Tariff wars taking some of the steam out of still strong U.S. economic growth

The tariff wars are showing up in a wider U.S. trade deficit and have taken some of the steam out of still strong third quarter growth.

Economists Thursday trimmed third quarter growth forecasts, after reports of a wider than expected trade deficit and weaker equipment investment. The average third quarter forecast in CNBC/Moody's Analytics Rapid Update survey of economists fell by 0.2 percentage points to 3.2 percent.

Trade data and durable goods reports were released Thursday morning, as was the final reading on second quarter GDP, which grew by 4.2 percent.

"We saw an acceleration of activity in the second quarter. Exports surged in Q2, and now they've fallen off the table in Q3," said Stephen Stanley, chief economist at Amherst Pierpont. Stanley said it appears the export data was impacted by activity around the imposition of tariffs on Chinese goods and the anticipated retaliation of tariffs on U.S. exports to China.

"There are enough anecdotal reports from people in the industry that suggest that's what's going on. I think people were trying to rush stuff out of the gate because July was when tariffs on Chinese imports went in...It makes sense that people were rushing stuff out the door in May and June." Stanley said he cut his forecast for third quarter to 2.8 percent from 3 percent.

J.P. Morgan economists cut their third quarter forecast from 3.5 percent to growth of 3 percent. They said the biggest contribution to their forecast reduction was a widening of the trade deficit in goods to a near record $75.8 billion in August, from July's $72 billion. They expect net exports will subtract about 2.1 percentage points from GDP growth in the quarter.

The 1.6 percent decline in exports was due in large part to a 9.5 percent drop in shipments of food, feeds and beverages. While there are not yet specifics, economists expect that could reflect a reduction in soybean exports to China.

"The widening in the August trade deficit reflected both a 1.5% decline in exports and 0.7% increase in imports. Both of these may have been impacted by the ongoing trade conflict. Soybean exports were reported to be front-loaded ahead of Chinese tariffs earlier in the year and now agricultural exports have been coming off hard the last two months, dragging down overall exports," the JP Morgan economists wrote.

"Meanwhile import growth has been picking up lately, which could reflect efforts by importers to get goods in the country before higher US tariffs kick in. The possible stockpiling of imported goods ahead of the tariffs may also be a factor explaining the robust $65 billion estimated annual pace of real inventory accumulation in this quarter," they wrote.

The J. P. Morgan economists said that is also why inventories grew more at wholesalers and at retailers than at domestic factories, which saw a 0.4 percent decline. "Pull-forward of imports into warehouses may persist for the duration of the year, as importers may surmise that the trade conflict with China won't be resolved in time to head off the scheduled bump-up in tariffs at year-end," they wrote.

Stanley said so far, he doesn't see any evidence that the impact from tariffs will be sustained in the trade flows. He also expects growth to remain strong at about 3 percent for this year.

"Consumer and business inestment areas are still quite storng. It's just these inventory and trade swings that have pushed the headline number a bit, but that's not indicative of the underlying health of the economy," Stanley said. "It could be somewhat disruptive but the underlying economy has a tremendous amount of strength."

The part of durable goods that most reflects business investment did weaken in August. Core nondefense, ex-aircraft capital goods shipment growth was just 0.1 percent last month, and the closely watched core orders fell by 0.5 percent.

"Real business spending on capital equipment—estimated using core capital goods shipments—appears to be increasing at about a 3.0% pace this quarter, the slowest growth since late 2016," JP Morgan economists wrote. "On the plus side—at least for Q3 GDP—inventory growth now appears to be adding even more to current-quarter growth, about offsetting the trade drag."

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