The gap in perceptions of trade policy impacts between administration advocates and officials from export-dependent industries continues to grow, Bloomberg says this week.
While the Trump administration emphasizes the impact of growing economic pressure on China, many analysts are focusing heavily on emerging threats to global demand. Bloomberg thinks these are intensifying at the same time business confidence and investment are weakening in many key markets.
Consumers have been providing the main drivers of global growth for much of this year. And, while recent retail sales growth has been strong, “there are signs that could soon change, as weakness in manufacturing seeps into hiring and financial markets tighten amid the trade war.” Both forces could lead households to retrench, fanning fears that the world economy is heading to recession, Bloomberg says.
Morgan Stanley economists are already warning that American consumers are all that stand in the way of a U.S. contraction and their counterparts at JPMorgan see global employment growth remaining around the 1% of the last quarter, a sharp slowdown from the previous pace.
“It would be misguided to believe that manufacturing weakness is not going to filter through to the rest of the economy,” even though factories are a relatively small share of U.S. output, said Gregory Daco, chief U.S. economist at Oxford Economics.
A big warning came last week, when concerns about tariffs and inflation helped push down the University of Michigan’s U.S. economic sentiment index by the most in almost seven years. If that’s the start of a new fault line in the global economy centered on consumers, that spells deeper trouble ahead for world growth, Bloomberg thinks.
A key risk is the potential unraveling of the solid labor-market story across advanced economies as surveys show employment at factories falling around the world. Germany, at risk of recession, has seen initial signs of weakness in its labor market. UK sentiment is being battered by Brexit uncertainty and Asian economies such as Korea and Indonesia have recorded declines in consumer sentiment.
In the U.S., the Institute for Supply Management’s factory index indicates manufacturers are cutting jobs. Monthly U.S. jobs figures from the Labor Department are due Friday and will be watched closely.
Bloomberg says its own economists are expecting that consumer spending will be “the main driver of growth in the second half, so barometers of household demand, such as sentiment, savings patterns and income growth will be major focal points in the medium term. For this reason, the cooling in the ISM employment sub-index bears watching,” according to Carl Riccadonna, Bloomberg’s chief U.S. economist.
For central bankers, the question is whether other parts of the economy can keep riding out the storm that’s been largely isolated in manufacturing--or a broader “infection” is inevitable. How they gauge that spillover threat could be central to how much stimulus they need to pump into their economies.
Federal Reserve Bank of San Francisco President Mary Daly noted the contrast in the economy last week, saying that uncertainty has hurt business investment but that domestic demand looks “really solid.”
U.S. consumer spending rose 0.6% in July, beating estimates, according to a report on Friday, following the best quarter in more than four years. In the euro area, retail sales are rising at about a 2% year-on-year pace, slightly faster than the average in 2018.
But the situation could shift as the punches to the global economy keep coming—such as the administration’s escalation of the U.S.-China trade war along with weaker corporate earnings, a manufacturing pull-back and Brexit.
In the U.S., the University of Michigan gauge showed how the trade war may have a psychological effect, with tariffs spontaneously mentioned by one-in-three consumers.
Pressured by a trade spat of its own with Japan, along with ongoing labor-market weakness, Korea’s sentiment gauge fell in August to its worst level since the start of 2017. Unemployment at a 45-year high is seriously crimping consumption in India, where car sales plunged the most in almost two decades in July.
At its last policy meeting, the European Central Bank noted weakening hiring intentions and “the question was raised as to how long the job market would still be posting positive surprises.”
U.S. electronics retailer Best Buy Co. last week trimmed its guidance because of “general uncertainty related to overall customer buying behavior in the back half of the year.”
So, we will see. There are broad expectations that the Fed will cut interest rates at least some in the near future—even as a U.S.-China trade deal appears increasingly unlikely. However, the administration-Fed squabble appears likely to continue and even intensify and should be watched closely as it persists, Washington Insider believes.
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