Note: Travelling week.

Fed Minutes Signal More Caution on Cuts if Inflation Progress Stalls The meeting summary showed that all 19 officials approved this month’s quarter-point cut

(…) The Fed’s next meeting is Dec. 17-18. Officials have said the decision to cut rates at that meeting could be a close call, though they have left the door open to one last rate reduction this year.

Separately, the Fed’s staff revised up its assessment of the economy’s capacity to produce goods and services, or what economists refer to as “potential output,” due to recent gains in productivity. Higher potential growth driven by improvements in productivity, if sustained, could allow for an increase in output without resulting pressure on prices.

What Trump’s New Tariff Threats Mean for the U.S. Economy If president-elect follows through, consumers and businesses are likely to see prices rise on everything from fresh fruit to electronics

(…) Import-reliant businesses—especially automobile manufacturers—could face significantly higher costs that they would then pass on to consumers. Farmers and other exporters could face retaliatory tariffs. (…)

Tariffs of 25% on Canada and Mexico, and 10 percentage points added to existing tariffs on China, with those countries imposing retaliatory tariffs, would raise U.S. consumer prices by 0.75% next year, according to the Budget Lab. That estimate drops to 0.65% if households substitute purchases toward domestically produced or lower-tariff imported options. That would amount to more than $1000 in lost purchasing power per household, in 2023 dollars.

If the tariffs against Chinese goods were layered on top of the 60% Trump has already threatened, versus existing tariffs, the estimated inflationary effect would be higher. Beyond raising the prices that Americans pay for goods, higher inflation could lead the Federal Reserve to cut interest rates less than expected in the year ahead. That would keep rates on credit card balances and other loans higher than they otherwise might have been. (…)

Domestic industries that compete with lower-cost foreign manufacturers can experience greater demand for their products, while the government takes in additional revenues.

But consumers and other purchasers of imported goods aren’t able to buy as much, and both economic theory and the historical record show that they tend to lose more than the winners gain. Moreover, when a country imposes tariffs against another country, the other country often responds with tariffs of its own. (…)

American consumers will feel price increases not only after the tariffs are imposed but also in the run up, as stores and businesses rush to preorder nonperishable goods, said Kimberly Clausing, an economist at UCLA School of Law.  Lumber from Canada is an example of how that would play out. (…)

The Peterson Institute for International Economics, a think tank in Washington, D.C.,  estimates that under Trump’s new possible tariffs, prices would rise by 1%. It additionally estimates that by 2026 gross domestic product would be 0.6% lower than it otherwise would have been, and that total U.S. employment would be 1% lower. (…)

Employment in agriculture would be hard hit, too, according to the analysis, coming in 3.1% below where it would have otherwise been. Employment in durable manufacturing—the building of cars and other long-lasting goods—would be 5.4% lower.

Automakers, in particular, might be at risk. They have become reliant on a network of factories and parts suppliers that span the U.S., Mexico and Canda since the North American Free Trade Agreement came into effect 30 years ago, followed by its successor, the United States-Mexico-Canada Agreement.

Tariffs of 25% on imports from Mexico and Canada could add $3,000 on average to the price of a car, according to analysts at Wolfe Research. The firm estimates that about $97 billion worth of auto parts are imported to the U.S. from the two countries each year, and four million vehicles are shipped in—about three million from Mexico and one million from Canada.

Added costs from the potential levies also would hammer the bottom lines of General Motors, Ford Motor and Jeep-maker Stellantis, which all produce vehicles south of the border and rely on parts shipments from there. Evercore ISI estimates a 50% reduction in earnings per share for GM and Stellantis, and 25% for Ford. Shares of all three companies fell on Tuesday, with GM’s stock shedding about 9%.

The National Retail Federation said the timing of the proposed tariffs in January would have an outsize impact on fresh fruits and vegetables, of which the U.S. sources less at that time. U.S. importers will pay 25% more on $10 billion worth of Mexican avocados, tomatoes, raspberries, strawberries and peppers alone; and a 25% tax on $10 billion worth of Mexican beer, tequila and mescal imports, said David French, senior vice president for government relations at the industry group. (…)

Trump’s Trade Chief Advocates ‘Strategic Decoupling’ From China Jamieson Greer has been nominated as US Trade Representative

Jamieson Greer, who’s been nominated as the US Trade Representative, played a key role in imposing tariffs on China during Trump’s first term. As former chief of staff to Robert Lighthizer, who was Trump’s trade representative then, Greer shares a tough stance on Beijing. (…)

Greer recommends that Congress pass laws to protect US companies from economic coercion or retaliation by China. This could include allocating tariff revenue to support affected workers and firms, as well as giving the president the authority to take action against foreign companies that take advantage of Chinese retaliation by backfilling into the Chinese market.

This means if China blocked an American firm from selling in its market, the US might compensate that company. It could also lead to Washington taking action against firms from Brazil or elsewhere if they start selling more soybeans or other goods to Beijing to replace US sellers who have been shut out.

Greer calls for expanding export controls on China to cover a wider range of critical industries, such as aircraft, transportation equipment and legacy semiconductor manufacturing equipment.

This would be a step up from current US export controls, which mainly focus on advanced semiconductors. (…)

Greer calls for Congress to allow the US government to review outbound investment into China across a wide range of sectors with economic and strategic significance. He says the executive branch should have the authority to block such investments if they pose a threat to US economic or national security.

Greer suggests that Congress should consider expanding incentives for critical sectors, similar to those in the CHIPS and Science Act or the Inflation Reduction Act. The targeted industries include pharmaceuticals, robotics, medical devices, aircraft, automotive, energy products, telecommunications and electronics. (…)

Greer also advocates for strengthening restrictions to prevent Chinese firms from selling products to the US government, and recommends that Congress direct the Treasury to set up a China-specific sanctions regime focused on issues such as international security and human rights.

Trump Wields a Tariff Bludgeon The threat of a tax on imports will be his all-purpose lever in foreign and even domestic policy.

The WSJ Editorial Board:

(…) The first political point to note is that Mr. Trump’s tariff justification isn’t economic or based on the traditional claims about cheating or “dumping” products in the U.S. That would typically require studies that find economic harm or a national-security threat.

The tariff here is in service of Trump’s campaign promise to reduce illegal migration and fentanyl smuggling. He vows to take unilateral executive action without any explicit legal rationale. Mr. Trump is threatening the countries, including two neighbors and allies, with economic harm if they don’t help him solve a domestic U.S. problem.

This is an extraordinary use of tariffs, but Mr. Trump is going to use this threat often in his second term. He tried a version of this in his first term to coerce Mexico into assisting him in better policing the border, and he liked the result. Mexico went along with the Remain in Mexico program that held migrants on the Mexican side of the Rio Grande while they awaited asylum rulings.

The hopeful interpretation now is that Mr. Trump is merely using tariffs again as a negotiating strategy to get these countries to help. If they act to reduce the flow of drugs and people, he’ll lift the tariff threat and claim political victory at home.

The problem is that this strategy isn’t cost free and there can be collateral damage. Start with the U.S. auto industry, which depends on cross-border trade to remain competitive. Vehicle components and raw materials move back and forth across North American borders as cars are assembled. A 25% tariff on each border pass would raise prices and cost American jobs. It’s no accident that shares of Ford Motor (-2.6%) and General Motors (-9%) fell sharply on Tuesday on the tariff news. Mr. Trump may not care about stock prices, but what about his new working-class coalition?

There is also the potential risk of retaliation. Mexican President Claudia Sheinbaum on Tuesday offered to talk to Mr. Trump about fentanyl and migration. But she also said she is prepared to respond with tariffs on U.S. exports. Mexico has shown in the past that it can be politically shrewd choosing the American goods and areas it targets with tariffs. Think swing Congressional districts and states.

“One tariff would be followed by another in response, and so on until we put at risk common businesses,” Ms. Sheinbaum said. She has her own economic nationalists to please.

There’s also the not-so-small matter that Mr. Trump’s tariffs, if imposed, would shatter the U.S.-Mexico-Canada Agreement that he negotiated and signed in his first term. The pact’s terms say it can’t be reviewed until 2026, and then the parties have another decade to negotiate new terms or abandon it.

In 2019 Mr. Trump said the USMCA would be “the best and most important trade deal ever made by the USA.” If he blows it up based on his own short-term political needs, he’ll send a message around the world that his—and America’s—treaty word can’t be trusted. U.S. trading partners and allies everywhere will get the message, and China will be courting them with promises of a more reliable export market. Using trade to punish allies is especially short-sighted if you want their help against Chinese mercantilism.

***

It’s also possible that Mr. Trump views tariffs not merely as a tool for ad hoc negotiation but as a lever to remake the entire global trading system. In that case he’ll try to build high tariff walls in an attempt to force U.S. and foreign companies to build nearly everything in America. The economic and political harm from that strategy is for another day, but investors can’t rule it out and members of Congress would be wise not to give him that power.

As we wrote during the campaign, tariffs were the main economic risk of his candidacy. Mr. Trump campaigned as the Tariff Man, and he aims to impose them early and often. Get ready for what could be a wild ride.

Note: Travelling week.

Here we go!

Trump Fires Salvo on North American Trade Pact President-elect signals intention to upend USMCA, wring concessions on immigration and fentanyl

Donald Trump’s new tariff pledges send a clear signal that he wants to rewrite the terms of North America’s free-trade pact and follow through with plans to hit China with tariffs, demonstrating to allies and adversaries alike that he is serious about renewing confrontation over a global trading system that he believes costs the U.S. dearly.

On his Truth Social social-media platform on Monday, Trump said he would levy tariffs of 25% on imports of all goods from Mexico and Canada, accusing both countries of facilitating illegal immigration and fentanyl abuse in the U.S. The Mexican peso fell 1.4% against the dollar in Asian trading Tuesday, while the Canadian dollar lost 1%.

He also promised to levy additional tariffs of 10% on Chinese imports, citing what he says is China’s failure to regulate the chemicals that go into fentanyl. Many Chinese products are already subject to average levies of about 15% after the first phase of the trade war that kicked off in 2018, during Trump’s first term in office. The Chinese yuan shed 0.3% against the greenback in offshore trading.

A 10% extra tariff on Chinese imports is “an opening salvo,” said Joe Brusuelas, chief economist at global accounting firm RSM.

The tariff threat suggests Trump is seeking to include immigration, security and drugs in a negotiation that usually revolves only around trade, as well as accelerate a planned review of the USMCA scheduled for 2026, said Alberto Villarreal, managing director of Nepanoa, a Chicago-based consulting firm that provides services for companies wanting to set up shop in Mexico.

“If Trump follows through with imposing immediate and unilateral tariffs, this would mean ‘going nuclear’ on USMCA,” he said.

Tariffs would likely drive up the price of steel and aluminum in the U.S. because Canada and Mexico are major suppliers of those metals to the U.S. market. The U.S. also buys almost all of Canada’s oil.

U.S. automakers including General Motors and Ford Motor have spent decades planning their factory footprints around free trade between the three countries. About 16% of vehicles that will be sold in the U.S. this year will have been built in Mexico, or roughly 2.5 million cars, trucks and SUVs, according to a forecast from research firm Wards Intelligence. Vehicles manufactured in Canada will account for about 7% of U.S. sales.

Tariffs could hit the automotive supply base hard, potentially pushing up prices in the U.S. Hundreds of parts suppliers operate in Mexico, feeding both local factories and U.S. plants. Some parts cross the border several times in various stages of production before landing in a finished vehicle, said Mark Barrott, head of the automotive and mobility practice at consulting firm Plante Moran.

“Every time that would be subject to a tariff. Those costs are all likely to fall on the consumer,” he said Monday, before Trump’s posting on the planned tariffs.

If Trump carries out his tariff threat, Mexico should retaliate, leveling tariffs on U.S. corn growers, milk and pork exporters and other sectors that are among the president-elect’s most important supporters, said Ildefonso Guajardo, who served as economy minister and led Mexico’s negotiations for the creation of the USMCA. (…)

Trump has threatened Mexico with tariffs before. During his first term in office, Trump threatened Mexico with 25% tariffs if it didn’t stop thousands of migrants from crossing into the U.S. across its southern border. Then-President Andrés Manuel López Obrador deployed thousands of National Guard members to contain U.S.-bound migrants. The tariff threat was dropped.

If Mexico can limit migration and fentanyl trafficking—and discourage Chinese firms from shipping goods to the U.S. via Mexico, another Trump policy goal—then tariffs could be avoided, said Benito Berber, chief economist for the Americas at Natixis. (…)

Bloomberg:

(…) “The president-elect has done what he’s famous for, which is try to stir the debate. The only surprise is how early he’s done it,” Volpe said. “What we learned in the first term was he uses strong rhetoric, public rhetoric. But the negotiations are always tough, but reasonable — and I’m just telling everybody to be patient.”

A 25% tariff applied to all imports from Canada would put pressure on energy costs. Oil, gas and other energy products are Canada’s largest export to its southern neighbor; it’s by far the largest external supplier of crude to the US. Wilbur Ross, Trump’s former Commerce secretary, said earlier this month it would make no sense to place tariffs on Canadian energy. (…)

Currently, the re-branded trade pact, known as the United States-Mexico-Canada Agreement, allows for duty-free trade across a wide range of sectors. It’s not clear what recourse American importers, who would pay the duties, would have under the pact to head off any levy.

Beyond Bessent, Trump still has a number of top economic roles to fill in his administration. One of the chief architects of Trump’s tariff agenda, former United States Trade Representative Robert Lighthizer has yet to land a role in the second term.

November Vehicle Sales Forecast: 16.2 million SAAR, Up 5% YoY

November’s forecast SAAR of 16.2 million units is the highest since May 2021. With the month having an atypical fifth weekend, the extended timeframe means there is more upside than downside to November’s forecast – especially with retail volume already showing solid growth.

Clause-trophobia: (n) the fear that aggressive Presidential use of rarely-exploited legislative provisions will ride roughshod over democratic norms.

From Bruce Mehlman:

1. The Adjournment Clause: Article II, Section 3 of the U.S. Constitution says the President “may adjourn [Congress] to such Time as he shall think proper” if the House & Senate cannot agree on when to adjourn. When Congress is adjourned, Presidents can make recess appointments to fill jobs in the Executive Branch that otherwise require confirmation, as most modern Presidents did before Congress stopped formally adjourning (by maintaining pro forma sessions) to prevent it. Some fear the House may vote to adjourn in 2025 while the Senate declines, empowering President Trump to send them home and recess appoint whomever he wants, avoiding the increasingly time-consuming task of Senate confirmation (chart). Will the 119th Congress advise & consent or adjourn & relent? Stay tuned.

   

2. Impoundment: Title X of the Congressional Budget & Impoundment Control Act of 1974 prohibits the President from refusing to spend funds appropriated by Congress. In response to government persistently spending more than it takes in (chart from CBO), and seeking offsets for desired tax-cutting, President Trump says he will “use the president’s long-recognized Impoundment Power to squeeze the bloated federal bureaucracy for massive savings.” Can the President convince Courts to limit this Act or get Congress to modify or repeal it? Stay tuned.

3. Insurrection: The Posse Comitatus Act of 1878 bars Presidents from using the military for domestic law enforcement. The primary exception is provided by the Insurrection Act of 1792, if military forces are necessary to “suppress Insurrections and repel Invasions.” President Eisenhower invoked this exception to deploy federal troops to Little Rock Arkansas to protect students amidst school desegregation. President-elect Trump confirmed on Monday that he also intends to use the U.S. military to help with the mass deportations of undocumented immigrants, which Pew Research estimates at over 11M people (chart). Is the rising number of unauthorized immigrants an “invasion” triggering the Insurrection exception? Stay tuned.

4. Section 7511: The Pendleton Act of 1883 envisioned a professional U.S. civil service made up of experts who knew their fields, had to pass competence tests & could not be fired without due process. But the 1978 Civil Service Reform Act included a provision (now Section 7511 of Title 5 of the U.S. Code ) that stripped civil service protections for those “whose position has been determined to be of a confidential, policy-determining, policy-making or policy-advocating character.” There are 2.2M full-time federal employees (chart). Can President-elect Trump dismiss tens of thousands of career civil servants based on Section 7511, as he has vowed to do? Stay tuned.

5. Budget Reconciliation: The Congressional Budget Act of 1974 allows a bare Senate majority to overcome filibusters (chart) and pass bills that impact spending. Bills enacted using the reconciliation process include Clinton’s 1996 welfare reform; George W. Bush’s 2001 tax cuts; Obama’s 2010 Affordable Care Act, Trump’s 2017 tax cuts and Biden’s American Rescue Plan in 2021 and Inflation Reduction Act in 2022. Can President Trump & Congressional Republicans extend tax cuts & pursue other policy priorities (tariffs, immigration, permitting, border wall) using reconciliation in 2025? Stay tuned.

6. Trade After Loper Bright: While Congress delegated much trade policy authority to the Executive Branch, a 2024 Supreme Court decision (Loper Bright v. Raimondo) reduced agencies’ ability to interpret ambiguous legislation going forward. This could hinder President-elect Trump’s plans to to impose a 10–20% across-the-board tariff on imports & an additional 60% tariff on imports from China to deal with persistent U.S. trade deficits (chart). Will President Trump’s sweeping tariff plans pass legal muster or require new enabling legislation? Stay tuned.

Trump’s deportation dilemma (Axios)

It’s one thing to call for the largest deportation in American history. It’s another to pull it off logistically, given the highly complex process of spotting, detaining, holding and evicting people in the U.S. illegally.

The judicial process — one small piece of a long, expensive deportation machinery — illustrates vividly the complexity ahead.

The U.S. immigration system’s backlog of 3.7 million court cases will take four years to resolve at the current pace. But that could balloon to 16 years under President-elect Trump’s mass deportation plan, Axios’ Russell Contreras reports.

Without a huge increase in immigration judges, millions of new cases would flood the non-criminal system. Trump’s administration likely would need new detention centers nationwide to hold people suspected of being in the U.S. without authorization — possibly for years.

Immigration experts estimate the whole operation could cost taxpayers $150 billion to $350 billion.

Immigration courts closed 900,000 cases from Oct. 1, 2023, to Sept. 30, 2024, according to data from the Transactional Records Access Clearinghouse (TRAC) at Syracuse University.

• That’s the most cleared cases in a fiscal year, and 235,000 more than the previous year, TRAC reports.
• At that pace, immigration courts wouldn’t clear all of the active cases until 2028, an Axios analysis of TRAC data found.

Add 11 million undocumented immigrants — who Trump said would be part of his mass deportation plan — and the backlog would go into 2040 at the current pace, according to an Axios review.

That’s not counting millions of other migrants trying to enter the U.S. in the future.

Tom Homan, just over 12 hours before he was named Trump’s border czar, told Maria Bartiromo on Fox News’ “Sunday Morning Futures” that the administration will “concentrate on the public safety threats and the national security threats first, because they’re the worst of the worst. So it’s going to be the worst first.”

“That’s how it has to be done,” Homan added. “And we know a record number of people on the terrorist watch list have crossed this border. We know a record number of terrorists have been released in this country.

“We have already arrested some planning attacks. So, look: The president is dead on when he says criminal threats, national security threats are going to be prioritized, and that’s the way it’s going to be.”