Courts Create New Hurdles for Trump’s Tariff Policies

Jeffrey Roach (00:03):

Hi, I'm Jeffrey Roach, Chief Economist for LPL Financial, with some highlights to explain what we know about the current macro landscape. First, interest payments as a percent of tax receipts are too high. Other than tariffs, the next big item for investors to digest is the fiscal challenges. Well, as we know, the so-called X date is sometime in late August or early September. This is the time when Congress runs out of the extraordinary measures to manage the debt ceiling, and in the meantime, roughly 18% of tax revenue is going toward interest payments. The ratio is at the peak from the early 1990s when the economy was coming out of a recession. As the chart illustrates, the ratio falls as tax receipts grow from a robust economy. This is one of the reasons that healthy growth is the strongest antidote to most of our fiscal woes. Second courts threw cold water on Trump tariffs.

Jeffrey Roach (00:59):

The U.S. Court of International Trade ruled on May 28th, that much of the retaliatory tariffs are not valid. However, the tariffs under section 232 can remain in place. Those are on steel and aluminum as well as autos and auto parts. Future section 232 tariffs on other commodities such as pharmaceuticals and semiconductors are expected but not yet implemented. If the court's rulings are enforced, consumers face an overall average effective tariff rate of 6.9% the highest since 1969, but creating a drastically different scenario than what we had just a few days ago. Third, tariff threats are far from being over. Despite the ruling of the U.S. Court of International Trade President Trump could still reinstate tariffs on the basis of section 338 of the tariff Act of 1930. In sum, here are a few key takeaways from the recent court decision. One, expect market volatility to continue. We've seen markets be especially sensitive to news headlines, and we don't expect much to change in the near term.

Jeffrey Roach (02:06):

Two, some tariffs on auto steals and other commodities are not impacted by this ruling as they were justified by Section 232. Three, inflation risks should simmer. If the extreme retaliatory tariffs are removed. Four, recession odds are much lower. Given the weaker impact from extreme tariff threats, five, economic growth prospects improved, especially in the latter part of the year. The engine of growth will likely come from insatiable demand for artificial intelligence, power generation plants, and other capital investments. Well, that's all for now. If you want more insights on global market trends, follow us on social media and take care.