Trade War Score: USA 1 — China 0
Trade War Update: USA 1, China 0…
At least that’s the way it looks so far. Mind you, I’m only judging by what’s happened to stock prices in the U.S. versus China since trade tariffs on $60 billion worth of Chinese imports were first announced on March 22.
Since then, the S&P 500 Index has gained 6.8% while China’s stock market has plunged 13.8% in value.
First round in this heavyweight fight goes to Uncle Sam, at least from the viewpoint of stock investors.
But the reality is the ongoing trade tempest, not only with China but most of our major trading partners, is beginning to bite into the real economy.
The latest reports out this week on business activity in both factories and the service sector of the global economy show the pace of growth clearly slowing.
Especially in Europe, but also Japan, China and the U.S.
For the 19-country eurozone, a monthly report on business activity in the region shows a slowdown in manufacturing growth, weaker new orders and slumping corporate confidence, as tariffs begin to bite.
Source: Bloomberg, IHS Markit, European Commission
As you can see in the chart above, Europe’s Purchasing Managers’ Index (PMI) for manufacturing and services fell more than expected last month to 54.9, a 20-month low.
In Japan, factory activity slowed to the weakest pace since 2016. Chinese authorities are so concerned about the impact of lost exports on their economy authorities in Beijing announced policies to stimulate more domestic demand.
In the U.S., where our PMI showed continued growth, the pace of export orders slowed for a second straight month, while material costs are on the rise.
Slowing global trade plus rising inflation are a toxic combination that could easily lead to stagflation if trade tensions get worse.
Cost increases for U.S. manufacturers are also starting to show up in the latest data, a worrisome sign. A report from the Federal Reserve Bank of Richmond this week showed finished goods costs are increasing at a 2.74% yearly rate.
This key East Coast manufacturing region includes the Carolinas, the Virginias, Maryland and Washington, D.C.
Even worse, prices paid for materials used to manufacture products in the region are expected to jump even more, 2.84% over the next 12 months.
That’s the fastest rate of inflation since 2013!
At the same time, wage expectations in the region are rising at the fastest clip in more than 10 years. That’s putting the squeeze on profit margins, undercutting the benefits of corporate tax cuts.
As I’ve said before: No one wins a trade war, especially one that drags on with no end in sight.
The U.S. economy is in much better shape to weather this trade tempest, and perhaps secure better trade terms as a result.
But the longer this drags on, the more risk to our economy and stock market.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch