Beaulieu: Economic Indicators Point to Slowing Growth

New mill orders for iron and steel products are up 16.4 percent over year-ago levels, which seems very positive. But deflated, the figure declines to 5.5 percent. “The first half of 2018 was definitely the best. You will see a softening and a transition in the third quarter, and in the fourth quarter a more noticeable slowing in the rate of rise in production and new orders,” he said.

Commenting on the Trump administration steel tariffs, Beaulieu noted that steel industry revenues and profits were rising before the tariffs were put in place. “The reality is that throwing the tariffs on Canada and Mexico cost us more than it cost them because we export more steel to Canada and Mexico than we import from them. So, when they threw retaliatory tariffs on the U.S., we ended up with an inverse flow, a problem selling steel into those countries.”

Trump tariffs have prompted retaliatory measures from many nations, which are targeted to do the most political damage. Tariffs on U.S. exports of motorcycles are aimed to hurt Wisconsin-based Harley-Davidson, the home state of House Speaker Paul Ryan. Tariffs on Kentucky bourbon are meant to punish Kentucky Senator Mitch McConnell. “When they target those products, it makes a difference to [consumers] who were not supposed to be in the line of fire,” Beaulieu noted.

The U.S. is the second largest exporting nation in the world. Exports make up about 8 percent of U.S. GDP. “If exports slow because of retaliatory tariffs, there will be a ripple effect through the whole economy,” he said.

The uncertainty of the tariffs imposes a drag on investment. “The tariffs could be gone with a tweet. What if the tariffs are rescinded and you have extended $50 million [in capex] to work behind this wall, expecting it to last? What if this is a one-term president and the next president says we are going back to the way it was? We cannot build an economy off of a cost structure that is artificial,” Beaulieu said.

In a trade war with China, the U.S. will win because China’s exports to the U.S. constitute a bigger percentage of its GDP. “We win unless they go with the financial ‘nuclear option,’ which is to stop buying U.S. debt. Because we are a debtor nation, we have an exposed flank,” he noted.

Changes to the federal tax law, lowering the tax rates as a means to stimulate economic growth, are not having the desired effect, Beaulieu reported. Certain individuals and small companies stand to benefit, but many large corporations are using the windfall to pay down debt and buy back their own stock. Only 15 percent expect to give pay raises to their employees and only 15 percent plan to increase capital spending. “That does not provide the push to the economy that everyone was hoping for,” Beaulieu said. “Retail sales look good, but not much more than average. We are not seeing much benefit from people having more money in their pockets.”

Nonresidential construction will be an exception to the downtrend next year, Beaulieu noted. “Steel going into nonresidential construction will see an upside in 2019 and level off in 2020 because non-res lags the rest of the economy by 12-18 months.”

Beaulieu expressed no opinions about whether the Trump tariffs and tax cuts are good or bad, he just reported the facts of their effects. “Despite everything that has gone on in Washington, the economy has unfolded in a very predictable manner,” he said. “The economy is bigger than politics. While politics can certainly shake up an economy, the basics of an economy are longer lasting than any administration or policy.”