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WILL THE TRADE WAR LEAD TO A US RECESSION? The trade war is a new development for economists to analyze. The peace time decades since WWII have seen a massive expansion of global trade and there is now an enormous complexity in global demand and supply chains. The trade war has disrupted how businesses see their supply and demand chains, and quite reasonably, businesses have taken a step back and slowed investment plans. US businesses that depended primarily on China as a source of goods are looking to diversify their supply chains. American farmers, especially soybean farmers, have been hit hard by China’s response to US tariffs to curtail buying.


Are all of these developments enough to cause the US to enter into a recession? Probably not.


The US economy is consumer driven and the consumer is powered by confidence in labor income. When unemployment is relatively low, and more folks are working, consumers tend to keep spending. A recession in business investment is not likely to be enough to do anything but lead to a little more sluggish economic growth than otherwise. The trade war is taking its toll on equity markets, because it hits company profits much harder than consumers. As for the economy, the US may see several quarters of sub-par growth, below 2% real GDP growth due to the trade war, but it is hard to see the trade war causing an out-and-out recession.


The longer-term impacts of the trade war depend in part, of course, on how the trade war ends. Still, for many businesses, there will be no going back to the old supply chains. And, even if China resumes buying US agricultural products, there will be a well- founded reluctance to count on Chinese demand as a permanent feature of the market. Globalization and world trade have been disrupted, whether or not a deal between the US and China comes soon or never comes at all. Businesses are now treating the US tariffs as permanent even though they were initially imposed as bargaining chips. Tariffs are taxes on the world trade system. It makes little difference who pays them; global trade is going to be negatively impacted. The US is more insulated than most economies, but some of the pain has already found its way to the US and more will come, just not enough to cause a recession, at least in our view. On a more optimistic note, this long-lived, durable, record-setting economic expansion has many more quarters to run.


Blu Putnam & Jesus Martinez E: bluford.putnam@cmegroup.com


All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the authors and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.


21 | ADMISI - The Ghost In The Machine | July/August 2019


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