It was a relatively thin week for economic data. Housing starts rose 5.0% (±10.2%) in May – a strong gain, but not statistically significant. Single-family permits, the key figure in the residential construction report, fell 2.2% (±1.0%) in May, but were up 7.7% (±1.3%) from a year earlier. Homebuilder sentiment edged a bit lower. The National Association of Home Builders’ report noted that “builders are increasingly concerned that tariffs placed on Canadian lumber and other imported products are hurting housing affordability.” The NAHB estimates that “record-high lumber prices have added nearly $9,000 to the price of a new single-family home since January 2017.” The Conference Board’s Index of Leading Economic Indicators rose 0.2% (as expected, given the reported drop in building permits). The Conference Board indicated that “the recent deceleration in the growth of the LEI suggests that the expansion in economic activity is likely to remain relatively strong in the second half of 2018 but should not accelerate.

Speaking at a European Central Bank forum, Fed Chair Powell said that “the case for continued gradual increases in the federal funds rate is strong.” In recent weeks, Powell has deferred on commenting about trade policy (much as the Fed avoids making comments on fiscal policy), but has said that trade policy could be disruptive to the economy.

Tariffs on $50 billion in Chinese goods are set to go into effect on July 6. These apply mostly to machinery and industrial inputs. The proposed $200 billion in additional tariffs on Chinese goods (which sent the stock market down last week – this is U.S. retaliation against Chinese retaliation against U.S. tariffs) would presumably go into effect some time later and focus mostly on consumer goods. Beyond that, we may see tariffs on imported motor vehicles and parts, which would be much more disruptive to the economy. It’s difficult to put a precise handle on the direct impact of tariffs, but worst-case scenarios are on the order of shaving 1-2% from GDP growth over the next year (not enough, by themselves, to cause a recession). However, we may also see higher inflation, greater uncertainty for business fixed investment (at home and abroad), and possible financial market disruptions.