It’s An Expansion, If You Can Keep It

President Trump’s decisions on the US-China trade war reflect a method to the madness, his supporters insist. To everyone else, it just appears to be madness. Regardless, Trump’s abrupt announcement on Tuesday that new tariffs on Chinese goods would be delayed inadvertently provided some clarity on the US economy.

Soon after the news was released, US stocks surged. The implication: a fair amount of the recent weakness in US economic growth is bound up with the US-China trade war. Absent this self-inflicted policy, output would be stronger and recession fears would fade.

Yes, that’s speculation, and it’s based on one day of implied analysis via a pop in the stock market. Caveat emptor. Nonetheless, it’s striking that equities bounced following a decision to delay new tariffs. The implication: a key headwind for the US macro trend could, in theory, vanish tomorrow if the US and China resolve their trade differences, or at least tone down the worst impulses.

Tantalizing as that is, it’s premature to read too much into yesterday’s market reaction—or Trump’s announcement. The president has a history of erratic decisions on trade and other topics and so today’s manna from heaven could quickly fade in a new tweetstorm from Trump.

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It doesn’t help that Trump’s reversal on tariffs appears driven by political calculations rather than a shift in policy. “The three-month delay to the imposition of tariffs on more than half of the $300 billion of Chinese imports, originally scheduled to take effect next month, is obviously designed to avoid a politically-damaging rise in consumer prices ahead of the holiday season,” says Andrew Hunter, senior US economist, at Capital Economics. He continues:

It should not be misinterpreted as a sign that trade tensions are easing. Tensions will probably continue to ebb and flow over the coming months, resulting in further bouts of volatility in the markets, but we still see a continued escalation as the most likely outcome.

The CEO of the US Chamber of Commerce claims that putting new tariffs on ice is a merely a calculation that doing so would lower recession risk, which had been rising recently, based on some metrics—the inverted Treasury yield curve, for example. “Nobody wants to run for president, on either party, in the middle of a recession,” says Tom Donohue.

Whatever the catalyst, the White House is sensitive to expectations for the economy and the financial markets. The recent slide in Treasury yields, signaling rising concern that recession risk is rising, is probably a factor in Trump’s latest pivot. In turn, it’s reasonable to expect that if economic expectations sink further, the White House will pull back on its trade-war tactics.

Goldman Sachs Group Inc. chief economist Jan Hatzius wrote in a note to clients that the delay of tariffs “is an incrementally positive sign” because “it suggests that the disruption in financial markets over the last several days could have led to a softening of the White House position.”

In any case, the events of the past 24 hours strongly suggest that the US economy’s outlook remains solid—if trade-war risk evaporates or is substantially reduced. Reality, alas, is more complicated and so the crowd is forced to factor in Trump’s mercurial decision-making process for estimating the economic path ahead.

The good news is that forward momentum for the US economy remains positive, based on a broad set of indicators, notwithstanding the bond market’s dire outlook. The trade war is still a factor, and will likely remain so for the near term. Exactly how much blowback the economy will endure on this front is unclear, largely because the White House seems to be making up policy on the fly, with little or no strategic goal.

The larger point is that a US recession, at this point, isn’t fate. There’s still time to secure and extend what is now the longest period of growth on record. It’s an expansion, Mr. Trump, if you can keep it.

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By James Picerno

4 thoughts on “It’s An Expansion, If You Can Keep It

  1. Pingback: Clarity on the US Economy -

  2. Terence Kivlan

    Perhaps the stock market is approaching a reckoning no matter what happens to real economy. The current ten-year bull market is based in the quicksand of zero interest rates. How could this not end badly for Wall Street. That is the reason for all the investor caterwauling for the Fed to keep cutting interest rates.

  3. Jeff

    This article fails to acknowledge multiple headwinds facing the US and global economy and stock market in general. It’s an easy narrative to ascribe all of the market turmoil and recession risk to tariffs and the trade war with China. I’ll lay out multiple reasons:

    1. S&P500 revenue and earnings growth has been slowing the last couple quarters even prior to tariffs announced or taking affect. The US has been considered in an earnings recession.

    2. Europe and Japan have already negative bond rates which means they are at the end of the line of government monetary stimulus. Germany likely had contraction the last quarter.

    3. The U.S. stock market is grossly overvalued by historical standards. Also tech to utility valuations are approaching levels prior to dot com bust.

    4. Several IPOs (Uber, Beyond Meat, Lyft) have occurred for companies with excessive valuations with negative earnings. Investment is disconnected from fundamentals.

    5. Corporate debt levels are at levels near prior to 2008 recession.

    6. Several yield spreads have already flirted with inversion or have inverted or the last year. It was only a matter of time.

    7. Leading indicators have been trending downwards beginning prior to tariffs (see OECD CLI).

    If anything the business tax cuts bought time while the tariffs have done the opposite – in effect Cancelling each other out. A one day bounce doesn’t prove anything other than the news was good that day. The S&P500 was pricing in a trade deal but still couldn’t breakout much above 3000. It basically hit a valuation wall.

  4. James Picerno Post author

    I don’t disagree with your points, but there’s still no recession. That could change, of course, and maybe it will. Or won’t. Projecting the macro trend ahead a couple months suggests the expansion will hold. Beyond that, no one has a clue because while the trend tends to extend into the immediate future, countless variables conspire beyond the 1-2 month-ahead window. Yes, risks are rising and so your points are well taken. But will the Fed do something extraordinary? Will Trump end the trade war? Unclear. The potential for keeping the expansion alive remains. Whether that comes to pass is open for debate.

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