Heathy US Consumers?
07/09/2019 08:04 am MYT
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"In the next 12-18 months, US consumers are going to bear the full brunt of their president’s idiocy. In the coming US recession, when unemployment will surely rise, what option do US consumers have ? Spend more ? Save more ?"



In May 2019, Tariff Man increased US tariffs from 10% to 25% on US$200 billion worth of imports from China. Since then, no substantial adverse impact has been witnessed on the US economy. This is due to the fact the goods affected have generally been non-consumer goods. Consumer spending makes up about two-thirds of US GDP. Anything that hurts consumer spending would hurt the US economy.




In May 2019, Tariff Man increased US tariffs from 10% to 25% on US$200 billion worth of imports from China. Since then, no substantial adverse impact has been seen on the US economy. This is due to the fact the good affected have generally been non-consumer goods. Consumer spending makes up about two-thirds of US GDP. Anything that hurts consumer spending would hurt the US economy.



On 1 Sep 2019, 15% tariffs went into effect on US$112 bln of Chinese imports. The said tariffs cover a wide range of consumer goods. According to computations done by the Peterson Institute For International Economics, the 1 Sep 2019 tariffs will see the share of Chinese imports of textiles and clothing hit by Trump’s tariffs surge from 10% to 87%, and for footwear, the coverage of Chinese imports will jump from 7% to 53%. While the May 2019 tariffs affected only 29% of consumer goods imported from China, the 1 Sep tariffs enlarged that scope to 69%. There is one more round to go in the madman’s trade war against China. Another round of US tariffs on Chinese imports is set to go into effect on 15 Dec, which will hit an additional US$160 bln of Chinese imports. Starting 15 Dec, US companies will find that 100% of their imports from China, in almost all product categories, will have been targeted by Trump’s tariffs. The US tariffs imposed on 1 Sep and 15 Dec will hit the average American household.



The average American household is not exactly in good shape. US consumer spending was essentially financed by surging household debt (figure 1).The Nineteen Nineties saw this debt jump from 40-50% to almost 100% by the 4th quarter of 2007. With consumers shocked, the 2008 crisis brought some sanity back to the highly indebted American households and the debt fell steadily. However, the last 3 to 4 years have seen the drop in household debt tapering off as they became complacent again with the prolonged US economic recovery.





The US personal savings rate has never been high, but what is worrying about the current rate is that it has remained low even though US household debt has stayed at an elevated level. While the current 7 to 8% saving rate (figure 2) is better than the 3 to 4% rate prevailing in the years before the US-led 2008 crisis, US household debt is now much higher. As we wrote earlier, Trump’s ridiculous tariffs on Chinese imports are just about to hit American consumers. Perfect timing.





As the full impact of Trump’s tariffs kicked in, the US economy is at the same time on the verge of starting a new recession. On top of the bearish inverted yield curve, the US ISM manufacturing index for Aug sank below 50%, the level that divides an expanding US manufacturing sector from a recessionary one. The last time this happened was in 2015-2016, but that was due to the 2015 crude oil crisis. This time, the US manufacturing sector has been hit by a slowing global economy and by Trump’s trade war against China. In the next 12-18 months, US consumers are going to bear the full brunt of their president’s idiocy. In the coming US recession, when unemployment will surely rise, what option do US consumers have ? Spend more ? Save more ? With this as our backdrop, i Capital is retaining its worried short-term outlook of the NYSE at a range of 2,450 – 2,950 for the S&P 500. For now, i Capital retains its medium-term and long-term outlook of the S&P 500 as highly uncertain.



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Note from Publisher
i Capital will not be published for the issue dated 19 – 25 Sep, 2019. However, during this period, www.icapital.biz will be updated as usual. Our office’s operating hours will not be affected. Volume 31, number 6 of i Capital will hence be dated 26 Sep – 2 Oct, 2019.

The haze is back. According to the Department of Environment’s Air Pollutant Index (API), the API readings have reached unhealthy levels in many parts of Malaysia; some have even reached “very unhealthy” levels. This health hazard has plagued Malaysia, Indonesia, and Singapore for decades. Although forest fires caused by extreme dry weather play a part in the problem, the habit of Indonesian farmers using fire to clear land has been the main culprit. While the Amazon rainforest fires have caught global attention and the Brazilian government was under heavy criticism from the global community, the Indonesian government has received much kinder treatments from her neighbours and indiffercne from the global community. Apart from apologising, the Indonesian government really needs to put a stop to this perennial health and safety hazards that have been affecting millions of people.

Meanwhile, shareowners of icapital.biz Bhd are reminded to attend the 15th AGM on 21 Sep at the Sime Darby Convention Centre, Kuala Lumpur.
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