Why do we talk about the consumer every week? Consumer spending makes up two-thirds of all U.S. economic activity, which is a lot. Personal income increased 0.1% in March and increased 0.5% in April. That’s an additional $27 billion in consumer savings from March to April. How is consumer spending related to consumer savings? In April we saw people spend less money on services which includes things like electricity, gas and other items like retail sales. Job growth and consumer spending in retail sales have been a large lag. We would like to see some money come back into the economy; however, we’re seeing evidence of the noise on tariffs start to show an effect.
Rare Earth Metals
We head into this week with $60 billion worth of Chinese tariffs already in effect. Currently, we have no formal high-level talks on the calendar, but, we do have the talk of Mexican tariffs so there’s still a lot going on with the trade war talk. Another trade war conflict that we’re looking at very carefully is that China mentioned recently that they’re going to stop exporting rare earth materials. If you pick up just about any electronic consumer good, it will most likely have a sticker on it that says it was “Made in China”. Most electronics are made with rare earth metals and here’s why this matter is important to us as Americans. America imports about 80% of rare earth materials from China. Specific metals such as arsenic, gallium, graphite, indium and scandium are 100% sourced from China. The problem with that is that smartphones, electronic vehicles, military gear, TVs, computers, and many other things all have these types of rare earth materials in them. If China says they’re not going to export these out, you will see technology companies and construction materials basically be halted by China. This will be a huge deal and we’re making sure to continually look at this very carefully.
The Shift to Mexico
There have been conversations about the tariffs in China as well as Mexico. It’s safe to say that we are very interdependent in our supply chain with Mexico. If you look at what would change with a tariff increase on the day-to-day, the auto market would likely go up about $1,300 on average, per vehicle. Computer products could also have the potential to go up. Whether it be a hard drive, a computer screen or anything to do with the computer, the tech companies build most of it in Mexico. Not only would there be a change in technology, you would also see an increase in fuel. When you get right down to it, there’s a good bit that comes from south of the border with auto being the primary thing. About $125 billion in auto supply parts come out of Mexico to the U.S each year. The U.S. sells the finish products and then about 15-20% of our auto market goes back to them. There’s a meaningful impact even at 5%. In addition to that, if you combine China and Mexico, that’s where most of our supply comes from. The Chinese tariffs have caused a lot of manufacturers to shift to Mexico. There’s a scare with the manufacturers that they could potentially have to shift out of Mexico and if they’re forced to, there’s a concern that there would be a large increase in price. For example, if you had to bring in the supply from Europe it would be about 40% more than what is paid now for goods out of China and Mexico. Manufacturers are a little concerned because there’s a lot of tariff play in our two major supply countries which comes with uncertainty.
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