4-month supply in April from 3.5 months in January and February. Concerns about the implications of the tax cuts recently passed by the House of Representatives have pushed up bond yields and kept mortgage rates relatively high. This too will act to slow the housing sector.
We also are likely to see the inflation data turn up after a lag. The surge in imports during the first quarter allowed retailers to delay increasing prices. However, several large retailers have reported raising prices in recent weeks. This should start showing up in the May and June inflation data.
Ultimately, the tariffs are likely to have a larger impact on growth than inflation. The uncertainty from the erratic way in which the tariffs have been rolled out will be compounded by uncertainty about the ultimate legal outcomes of the cases working their way through the courts. Some may wind up before the Supreme Court and may not be decided until next year. Slower growth will work to blunt the inflationary impacts of the tariffs. Slower growth is also likely to become the dominant concern for policy-makers at the Federal Reserve in the second half of this year.
