TARIFFS, MINIMUM WAGE AND MANUFACTURERS

There are still a lot of uncertainties regarding Trump's plans but we'll have to wait and see what they are specifically.

The main topic these days seems to be the imposing tariffs on imports to narrow the trade deficit and how it could benefit the US. But I do not see it in that manner.

US manufacturing will still have to rely on imported raw materials and components as the US cannot manufacture everything. Imposing tariffs on components will drive up inflation as the manufacturers in the US who require these components will have to pay a higher price for them and this will be passed to the consumers.

Not only that, the minimum wage of US$15 per hour (applicable to some states) will add on to manufacturing costs.

Manufacturers will also have to contend with rising costs of financing as interest rate increases.

With rising costs, manufacturers would have to look at automation and this could have ill effect on the labour force.

Back to the US consumers, they are simultaneously confronted with rising credit card debt, rising interest payments, rising insurance premiums and healthcare costs, and shrinking disposable income due to slow wage growth vs inflation. How much longer can the consumers continue to support the economy if prices keeps on rising?

Perhaps the latest Retail Sales data can shed some light into this. Retail sales ex-auto and ex-gas were unchanged vs 0.4% rise in expectations. So this goes to show other than autos and gas, consumers spending hardly budged.

And about those auto sales, most are driven by offering subprime auto-loans which are now in danger of falling apart very much like the housing crisis in 2008 as delinquencies rose (see chart below).

Source: Business Insider

Incidentally Consumer Confidence fell in the month of January to 98.1 vs expectations of 98.5.

With 70% of the economy being consumer driven, we could see some tough times ahead in the US economy.