- President Donald Trump’s threatened tariffs on all Mexican goods would eat into US economic growth and corporate earnings, experts say.
- Several Wall Street firms have reduced their earnings and economic growth outlook as a direct result of the proposed tariffs.
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The primary measure of economic growth that President Donald Trump touts over and over again could take a direct hit as a result of his newly threatened tariffs on all of the goods the US imports from Mexico.
The risks the tariffs pose to GDP are only part of the puzzle. The proposed duties, set to take effect next week, will eat into corporate earnings, hit the stock market, and boost prices for consumers, market strategists and economists say.
The new tariffs are troubling for investors partly because they apply to all of the goods from Mexico, not just select items, as is the case with the Trump’s administration’s tariffs on Chinese goods, said Erin Gibbs, a portfolio manager at S&P Investment Advisory Services.
The goods the US imports from Mexico could negative impact a different set of industries than the Chinese tariffs, Gibbs said. Some of the industries that would be hit with the tariffs, like food and consumer staples, operate on razor-thin margins.
So even a 5% tariff could have a “meaningful negative impact on profits until they can pass the higher costs along,” Gibbs said. In other words, US consumers will eventually absorb that burden, particularly if the tariffs on Mexican goods rise to 25% as Trump outlined. The administration said last week that the tariff on goods would increase to 25% in October if immigration at the US-Mexico border is not remedied.
“It is surprising that the president is willing to disrupt and hurt healthy American businesses by using tariffs for purposes other than trade,” Gibbs said.
Markets Insider has compiled five statistics that put into perspective the longer-term US stock-market and economic risks that the proposed tariffs pose, according to Wall Street economists and strategists:
The probably of a recession is on the rise
- JP Morgan
The risk of a US recession beginning within one has risen over the last two weeks, according to JPMorgan’s model.
The firm’s model considers different measures of business sentiment that have been hit from China-related trade tensions, like the flash May PMI business surveys and a deterioration in University of Michigan consumer sentiment.
“This move was largely driven by declines in several measures of business confidence amid renewed escalation in trade policy tensions,” the economists said.
While consumer sentiment is still elevated, manufacturing sentiment has remained close to its December lows. The Institute for Supply Management said Monday that its gauge of manufacturing activity fell more than economists expected in May, bringing it to its slowest pace since 2016.
“On top of this lingering caution among businesses, we have now seen a re-escalation of trade tensions in recent weeks, prompting declines in several business surveys and pushing our model probability of recession back up to 43%,” the firm wrote.
Goldman Sachs cuts its GDP forecasts for the 2nd half of the year
- Goldman Sachs
Goldman Sachs lowered its quarterly gross-domestic-product forecasts for the rest of this year due in part to heightened trade-related uncertainty.
Jan Hatzius, the firm’s chief US economist, said in a note to clients dated June 2 that the firm was reducing its third- and fourth-quarter GDP forecasts by 0.5 percentage points and 0.4 percentage points to 1.9% and 2% quarter-over-quarter, respectively.
That reflects “the drag from tighter financial conditions, heightened uncertainty, and eroded consumer purchasing power” with tariffs expected to boost inflation by 0.5 percentage points in the second half of this year.
Still, Hatzius expects growth to rebound next year.
“We expect growth to rebound moderately in 2020 as tariffs come off and financial conditions stabilize,” the firm wrote.
Corporate earnings are set to take a hit
- Bank of America Merrill Lynch
Corporate earnings are set to take a hit this year and next due to Trump’s tariffs on all of the goods the US imports from Mexico, Bank of America Merrill Lynch said Monday in a note to clients.
The firm cut its earnings-per-share forecasts for 2019 and 2020 due in part due to renewed trade tensions between the US and China and because of the newly proposed tariffs on Mexico.
“We estimate a 1% EPS hit from increased China tariffs,” the firm said. “From tariffs on Mexico, we estimate a 0.6% drag in ’19 & 1.5% in ’20.”
BAML lowered its 2019 earnings-per-share outlook to $166 from $168, marking a 1% reduction. Its 2020 EPS outlook was cut to to $176 from $180, marking a 2% reduction. That places the firm’s outlook below Wall Street’s consensus for this year and next.
“Our downward revisions are mainly driven by sectors that are directly hit by the recent trade tensions,” they wrote, pointing specifically to industrials and materials.
Inflation is headed higher
- Goldman Sachs
“The trade war is likely to become increasingly visible in the inflation numbers,” Goldman Sachs US economists led by Hatzius wrote in a Sunday note.
On the heels of the newly announced tariffs on all Mexican goods, Goldman’s new US core PCE forecast – the personal consumption expenditure, a measure of the change in prices in goods and services – rises to 2% in August. It was at 1.57% in April.
That measure could then jump to between 2.3% and 2.4% in early 2020 before falling under the assumption that tariffs will be removed, the economists said.
“If all proposed tariffs are implemented, we estimate a core inflation impulse that peaks at an eye-popping +1.25pp early next year,” they wrote.
Stocks will drop
- Markets Insider
“The unpredictability of the administration regarding tariffs/trade combined with a late cycle economy and a Fed seemingly on hold makes a 16x multiple now unreasonable, and 15x seems much more appropriate,” Tom Essaye, the founder of the Sevens Research Report newsletter, said in a Friday note to clients.
With that earnings multiple and a 2020 S&P 500 EPS forecast of $180, a “reasonable downside target” is now 2,700, Essaye wrote. That implies a drop of about 3% off current levels.
At the same time, there are “real doubts” over whether that $180 estimate can even hold up, particularly if the international-trade conflict deepens, he said.
Stocks plunged Friday on the heels of Trump’s announcement, and have since recovered their losses. US equity markets on Tuesday were firmly in positive territory, with the Dow Jones Industrial Average up more than 400 points.
- REUTERS/ Nacho Doce