Ever since the president authorized tariffs on steel and aluminum in March of 2018, the ongoing trade dispute with China has lingered over the global economy and has been an ever-present, yet unpredictable, source of volatility in markets. By taking a step back to look at how key players affected by the trade war have fared over the past year and a half, divergences have emerged among the global economies as well as within our own.
The U.S. economy has been growing steadily in the 2-3% range over the past several years. Despite the Federal Reserve’s (Fed) first interest rate cut in over a decade, there is no immediate concern from (most) policymakers that the U.S. economy is in need of monetary or fiscal stimulus to stave off a slowdown. Meanwhile, China’s manufacturing economy has suffered as U.S. importers shift supply chains to other locations in Southeast Asia. Vietnam has been a significant recipient of manufacturing displaced by the tariffs on Chinese goods. Germany — a large exporter of goods to China — can likely attribute its slowing economy to decreasing demand from the People’s Republic. Over this past weekend, both Chinese and German policymakers put measures in place to help support their respective economies.
The trade war weighs on the U.S. economy as well; but for now, its effects appear concentrated in the industrial and manufacturing areas of the economy. Manufacturing Purchasing Managers’ Index (PMI) results have fallen from above 60 in 2018 to almost contractionary levels (below 50) this year. With respect to stocks, the industrial sector has lagged the S&P 500 Index by almost 10% since March of last year. Business investment has fallen as well, which the FOMC statement cited when it cut rates last month. Despite the slowdown in these areas, strength in other parts of the economy — particularly U.S. consumer spending — are substantial enough to prop U.S. growth. This week’s chart highlights how gains in consumption have offset declines in investment.
The U.S. economy is more resilient to the impact of the trade war than other major global economies. Its primary driver of growth, the U.S. consumer, remains healthy thanks to a strong job market and solid household balance sheets. The Chinese economy reminds me of the U.S. after World War II — a manufacturing economy built around a strong middle class. At the time, however, the U.S. had little manufacturing competition as the rest of the world recovered from WWII. The current trade war is displacing manufacturing jobs from China as supply chains shift more nimbly to other countries.
It’s important for the consumer to keep supporting the economy during the ongoing trade war. Businesses will likely choose not to make investments in this environment until there is clarity or a resolution to the trade war. Another option for businesses is to wait out the current administration and hope a “trade dove” is elected in 2020. What concerns me most, though, is that the U.S. consumer has yet to feel the pain. The May increase in tariffs from 10% to 25% on $250 billion of Chinese imports was substantial, and importers may face no choice but to pass it along to the consumer. An additional $300 billion of imports could face a 10% tariff later this year. Like we’ve already seen businesses do, the consumer could start halting or delaying purchases, which could really put a squeeze on U.S. growth. Only time will tell.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
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