US household budgets are so stretched that relatively small price increases cause a reduction in spending. That already is clear from consumer response to rising oil prices.
If the Trump administration’s tariffs on Chinese and other imports turn into noticeable price increases, consumer spending could crumple in a matter of months, and US economic growth could fall to close to zero from an estimated 2.8% to 4% for the second quarter.
Tariff-driven price increases on big-ticket household items – such as the 8% year-on-year jump in the price of washing machines last month – would provoke consumer pushback and lower consumer spending.
The Trump recovery would begin to falter before the end of 2018. Nothing like the 2008 crash is in the offing, to be sure, but a disappointed consumer economy means an angry electorate, and political blowback against the administration’s tariff policy.
Let me spell it out in a few charts.
First, the 2.7% annual growth in hourly earnings is now equal to the annual rate of increase in the Consumer Price Index. By this measure, employment growth has brought no real increase in spending power.
Secondly, consumers are saving barely 2.5% of their personal income. That’s equal to the low savings rate registered in 2007, when households still sat on a decade’s worth of capital gains in home prices. With real wages stagnant, consumers are spending virtually all their personal income.
Third, consumer debt service as a percentage of disposable income has risen back to the levels we last saw just before the 2008 crash.
Nonetheless, households continue to use their credit cards to pay for consumption. During the past year, we observed a tick-for-tick correspondence between changes in credit card debt outstanding and changes in retail sales.
I observed in a June 30 report for Asia Times that household consumption already shows a worrying sensitivity to oil prices. Monthly changes in consumption move inversely with monthly changes in the oil price. In other words, when the cost of a tank of gas goes up, US consumers immediately cut back on purchases of something else.
For the past 20 years, falling inflation has been a bifurcated story. The cost of services is up 80% in the past two decades, while the cost of durable goods has been by 20%. That’s because the price of smartphones, consumer electronics and household appliances has fallen due to cheap imports from China and other low-cost producers.
Tariffs will raise the price of consumer goods, adding to the already-noticeable impact of oil prices on consumption. China’s exports to the US go straight into the US consumption basket.
President Trump’s political base of middle-class households will feel the pain almost immediately. Americans have come to expect low prices for consumer durables, and they won’t like it if they have to pay more at a moment when household budgets are already squeezed by zero real wage growth and rising debt service costs.
A trade war will be painful for both China and the United States. Americans aren’t used to this particular kind of economic pain. That makes the United Stats more vulnerable than China.
A trade war is a lose-lose proposition, but the administration should not operate under the illusion that China is more fragile than the United States.
US market is big but not like the way it used to be, and China does not rely on it as much. Wheas the US depends almost entirely on consumer goods imported from China and a few other countries, the prices will escalate and US consumers better be prepared to pay a lot more, the supply chain will take years to adjust and even than those jobs will not come back to the US, there are plenty of other countries that will make those goods at much lower labour rate and with much harder workers. Ironly is, those factories may be set up by those very same Chinese bosses!
David Goldman. Experts agree that China and the U.S. will equally lose out in their trade war. Simply ludicrous to make far reaching consequential decisions based on bilateral statistics which also do not truly reflect or differentiate the outsourced third party components and co-participation in ‘grossing’ up the bilateral balance of trade. The latter multitudinous aspect of global manufacturing itself reflects the fact that global trade is truly multilateral in essence. And furthermore that the greater profit flows to the patent or brand name owner. A similar mistake occurs in making geopolitical decisions based on a unipolar assumption of ideological hegemony by any global power when the fact is that we live in a diverse multipolar multitudinous ideological world. But leaving geopolitics aside, for whatever we opine are never going to influence the powers that be in China or the U.S.. In the end it comes down to the propensity of citizens of both countries as to how as consumers or workers they bear the burden of the economic hardships that should follow from recession and unemployment. In terms of physical, spiritual, psychological capacity who are going to be more resilient, stoic, frugal, insouciant and character tough?
Vincent Cheok
A sensible article in a long time.
Donald Trump and Peter Navarro said Trade War with China easily won. Fear not, "Everybody needs to relax," Navarro said. Trump’s trade wars against China, EU, S. Korea, Japan and NAFTA members is "good for the market," he insisted.
You comments are solid but let us acknowledge that the views of others cannot be ludicrous as they may labelours to be ludicrous and no progress can be made. Also one must START someplace from some visible point and not everything can be dismissed as just too complex to discuss. The US has a massive trade deficit and China holds the largest proportion as the main route for this deficit. This trade deficit may decline sharply and this is current USG policyso how can we proceed? Endless talking is nothing but vibrating air columns so the trade is constricted. What then happens? Okay, we make fresh observations and after reorienting take new decisions and ACTIONS – in OODA loop procedure. You know all this. Finally China has spent the past few centuries on fire, upside down, and at war with the result that everyhting accumulated is a thin veneer about 17 years deep so since joining the WTO in 2001 (?) so you want to study Mao on the nature of the Chinese personality according to his view.
Okay readers, the so-called ‘mid-term elections’ in the US will be in November and we will see then what the actual voter thinks after 2 years making it possible to test Mr.Goldman’s position above. Prophecy is always to be avoided. At the moment the propagandists are grinding out their overwrought emotional products. Everyone has illusions including Mr. Goldman and he knows it. What he does not know is those near term facts which are not really facts yet so he guesses.
Here is the goal. As the US is less than 5% of the global population and the share of total output has fallen by about 1/2 since 1945-50 the USA must run balanced payments with particular attention to the merchandise trade deficit. China then Germany are the two most visible high spots in a chart field of red ink so moving phone production to Vietnam will not achieve much for long.
Ah, Xmas is coming and all those lights and ornaments lining the
shelves in Walmart. At least for 2018, they are mostly made in China.
US consumers will experience sticker shock and awe. Fortunately,
Washington apples, cherries, cranberries and melons will be less expensive.
So, underlying this article is the question: do the consequences of confronting decades of China’s ‘unfair’ trading practices — dumping, discriminatory non-tariff barriers, forced technology transfer, over capacity, and industrial subsidies — justify the negative impact on the American consumer and the U.S. economy.
Isn’t that a prime question to ask when embarking on any war, including a trade war.
Yes, President Trump is implicitly asking voters (who voted for him) to sacrifice for a more durable and fair trading posture with China, Germany and all nations who’ve the enjoyed positive economic results of the America’s comparatively open trading policies.
While we may see your prediction come true that "US economic growth could fall to close to zero from an estimated 2.8% to 4% for the second quarter," this war won’t last long. That Trump’s gambit and worth it.
The author is right in pointing out weakness of America! Americans consume too much and waste at the same time. The design philosophies adopted in the design of products, manufacturing techniques , emphasis on use of cheap materials etc. all contribute to shorter life time of consumer products. This results in waste. People have no choice and are forced buy new clothes or say slightly modified ‘new model’ otherwise no different than older ones. Junk the old type philosophy. It results in waste and finally pay more for imports!
High time Americans better learn to economize in consumption. Then it will be OK someday!
When both countries fall into recession, who do you think will survive? China with its huge savings, or the US with its huge debts? China which made almost every thing, or the US who import almost every thing it consume? No doubt both will feel great pain, but I can guess who is going to survive and who isn’t.
I think that consumption is not the only Achilles’ heel of USA in a trade war with China. USA has other weak points. First, whether we like it or not, the fate of any leading country follows an inevitable bell-shape curve, which includes an ascension path followed by a declining one. USA Reached its peak somewhere in the 1980s and 1990s. It is now in its declining phase. Second, USA is involved in many military adventures that require much energy and resources. On the other hand, most of the energy and resources of China are focused towards economic development. Third, there is no comparison between the leaders of China and the leaders of USA. Chinese leaders are more capable that the American leaders. We just have to compare the activities and the speeches of Hu JinTao and Xi Jin Ping with those of Obama and Trump. Fourth, China produces more engineers per capita than USA. USA, on the other hand, produces more lawyers per capita than China. The economy of a country depends more on engineers than on lawyers.
US consumers will inevitably be hurt (& PRC consumers to some degree as well), but I’m skeptical as to the timing of when the first noticeble impacts will occur. We saw a sizable uptick in US imports from the PRC earlier this year, likely a result of US businesses buying up inventory prior to the tarriffs going into effect. Furthermore, as others mentioned, there will naturally be ways to circumvent tariffs from both sides. On top of that, the actual implementation of tariffs will provide some additional lead time for transactions to go through. Consequently, I’m not sure whether the US consumer will actually feel any noticeable impact prior to the Nov elections, but they’ll definitely feel it by next year at the latest.
LOL don’t worry about an angry elctorate, Trump already has that covered with his demogogury and populism. They’ll angrily follow him lashing out at whatever he says until its too late.
The Goldman boys in Wall street tend to portray different picture by manipulating. Poor Americans. This is war on China fir its Belt and Road initiative and by default ti contain Russia and Iran. Keep in mind, that the guy is thr bafoon but his advisors are Israeli firsters. This has nothing to do with saving American jobs or interest.
Mike Johnson,
Imposing tariffs on imports of Chinese products does not mean that USA will stop importing these products or that USA will reduce the quantity of these products it will import. USA will import the same quantity of the same products from other countries instead of from China, but at a higher price. The overall US trade deficit will not decrease but will rather increase because of the higher prices of the products. The US customs will not collect more customs duties but US consumers will buy the same quantities of the same products at higher prices.
An iPhone7 retails in the US at USD 650 of which China contributes only 8.50 or 1.3 %. The import cost is about 400 to 450, so China contributes about 2 %.
In 2017, China’s GDP was USD 12,238 billion, total exports was 2.26 trillion of which 0.5 trillion goes to the US. Exports to US therefore, accounts for 4% of GDP. Taking the Apple iPhone as an example, lets be generous and assume that 0.25 trillion of the exports to the US were contributed by China. Therefore, tariffs by US on total imports from China has a 50% effect and hits 2% of China’s GDP. If growth in 2018 can be maintained at 6%, it should be reduced to 4%.
In 2017, US exports to China was 130 billlion. Assuming 75% contribution by US, the US component of exports to China would be 100 billion. This plus the surplus in service exports of 50 billion makes a total of 150 billion comparable to the 250 billion imports from China.
China’s action on imports from US would affect US more. Why ?? Because USD is a reserve currency and this makes it relatively less painful to continue purchasing imports from China with higher tariffs whereas China’s imports from US will fall sharply due to tariffs and devaluation of the yuan.
Migrant workers affected will relocate back to the farms and China will readjust its agricultural policy for sustainable food security and revitalization of the rural areas thereby reducing rural poverty.
Moreover, China can take very effective action in reducing tourist and
educational imports from the US.
Finally, in PPP terms, China’s economy is bigger than the US. Trump, Lighthizer and Navarro are delusional.
Trump is putting 10% tariff on rare earth, I bet China will put 20% exit tax on rare earth as well.
Lol. US wrote the rule, now it cry unfair.
good
congratulations to all comments excellent work.
lets be real. Tarrif is a tax and our government is hiding under the guise of lowering income tax.
Trump is also pushing up defence spending by NATO and other countries. US expenditure on defence will also rise. This may lead to inflationary pressure, pushing white good prices farther up, and accentuating the trends outlined in the article. Trump is driving USA and the world into a position where only a war will maintain high levels of investment and employment in USA. Alas! The only hope is that China will strengthen up, and save the day for humanity.