MNI INTERVIEW: U.S. Factories to See 2H Recovery-Fed Economist

By Jean Yung

     WASHINGTON (MNI) - The continued U.S. economic expansion will likely boost

manufacturing in the second half of the year even with a Chinese trade war

weighing on business decisions, Federal Reserve Bank of Chicago adviser Bill

Strauss said.

     Real economic indicators are holding up well despite recent market

volatility triggered by signs the trade war was escalating, Strauss told MNI. He

cited the global slowdown and financial market risks as concerns, but the Trump

administration's immediate threat of additional tariffs on Chinese imports has

been kicked down the road for now. Washington on Tuesday said it would delay the

next round of tariffs several months while narrowing the scope. 

     Businesses in the Chicago Fed district, a big part of the nation's

manufacturing base, tell Strauss they are holding off decisions if possible in

the uncertain policy environment and examining options for moving supply chains

outside China.

     "The longer this goes on, the longer the pent-up activity gets created.

What will release it, it's hard to say," Strauss said. 

     --MANUFACTURING, AUTOS RECOVERING

     Industrial production may have turned a corner since the weakness at the

start of the year, with the Fed's index rising out of negative territory in May

and June, Strauss said. The latest Blue Chip survey projects a flat trend for

the year, indicating a recovery could take place in the second half. 

     Similarly, vehicle sales have actually fallen less than expected this year,

bolstered by the healthy labor market, Strauss said. 

     "We have added 2.2 million jobs over the past year -- people who have money

to spend and a desire to buy things -- and that contributes to strong underlying

fundamentals," he said.

     --GLOBAL, FINANCIAL CONCERNS

     Strauss said there are risks on the financial side. A steep slide in yield

on the benchmark 10-year note and concerns over whether equities are

overextended raises recession fears. On Tuesday, the 2-year-10-year curve neared

inversion.  

     "With the 10-year falling as much as it had, I would have expected a bit

more concern, but most people say markets are still relatively solid," he said,

citing the mood at a recent conference of business economists in Boise, Idaho. 

     A downgrade of growth around the world is a bigger worry, with foreign

central banks lowering rates as a reflection of the weakness, he said. Trade

uncertainty has contributed to the slowdown.

     Should the Trump administration impose additional tariffs this year on

everyday items coming from China, it would break with decades of U.S. policy, he

said. 

     "If this tariff goes into effect with the magnitudes being suggested, it's

large enough for businesses and consumers that it would cause our tariff rates

to jump up significantly from being among the lowest in the world -- especially

on a bilateral basis against China," Strauss said. "When I look at risks, it's

the one that stands out."

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

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