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White House learns wrong lesson from labour market

American companies are already delaying investment and facing higher costs
U.S. President Donald Trump walks on the South Lawn of the White House upon his return from Bedminster, New Jersey, to Washington, U.S., July 8, 2018. REUTERS/Yuri Gripas

By Gina Chon

WASHINGTON (Reuters Breakingviews) - The White House is learning the wrong lesson from a strong labour market. U.S. employers added 213,000 jobs in June, continuing a hot streak. President Donald Trump reckons he has enough of an economic cushion to ratchet up trade wars with China and with U.S. allies like Canada and the European Union. Yet American companies are already delaying investment and facing higher costs.

The U.S. economy is adding an impressive number of jobs as it enters its 10th year of expansion. With figures revised upward for April and May, U.S. employers added an average of 211,000 jobs per month over the last three months, the U.S. Labor Department said Friday. The unemployment rate rose to four per cent, but that’s because more people were looking for jobs, swelling the labor force by more than half a million people.

Trump and his advisers argue the country can afford retaliatory tariffs because of the strong economy. U.S. tariffs on US$34 billion worth of Chinese imports kicked in on Friday, and Beijing said it will respond in kind. Canada, Mexico and the European Union are imposing levies on a total of about US$20 billion in U.S. goods because of the administration's steel and aluminum tariffs. Trade adviser Peter Navarro contends China has more to lose than America while White House economist Kevin Hassett says the trade moves are “dwarfed” by positive economic data, aided by the Republican tax cuts passed last year.

Yet U.S. companies are already being hurt. While the Institute for Supply Management’s June survey showed manufacturing growth, businesses were hit by supply chain problems due to tariffs. A food and beverage company told ISM it would shift production to Canada for products sent to China, while a fabricated-metals producer said the price it pays for steel increased by 20 percent since March.

Some businesses told Federal Reserve officials they have scaled back or postponed capital-spending plans despite the fact that they can immediately expense investment costs under the new tax legislation. Retaliatory tariffs threaten US$713 million in exports from Florida, US$2.3 billion in goods from Michigan and US$3.9 billion in products from Texas, according to the U.S. Chamber of Commerce.

Because of the economy's overall health, it may take some time to see the full effects of trade wars. But the buffer is dissipating, and the pain is likely to be felt more broadly as the November midterm elections approach.

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