The Chinese economy slowed to a growth rate of 6.5% in the third quarter, a bit lower than expected and the weakest pace of growth since the global meltdown year of 2009. Factory output was weak and Chinese consumers bought fewer cars. Chinese stocks are having a terrible year, as well, with the Shanghai composite index down nearly 25%.
It might get worse from here. While Trump’s tariffs on Chinese imports may explain some of the current slowdown, they only went into effect, in force, on Sept. 24. And there was a surge of exports to the United States right before then, as shippers rushed to get goods to the United States before the tariffs hit. So production of goods headed for America might have surged in the third quarter, which would presage a big drop-off in coming months.
But Trump shouldn’t gloat, because the U.S. economy is likely to slow down, too. GDP growth hit a robust annual rate of 4.2% in the second quarter, temporarily legitimizing Trump’s promise to push GDP growth to 3% or higher. But part of that growth was transient, driven by tax cuts that went into effect for the first time this year, and a boost in government spending that will fade.
Growth for the rest of the year is likely to be lower. The New York Federal Reserve just downgraded its estimate for third-quarter growth to a paltry 2.1%, with the fourth-quarter growth prediction hitting 2.4%. That would be a sharp drop from the second-quarter rate and a comedown for Trump.
Other forecasts are rosier. Moody’s Analytics foresees annualized growth rates of 3.2% for both the third and fourth quarter, with GDP growth at 2.9% overall for the year—just shy of Trump’s 3% target. The latest forecast for 2018 GDP growth from the National Association of Business Economists is also 2.9%. The first official figures for third-quarter growth come out October 26.
Consumer and business confidence, and the overall direction of the economy, matter more than economists’ GDP estimates for a single quarter. Job growth is probably likely to remain strong for the rest of the year, with wages picking up. Trump will have a glowing economy to brag about for at least a few more months. But there are gathering signs of a slowdown coming, or worse. Stocks have vacillated this year and are up just 3% since January. Traders worry whether the market is accurately pricing in the impact of Trump’s trade war with China, and wonder how much longer a nine-and-a-half-year-old bull-market rally can last.
Retail sales slowed recently, prompting forecasting firm IHS Markit to lower its estimate for upcoming holiday sales growth from 5% to 4.7%. The housing market is slowing down, too, with existing-home sales tumbling to a two-year low. And it could slow further, due to rising mortgage rates and the new cap on mortgage-interest deductions included in last year’s tax-cut law.
A recession isn’t imminent, but economists increasingly think one could hit by 2020, as the stimulus of recent tax cuts and federal spending hikes wear off, and soaring federal deficits take a toll on debt markets. Trump has suggested the U.S. can outlast China in a kind of economic attrition warfare, as protectionist trade policies cut growth in each country and test how much economic pain politicians can impose on their own people.
But if that calculation truly favors the United States, Chinese leaders don’t seem to have noticed. They’ve made no concessions to Trump, so far, and seem content to wait and see who blinks first. The biggest risk, to both countries, may be that nobody blinks.
Economists are largely opposed to the Trump tariffs — now applied to more than $300 billion worth of imports — because they are a tax on business activity that gives the government too much control over business decisions. But business owners are split — with some opposed to the tariffs, and some delighted.
A survey of business operators conducted Sept. 18-19 found that 38% expect the Trump tariffs to have an “extremely positive” effect on their company, while 11% expect the tariffs to have a “somewhat positive” effect. So combined, 49% expect the net effect to be favorable.
Only 23% say the tariffs will have an “extremely negative” effect on their businesses, with another 13% expecting a “somewhat negative” effect.” That’s 36%, combined, who expect negative consequences from the tariffs.