Will Fed Notice Big Drop in Construction Spending? Steep Decline in Housing Demand?

The early action in the stock market indicates that investors have probably absorbed the threat of increased tariffs by the United States on China and have shifted their focus back to the robust earnings report from Apple, released after yesterday’s close.

According to reports, the Trump Administration could announce tougher tariffs on China as early as Wednesday in Washington. The plan is to more than double the tariffs proposed on July 10. China responded by accusing the United States of bullying and again vowed to retaliate if President Trump follows through with his alleged threat.

The move by stock investors makes sense and follows a familiar pattern. Typically, the first threat is met with a steep sell-off. This is usually because investors haven’t hedged against the risk from a specific event. As the threats continue, the markets become more immune and the effects are diminished.

We saw a similar movement in the markets about a year ago when North Korea was testing ballistic missiles. Today’s quick recovery from the threat of stronger tariffs indicates that investors are likely to be unfazed until the actual impact of the tariffs shows up in the economic numbers. This assessment is similar to what Fed Chairman Jerome Powell told Congress last month.

Fed Decisions

The Fed is not expected to raise rates at the conclusion of today’s two-day meeting. It’s probably not going to alter Fed policy either. Traditionally, this meeting is an informational meeting. In keeping with that tradition, traders should be watching for any comments by FOMC members on their outlook for inflation and their thoughts on the potential impact of a prolonged trade war on the global economy.

Keep in mind that these will only be thoughts. We should start to see the real impact of the tariffs starting in September. Or will we. Perhaps they are already here.

Trump Factor

Second quarter GDP came in at 4.1 percent as reported last week. President Trump heralded the news, saying that he expects it to continue to grow. However, he didn’t mention that he may have goosed it along with his tax cuts and his tariffs. Prior to the implementation of the tariffs, a lot of items moved out of the country particularly soybeans. These two factors may have artificially delivered the blow out number.

Preliminary GDP reports for the third quarter should be watched closely for signs that the tariffs are having a negative impact on growth. This should lead to increased criticism of the Fed by President Trump who is currently “not thrilled” about raising interest rates. Increased criticism of the Fed could upset the economic recovery.

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Economic Reports

Today’s better-than-expected ADP private-sector jobs report was a bit of a surprise. It showed the private sector added 219K jobs in July versus an estimate of 186K. This is likely to mean economists will increase Friday’s Non-Farm Payrolls forecasts from 190K to over 200K.

Other reports didn’t fare as well. ISM Manufacturing PMI came in at 58.1, missing the 59.4 estimate and coming in well below the 60.2 previous read. Construction Spending fell 1.1%, however, the previous report was revised upward to 1.3%. Nonetheless, a slowdown in construction should not be ignored especially since Trump placed his first tariffs on aluminum and steel, two materials important to the construction trade.

Although stock market investors and the Fed may be waiting for more evidence of an economic slowdown caused by the tariffs, we may already be seeing signs that they are. Let’s see if the Fed took notice.