Indications Are The Economy Will Slow With Or Without A Trade War

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Some time in the first half of 2015, the USA economy began slowing. And despite the jump in second quarter GDP - the economic growth remains in a long term down trend.

As the economy is 70% consumer driven, slowing of consumer consumption is the prime reason for this projected slowing. The graph below shows the slowing of the economic growth of consumption (and income) since the first half on 2015.

The gap between personal income growth and consumer spending is financed by credit. The interest costs of credit continue to rise which adds additional headwinds for consumer spending.

According to Lakshman Achuthan, Co-Founder & Chief Operations Officer of ECRI

Contrary to the notion of a “strengthening" economy, consumer spending growth has fallen to a 4 ¼-year low, as personal income growth continues to undershoot spending growth.

The consumer -- which makes up about 70% of the economy -- is getting hit with a six-year highs in inflation, so real wages are actually lower than a year ago.

Note that real GDP's 2Q2018 headline 4.1 % growth (which includes significant improvement in the rate of growth of consumer spending) is based on an annualized quarter-to-quarter growth, when one uses year-over-year methodology the improvement was a much more modest 2.6 % in 1Q2018 to 2.8 % in 2Q2018. And as shown on the FRED graph above - consumer spending rate of growth is in decline.

Lower consumer consumption could reduce corporate profits unless cost cutting or price increases increase margins. And the real question is still unanswered - what will the effects of the trade wars be to the US economy.

  • Seems like the EU - USA trade issues will be resolved after President Trump and European Commission President Jean-Claude Juncker outlined of a deal to suspend new tariffs and expand European imports of US goods.
  • There has been no recent news on NAFTA, and the three countries have been unable to find consensus on several critical issues. So far NAFTA remains in force - and President Trump's new strategy of negotiating bilaterally with Mexico and Canada appears to be rejected. But this negotiation seems to be on the back burner as President Trump seems to be concentrating on China.
  • China's main strategy of enlisting EU support against the US duties is now dead. An additional $200 billion of Chinese goods will be hit beginning in August. The U.S. - China dispute could grow or simply be negotiated away. Looking at exports in the pie chart below, China is not a large part of USA outbound trade - the USA imports four times as much Chinese products as it exports to China. With the EU and USA now on the same page, the China strategy joining forces with the EU against the USA is now dead. China will be the bigger loser in a trade war. You cannot punish a customer and think you will win.

Trade wars have no winners - but there seems little to fear of a significant economic hit to the USA economy. The major headwind to the USA economy remains the consumer consuming less.

Other Economic News this Week:

The Econintersect Economic Index for July 2018 improvement cycle continues and remains well into territory associated with normal expansions - although this month it forecasts slightly weaker growth. There are continuing warning signs of consumer over-consumption, but the relationship between retail sales and employment improved.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Economy , Earnings

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