KEY DATA: Imports: 0%; Nonfuel: -0.3%; Exports: -0.5%; Farm: -5.3%/ NFIB: +0.7 point
IN A NUTSHELL: “The strong dollar is helping keep import costs down, though it improves the competitiveness of foreign companies.”
WHAT IT MEANS: The dollar has been rising sharply, increasing about eight percent since its bottom early in the year. That is now showing up in softer import prices, which were flat in July despite a rebound in energy costs. Imported food prices were down solidly, as were capital goods and vehicle prices. Consumer durable good costs were up, possibly because of sharp increases in the prices of goods from Canada and Asia that have been subjected to tariffs. We can also see the impact of the trade skirmishes on export prices. Agricultural products suffered a huge drop in prices, as they are the targets of foreign tariffs and are starting to lose markets.
While the trade war may be battering some industries, small businesses seem to be as happy as they have ever been. The National Federation of Independent Business’s Index jumped in July to its second highest level on record. The record was set in July 1983, thirty-five years ago, which says a lot. Small business owners are hiring and looking for more workers, though the inability to find qualified workers remains a major problem. The confidence of small business owners can also be seen in the rise in the plans for capital spending.
MARKETS AND FED POLICY IMPLICATIONS: The economic expansion has reached into the small business sector, which now may be the most optimistic of any group. That is a positive indicator of near-term growth, as these firms don’t tend to make multi-year decisions. The strong hiring expectations should form a base for job gains. But these firms are starting to be pressured by the lack of workers and their compensation costs are rising. That may be good for their workers but not necessarily for their bottom lines and that could limit hiring. It is hard to pay a current workers less than a new worker, so pay increases reverberate through the small business quickly and extensively. Still, the small business optimism is good to see. On the other hand, the impacts of the trade skirmishes are not good to see. Tariffs may have been put on some products but a decline in the value of the dollar affects all imports, making all foreign firms in all industries more competitive. Also, the tariffs are essentially a sales tax that U.S. consumers have to pay. That is true not just for products imported into the U.S. Some of our exports, such as farm products, that go to other countries, face tariffs there. When they are turned into finished goods and sent back to the U.S., they face tariffs a second time. Who pays those costs? Consumers. So look for retail inflation to start accelerating as we move through the year. For now, though, the soft import price index provides some respite for the markets as investors didn’t see a surge in import prices that would spook bondholders or the Fed.