MNI INTERVIEW: Fed Economist: Trade Fight Hurts Energy Capex

By Jean Yung

     WASHINGTON (MNI) - Pessimism in the oil and gas sector could erode U.S.

business investment until the outlook for global trade and economic growth

clears up, the Dallas Federal Reserve Bank's research director told MNI.

     A dearth of energy investment dominated the 0.6% annualized decline in

second quarter non-residential fixed investment, which otherwise would have been

little changed, Marc Giannoni said in an interview. Firms surveyed by the Dallas

Fed cite growing uncertainty as a dark cloud over future conditions, he said.

Crude oil futures traded as low as $50.52 per barrel this week, the lowest since

the market rout in December. 

     "Slower global demand is the main concern," Giannoni said. More than half

of respondents to the latest Dallas Fed Energy Survey in June said uncertainty

has increased.

     With U.S.-China tensions rising even further this week and global central

banks embracing monetary accommodation, anticipation is building that the Fed

will follow July's quarter-point "mid-cycle adjustment" with further moves this

year. Chair Jay Powell last week cited soft investment and manufacturing as

signs trade tensions are slowing the U.S. economy.

     --TARIFFS HURTING

     "Out of 300-plus firms we last surveyed, nearly a third of them said their

profit margins had decreased as a result of implemented tariffs, which is pretty

significant," Giannoni said. Roughly 20% say production and revenue have fallen

and a similar portion are paring capital spending plans in response to tariffs

that have been imposed already. 

     "The firms we survey refer to the uncertainty over tariffs repeatedly. By

how much they'll cut investment, it's hard to say. But I expect the effect will

be larger than it has been so far," Giannoni said.

     --REGIME OF UNCERTAINTY 

     Trade policy uncertainty "leaves businesses feeling it's not clear that

what is in place today will be in place a few weeks from now," Giannoni said.

That may lead to a slowdown in capital investment even if new tariffs on Chinese

imports planned for Sept. 1 don't materialize, he said.

     If the slide in capital investment continues it would have a noticeable

impact on the economy, especially if it broadened into a Dallas job market that

has been facing labor shortages.

     "Recent events are added confirmation that we are in this environment where

you never know what things are going to look like," he said.

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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