Trade uncertainty skyrockets

From Diane Swonk

 

Effects of Trade Policy Uncertainty - work done by @IMF. “The drag is stronger on investment than on consumption…” but hits both.

That little blip before now...the onset of the pandemic. Stunning.

Why does it matter?   People choose to build or expand factories, office blocks, etc., when they have reasonable certainty and confidence about what is going to happen.   When uncertainty skyrockets, physical investment slows, consumers, worried about the future, cut back on spending, and employers stop hiring.  And the economy falls into a recession.

Consumer sentiment slides. Recession, anyone?

The consumer sentiment index from the University of Michigan has led every recession since 1953, except of course the Covid Crash.   The decline in the last couple of months is not precipitous, but it's driven by sharply deteriorating inflation expectations.  Which are, obviously, driven by Trump's tariffs.

However, there's another effect of the Trump tariffs.  This is the big jump in uncertainty.  And the effect of this is being seen in some data series---for example, the sharp decline in the services ISM.  When uncertainty strikes, it's easy to reduce your expenditure on services---reduce your eating out; stop going on holiday; don't go to shows; postpone going to the hairdresser.    Another example: the NFIB (National Federation of Independent Business) optimism index.  This index jumped after Trump was elected.  Small business thought he would be good for business.  It turned out to be the opposite, and small business optimism is now falling.

We've only had a few new data points since the inauguration.  So far, they've all pointed towards a slowdown.  Every month that the chaos continues means that things are going to get worse, and the recovery is going to be harder to engender.