Turmoil surrounding U.S. tariffs on car imports is likely to deal a blow to the global economy as uncertainty has made investors “nervous” about an incoming recession, William Strauss, senior economist at the Federal Reserve Bank of Chicago, told Auto Finance News. The nervousness, in turn, has fueled the U.S. Treasury Department‘s yield curve to invert for the first time since 2007.
“When people get nervous, they run to protect assets, and that is moving to the U.S.,” Strauss said. “If these tariffs actually go into effect, then we can talk about how it could be a significant risk for our economic expansion.” The U.S. economy has been in an expansion period for 122 months, he noted.
In fact, the risk of tariffs may come soon. Earlier this week, the Office of the United States Trade Representative had announced an additional 10% tariff on $300 billion of Chinese imports to go into effect Sept. 1, with some goods not receiving the additional tariffs until Dec. 15. Steel and car parts are on the list of imports for the earlier tariff increase.
However, the date of implementing tariffs has been pushed back in the past, causing additional uncertainty for investors. “If we just knew what the future was going to be, we could adjust and make our decisions based on that,” Strauss said. “But it’s this moving target where the levels of tariffs are being altered frequently. It’s very confusing to the market, and markets don’t like that. So that’s playing a role in this, as well.”
To that end, the inversion of the Treasury Department’s yield curve — a tool economists use to track the strength of the economy — is a clear indicator that investors have little confidence in the near-term economy and are demanding more yield for a short-term investment.
The spread between the 2-year yield and 10-year yield turned negative, or inverted, with the 2-year yield edging 1 basis point higher than the 10-year, according to the Treasury’s data. Though inversions have preceded the past five recessions since 1980, according to the Federal Reserve Bank of St. Louis, Strauss urged that 1 basis point isn’t something to fret about — yet.
“It’s not like there is a magic number — that when the spread is zero everything is fine, and then minus 1 basis point and all the sudden a trigger goes off,” Strauss said. “It has to do with how deep the inversion might get and how long it’ll be inverted.” Strauss did not speculate about the future of the yield curve.
