Much of the reporting on our ongoing trade war with China has been centered around its alleged ill effects: tepid growth, jobs headed oversees, and certain consumer goods rising in price. Now it seems to be causing panicky drops in the stock market. It appears as though the very idea of this trade war can be blamed for nearly all our perceived economic woes.
While it’s true that perception often impacts the stock market more immediately than reality, when you take a closer look at what the immediate and long term effects of this so-called trade war might actually be, a far different, far rosier picture emerges.
To begin with, the economy is currently doing quite well. Those jobs heading overseas because of tariffs? The more likely reason is that we are approaching full employment. In April, the unemployment rate fell to 3.6%—the lowest it has been in more than half a century. (The latest reading, for July, was 3.7%.) Unemployment rates among African-Americans and Latinos are at the lowest rates on record. Plus, wages are growing fastest among lowest-wage industries, according to the Bureau of Labor Statistics.
Still, there was that frightening 800-point drop in the Dow Jones Industrial Average DJIA, +1.05% on Aug. 14, followed by a more-than-600-point decline on Friday, when the Chinese replied to President Trump’s threatened tariffs with tariffs on a number of U.S. products.
On the one hand, these drops could be seen as direct reflections of these escalations. On the other, they might be as simple as corrections in a bull market. It is quite normal for such corrections to equal 20% or more, without impacting the overall upward trend.
It makes a certain amount of sense that our ongoing discussions with China over trade take up so much ink. China is, after all, the world’s second-largest economy, following the U.S. It’s also an important trade partner, and one that Trump has singled out for unfair trade practices.
Yet even after two rounds of tariffs, the total amount of tariffs actually imposed by both nations on the other has been less than 0.1% of total world trade, according to Secretary of Commerce Wilbur Ross, Trump’s primary trade negotiator.
This became all the clearer this past Friday, when China’s answer to the tariffs that Trump threatened to impose beginning Sept. 1 finally arrived. It was apparent from the short list of items and their relatively low dollar value, as outlined by Trump’s trade adviser, Peter Navarro, that they would have little impact on the U.S. economy. It also indicated that China is close to the end of U.S. exports that it might place tariffs on.
You don’t have to take Ross’s or Navarro’s word for it; when you look at the hard evidence, it’s clear that the economic impact of the tariffs instituted in 2018 and so far in 2019 have been quite modest. In the first five months of 2019, for example, U.S. exports to China were down by $11 billion, or 20%, according to the Census Bureau. But the U.S. balance of trade with China, though still negative, actually improved by $16 billion over that same time.
Most importantly, though these seem like large numbers, in context, these are actually very small amounts when compared to total U.S. GDP, which in 2018 was about $20 trillion dollars. A trillion, it’s worth spelling out, amounts to 1,000 billion.
Most writers covering the situation with China make the mistake of overstating the importance of foreign trade to the U.S. economy as a whole. In 2018, total foreign trade only accounted for some 12% of GDP. Exports from the U.S. to China account for less than 1% of U.S. GDP, according to the Census Bureau.
If trade with China isn’t driving our economy, what is? The answer is clear: The U.S. consumer. In 2018, consumer spending totaled 68% of U.S. GDP, or more than two-thirds of the economy. If we focus not on trade with China but, instead, on the U.S. consumer, plenty of positive signs emerge.
A strong indicator that consumer confidence and spending will continue to pull the economy upward can be found in the very low unemployment rate, which has finally caused wages to begin to rise. Further, an optimistic consumer increased spending by more than 8% on an annualized basis in July—far ahead of most economists’ estimates. And while consumers remain optimistic, they are also savvier than in the past, and not, it seems, splurging on automobiles and houses, as they did in 2007. Instead, they are saving a conservative 6% of their income, adding to consumer saving and their 401(k)s.
Consumer confidence, as measured by the Conference Board, surged in July to the highest level since November 2018. Consumers didn’t seem to be concerned with the reported trade issues, despite their prominence in the headlines. This might well be because, to consumers, the costs of tariffs are awfully hard to find. Tariffs are on wholesale prices and aren’t necessarily passed on to consumers by the importer. They also increase the sales of domestic corporations, which actually increases the purchasing power of consumers. Consumer prices have only risen 1.8%, or less then the Federal Reserve’s target of 2% in the 12 months ending in August, confirming little impact from the trade war.
All of this evidence and more add up to signs of a solidly growing U.S. economy that continues to have legs. In 2018, U.S. GDP rose 2.9%. The first two quarters of 2019 averaged 2.6%. The rest of the year will, as usual, depend on the unknowable decisions of the consumer, and the continuing impact of a tight labor market.
The economies that might be cause for longer-term concern, in fact, are the EU and China. Foreign sales for companies in the S&P 500 SPX, +1.10% account for more than 40% of the total.
China was the original bearer of bearish news surrounding this perceived trade war with the U.S. But that was very possibly a tactical move to distract, for the Chinese economy is weak: debt has been cranked up to near-dangerous levels in an effort to keep the economy strong in the face of rising costs, a labor shortage, and the natural continued slowing of its economy from the double digit rates of a decade ago.
Back in the U.S., the economy remains strong, and the underlying fundamentals still show plenty of signs for optimism. This, even in the face of so much reporting around the trade war that seems to signal otherwise. If anything, it might be time to start tiptoeing into the market on days when it’s carried sharply down by trade rumors.
Cornelius Bond is the author of “T. Rowe Price: The Man, The Company, and The Investment Philosophy” and a former member of the T. Rowe Price Investment Committee. He now is a general partner of New Enterprise Associates, one of the largest venture-capital firms in the U.S.
This post was originally posted at http://www.marketwatch.com/news/story.asp?guid=%7BE79D4B24-C820-11E9-AE9A-DD5E9969CD3F%7D&siteid=rss&rss=1.