The ability to fix the economy lies in President Trump’s hands, not in the Fed. Yesterday, the ISM manufacturing index dropped to its lowest point since 2009, a 47.8 reading, when 50 was expected. A reading below 50 means contraction, not expansion. President Trump was quick to jumping on his tweeter and blamed the Fed for not being more aggressive lowering rates. But it didn’t stop there. The early September car sales from Honda and Toyota also showed double digit losses, worse than expected and today’s numbers from Ford and GM are also expected to be bad. Fitch on Monday lowered global growth to 2.6%, the lowest since 2009 and the WTO dropped their estimate of global trade from 2.6% to 1.2%. The reason both Fitch and the WTO gave for slowing trade and global growth? The trade war between China and the United States.
The two countries are set to meet once again sometime after next week’s Chinese Anniversary holiday. President Trump threw out his traditional pre negotiating warning, this time, upping the ante even more by threatening to curtail Chinese and American financial investment in each other if things don’t go well. He was forced to backtrack on the idea, but like previous comments he is then forced to back up on, the idea can’t be completely discarded. That would escalate things to a new level. But then yesterday he congratulates China on their Anniversary, the same day the Hong Kong police began using live ammunition and seriously wound a student. The love-hate relationship is clearly on display. President Trump has said a week ago that only a “full deal” with China will be accepted. We know that China will never pull back from supporting their SOEs,(among other things they are kind of hesitant) so if it is “full deal” or nothing then the talks are doomed.
The other thing China demands is removal of all tariffs and that is something we know that Trump has been dead set against. He wants to maintain some sort of control during a monitoring period I am guessing. But he also likes to see the money rolling in from the tariffs, even if he continues to incorrectly state that China is paying for it. But there is the rub. In order to give a jump start to the US economy, and the world, the tariffs have to go, and as quickly as possible. We also know the “full deal” talk is to try and show the farmers and others that suffered under the trade war, that this agony was all worth it. Well, the recent Japanese trade deal and the long ago agreed to (but not ratified) USMCA deal were not “Full Deals”. In the case of Japan, it was a partial deal as it did not take into account the main point of contention, autos, and in the case of the USMCA, it was in effect really only a rebadged NAFTA. There have been some complaints, but nothing serious and even though any cobbled together China deal will certainly attract more criticism, the majority will just want to see a resolution. If necessary the President could just say that we have completed “Phase One”. But, in my mind, it will also be important that we reaffirm the continuation of the WTO, in order to have an independent trade referee to help stay on top of the Chinese, instead of just the US complaining and putting tariffs back on. That would just put us back where we started.
In the end, a “Half Deal “ with the Chinese might get the US farmer grousing, but in reality they just want to put this bad episode behind them, (even though things will never be the same). US business will be relieved and the President can give a fiscal shot to the economy that the monetary policy will never be able to give at this point. Monetary policy, in fact, as shown by the troubles in Europe has shot its bolt and won’t solve things anyway. So how about it Mr President?