Trade War Could Cause A Global Recession

Trade War - March Deficit Increases Slightly

Trade War - International trade report matters much more than usual because of the ongoing trade negotiations with China. In April, China had a $21.01 billion surplus with America which was more than its overall surplus. This latest American trade report is from March. 

America had a deficit of $50 billion which increased from $49.3 billion and was below estimates for $50.2 billion. The deficit being slightly lower than estimates could help the Q1 GDP report. Trade was about 1/3rd of Q1 GDP growth which was why I described the report as having weak underlying numbers.

The deficit with China narrowed sharply as it was $20.8 billion. This decline in the deficit is partially because of seasonality. The year to date deficit with China is $80 billion; it was $91.1 billion at this point last year. Exports were up 1% in March to $212 billion and imports were up 1.1% to $262 billion. 

Services exports were only up 0.1%, while exports of goods were up 1.4%. That increase reflects higher oil prices as America is a net exporter of the commodity. Oil prices averaged $53.1 in March as compared to $46.89 in the previous month. This boosted exports of industrial supplies to a gain of $1.8 billion. Food exports increased $0.8 billion. Civilian aircraft exports fell.

Trade War - Imports boosted by oil prices and related growth in industrial supplies. 

Trade War - Imports of vehicles were up slightly and imports of consumer goods were up $700 million. As you can see from the chart above, a 25% tariff rate could have huge ramifications on 2020 GDP growth. With the global economy already weak, a 0.3% decline caused by the trade war between America and China could be enough to send it into a recession. 

As you can see, real Chinese GDP growth could be hurt by 0.8%. China will likely boost its stimulus to combat this negative impact. It remains to be seen how bad the trade war gets and how big the fiscal stimulus is.

The negative 0.3% impact to American GDP growth could be a problem because the effects of the fiscal stimulus will be over by then. America is a democracy, so it can’t easily pass a stimulus to counteract the trade war. In fact, the Democrats wouldn’t mind seeing the economy hurt by trade next year as it would help their election chances in November.

Jobless Claims Fall Slightly

Trade War - Usually a 2,000 decline in jobless claims from the prior week is good news, but not in this case because claims have been elevated for 3 weeks. If claims stay this high, it means the labor market is weakening. It is consistent with the increase in layoff announcements earlier in the year. It also implies the May jobs report could be weak. Specifically, in the week of May 4th, jobless claims fell from 230,000 to 228,000 which was 13,000 higher than estimates.

As you can see from the chart below, the 4 week average spiked from 212,500 to 220,250. 4 week average will spike significantly if claims are near were they are now in the next report because the report 4 weeks prior was much lower. The 4 week average has increased 18,750 in the past 3 weeks. 

On a yearly basis, growth went from -10.6% to 2.3%. Previous growth high this year was in February at 3.6%. That was the weakest month of the year for job creation as only 56,000 were added. Continuing claims were up 13,000 to 1.684 million in the week of April 27th. 4 week average fell slightly to 1.673 million.

Core & Headline PPI Miss Estimates

Trade War - April PPI report, released on Thursday, showed yearly headline inflation of 2.2%. It was the same as last month, but missed estimates for 2.4%. There was a big increase in portfolio management services inflation partially because of the strength in financial markets. 

If everyday investors who don’t follow the markets closely put their money in index funds instead of mutual funds and if mutual funds lower their fees, inflation will be pushed lower in the long run. Weakness in financial fees has been one of the biggest catalysts for the weakness in core PCE inflation in the past year. If fees rebound in April, core PCE might bounce higher.

Food prices were down 0.2% monthly and 1% yearly. That’s different from the past few CPI reports which have shown multi year highs in food price growth. Energy prices were only up 1% yearly despite the recent increase in oil prices. Yearly core PPI inflation was 2.4% which was the same as last month. That missed estimates for 2.5%. 

Services inflation was 2.4% and trade services inflation was 3.1%. Core PPI excluding trade services was 2.2%.

To be clear, PPI is producer price inflation which is supposed to be a leading indicator for consumer price inflation because it is ahead in the supply chain. Trade services tracks prices at the producer level for wholesale and retail sales.

April CPI Misses Estimates & Core CPI Accelerates Slightly

Trade War - Headline yearly CPI increased from 1.9% to 2% which missed estimates for 2.1%. Core CPI increased from 2% to 2.1% which met estimates. However, when you look at the unrounded data, core CPI really only increased 3 basis points. We are still in the same position as there is modest inflation which allows the Fed to keep rates the same. Gas prices were up 5.7% monthly, while food prices fell 0.1%.

Apparel prices fell 0.8% monthly and 3% yearly. Last week Powell claimed increasing apparel prices could allow CPI to bounce back. Apparel is a very small part of inflation which means it would need to increase substantially to matter. It actually fell, so he was off base. 

Powell also called for an increase in airfare prices, but they fell 0.1% monthly and 1.8% yearly. The chart below shows there was an acceleration in commodities inflation which had previously been weighing on CPI.

Housing and medical care inflation was 0.3% monthly. On a yearly basis, they were 2.9% and 1.9%. They make up about half of inflation. Powell should have cited them as an inflation catalyst. Rent and homeownership inflation were 3.8% and 3.4% yearly. 

Physician services and hospital services prices were up 0.3% and 1.2%. On a monthly basis, new vehicle prices were up 0.1% and used vehicle prices fell 1.3%. 

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