Among the improving prospects for 2020 is the probability for the resolution of trade disputes that held back economic growth in 2018 and 2019. As I wrote this column, the revised NAFTA agreement, the U.S. Mexico Canada Agreement, was said to be close to tripartite agreement. This is good news for U.S. and global economic growth. For housing markets, more international trade will expand rental and for-sale housing demand in markets highly connected to sectors dependent on exports or imports.
It was time for some major trade agreements to be revised. NAFTA had been adopted before the rise of the technology sector and evolutions in the global auto supply chain. And China has been abusing intellectual property rights for decades. These challenges worked against the general growth benefits that trade creates.
The concern among many economists, including myself, was that antitrade advocates would seek to use tariffs (taxes) on trade as permanent policy rather than temporary tools for negotiation purposes. Since the publication of The Wealth of Nations in 1776 by Adam Smith, it has been understood that trade promotes growth. Taxes, regulations, and restrictions on trade and commerce accomplish the opposite.
The direct impacts of trade wars include higher costs for good and services, such as imported building materials. In 2018, tariffs on Canadian softwood lumber had a significant effect on lumber prices in the U.S. However, the indirect effects of trade conflict include a weakening of regional economic health. For example, reductions in export volume and prices for corns and soybeans have had negative consequences in many agricultural areas of the nation.
As exports weakened and input costs rose, the U.S. manufacturing sector weakened and came close to recession over the past two years. Home building in areas of the U.S. with concentrations of manufacturing employment felt this slowdown. The NAHB Home Building Geography Index, a measure of various regional construction indicators, shows this effect clearly.
Single-family construction growth rates in markets with concentrations of manufacturing employment were outpacing the rest of the U.S. until late 2017. After that, manufacturing areas realized slower single-family construction growth rates. These markets have seen declines in single-family construction for all of 2019, performing twice as badly as the rest of the nation.
As economists have revised 2020 growth prospects higher and revised down recession probabilities, many economic indicators are positive: consumer spending and confidence is high, unemployment remains low, and inflation is tame. Resolution of ongoing trade disputes would add to this list of solid indicators and boost regional economies and housing markets in U.S. areas connected to international trade.
