Canada slumps .... as will the US

OK, here I showed Mexico's PMI, which is falling fast.  So what's been happening to Canada?  Well, it's no surprise that it too is plunging.  In fact, the plunge started when Trump imposed his "beautiful" tariffs.  In common with much of the rest of the world, Canada had started a new upswing as the impact of interest rates started to wear off.   This upswing has come to an abrupt end.  (Heading towards Covid Crash levels!!)

This is what Canada and Mexico together are doing:

Together, Canada and Mexico buy about 20% of the US's exports.  So, we can expect a significant decline in US exports to these two countries.  And that's before the impact of retaliatory tariffs and boycotts.  

When we calculate GDP, we add exports and subtract imports to domestic spending [ GDP  = (C + I + G + NetInv) + X - M ], so the net effect on GDP, in a purely mechanical sense, should be close to neutral.  The problem is that this assumes that the demand for imports is replaced by domestic spending, and though some will be, it will be at higher prices.  That's the whole point of import tariffs:  to persuade domestic manufacturers to enter the market by making it more profitable.  So there will be shortages in the USA, and where there are not, there will be increased prices.   And since the tariffs change from week to week, no manufacturer is going to commit to new investment until things have settled down.  So there won't be much of a rise in employment or incomes, just a rise in prices and fewer goods available in shops.   In other words, the decline in imports, which arithmetically should lead to a rise in GDP, in fact will not. 

So far, Canada and Mexico have been the worst affected by the tariffs, for obvious reasons.  However, to a lesser extent, the Trump Tariffs are or will be having the same effect almost everywhere.  Which means the world economy and the US economy will slow.   We've already had one negative GDP quarter in Q1.  In Q2, imports [ M ]  will fall (increasing GDP), but so probably will exports [ X ], and consumption [ C ] (artificially boosted in Q1 by people bringing forward purchase to beat the tariffs) and inventories [ NetInv ] (built up ahead of tariff-induced price increases), all of which will reduce GDP.  Oh, and government expenditure [ G ](remember Elon's DODGY?) will also slump. 

Will the cavalry ride in to save us?  The Fed will be extremely reluctant to cut interest rates until the temporary (??) rise in inflation has passed out of the system.   And the economy takes time to respond to monetary stimulus.   In the bond market, always clearer-eyed than the share market, yields are rising, not falling.   It doesn't think the Fed Funds rate is going down soon.

Indicator after indicator points to a US and (prolly) a global recession.  (See next post).  This will be the second recession in my long career not caused by monetary or financial factors.  The first was the Covid Crash.  In my nightmares, I'm wondering whether this one will be as bad, just longer.