Economic Cracks Grow as U.S.-China Dispute Rolls On

The U.S.-China trade dispute has reached its eight-month mark, and the global economy has avoided a trade breakdown so far. However, economic cracks have started to appear as producers brace for possible unintended consequences of the trade dispute.

As shown in the LPL Chart of the Day, the most telling trend is the global decline in manufacturing activity, which is considered a bellwether for economic growth.

Economic Cracks Grow as U.S. China Dispute Rolls On

“While tariffs have yet to weigh on overall demand, we’re seeing an impact from the peripheral effects of uncertainty on global manufacturing and business confidence,” said LPL Chief Investment Strategist John Lynch. “However, we still believe the U.S. and China will reach an agreement before significant damage is done to the global economy.”

China’s export growth remains steady, but China’s manufacturing sector has been the most affected of major global regions recently. Markit’s gauge of Chinese manufacturing health has been on the brink of what Markit considers “contraction” territory for the past two months. China’s solid import growth has yet to stimulate manufacturing in other areas, even as the country has reduced its imports from the U.S. and turned to other regions for goods. Manufacturing activity in the Eurozone declined to a two-year low in October, while Japan’s Purchasing Managers’ Index gauge has hovered around a 12-month low since July.

While U.S. manufacturing health remains the strongest of all global regions, deterioration in the underlying data is spreading. Wholesale inventories have been climbing, but unfilled orders continue to increase with inventories, hinting at breakdowns in the supply chain as manufacturers and firms digest growing labor shortages and rising input costs. Trade tensions have also weighed on U.S. businesses, as growth in capital expenditures has dwindled to the slowest pace in 18 months.

We think the path to a trade agreement with China may be shortening, given the growing impact on U.S. economic data and a split Congress following last week’s midterm elections. For more of our thoughts on trade, check out this week’s Weekly Economic Commentary: Trade Check-In.


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