Economic conflicts between the United States and China have inevitably transpired to result in the trade war heard ‘round the world. While the predominance of the initial reporting outlets covered the updates in, what some may say, a panicked manner, others would argue that their responses were merely due to their general lack of knowledge in economic policies. Economics, after all, can be generalized as the study of human behavior in response to a change, as they continually restructure procedures to maximum their benefit in any given situation.
Both manufacturing and construction industries have taken obvious hits in direct result of the tariffs. Year-to-date construction spending is down 2.3% as of Quarter 3 (July-September) in comparison to the same time frame in 2018. Likewise, manufacturing (as of September 2019) was measured the lowest value in a decade (since 2009), indexed at 47.8.
While the manufacturing index has recorded numbers below 50 for two consecutive months now, it’s worth noting that the decline began prior to when the impactful tariffs were implemented. Let’s take a look at some comparative analysis below.
The ISM Index for the Manufacturing Industry
The ISM Index is data gathered by the Institute for Supply Management from 300 surveys filled out by United States purchasing managers within 20 different sectors throughout the manufacturing industry.
August of 2014 was the last time the ISM index was in a down trend eerily similar to what we are seeing today. According to linear data, the decline of the ISM was not drastically altered until May of 2019. Unofficial estimates can conclude that this was the time frame when the tariffs began to directly affect the manufacturing industry as a whole.
The data below taken from ISM 2014 peaks versus 2019 peaks will visually showcase the initiation of the decline in May with escalation visible through August.
Photo Credit: FTR | The Blog
While the above data based on the United States manufacturing economy shows obvious downturn, China’s data is appalling in comparison, only solidifying previous assumptions of a ‘winner-less’ trade war.
Business responses, in a word? Complicated.
While it is seemingly impossible to accurately predict procedural restructures on a per business basis, assumptions can inherently be made based on existing structure, best practices, and business models currently implemented.
Example: If a supplier to a commercial vehicle manufacturer is suddenly faced with 25% tariff increases on their products developed in their Chinese factory, you can assume with confidence that the upsurge gets passed on. The cost of production rises by 25%, so the business raises their price by 25%. This continues to funnel down – inland transportation (trucks) increases dealer prices 25%, fleet prices rise, freight rates increase by 25%, then at the very bottom of this funnel we find the consumer – who will also pay an increased price for the same goods.
What happens if the supplier from the example above begins to move production to Cambodia, resulting in only a 10% cost increase? Customers may first want proof of quality, ensuring the consistency and quality of the product remains untouched. This could be timely and expensive, thusly increasing an immediate need to ramp up production in the suppliers U.S. based manufacturing facility. Market competition would cap off product price increases made by the supplier, resulting in less profit with equivalent sales.
The latter directly impacts the business’s bottom line, but doesn’t shake the economy and/or pass the expenses down the entire supply chain.
Is a Recession on the Horizon?
The manufacturing sector has inevitably been the first fatality of the trade war. While consumer prices have yet to be touched as a direct casualty, the U.S., European, Asian, and Chinese economies have all drastically slowed as a result.
In an opinion post written by Joel Naroff from The Philadelphia Inquirer, he goes on to report that “the trade war has clearly affected growth in both the U.S. and China. The U.S. economy had been expanding by 3% or more. That pace has receded to one in the 2% range. Although the Chinese economic data are questionable, it is clear that a significant slowdown has taken hold there, as well. That said, it is wrong to focus just on the U.S. and China. We don’t live in a world where the impacts of policies remain within borders. We operate in a global economy that has interrelationships between most countries, developed and developing. Thus, any war will create collateral damage and this one has already done that.” [We have the first casualty of the trade war: Manufacturing. What’s next?]
On a positive note, the sector that holds the proverbial key to the recession is the job market. As long as job growth holds steady, individuals will have the means and confidence to continue spending. Thus, maintaining economic strength and longevity.
It goes without saying that the conflict between the U.S. and Chinese governments would be better served on resolute terms. The economy is uncertain (for the lack of a better word) and beginning to feel the pressure. A manufacturing recession could be on the horizon. But if China can recover their GDP, United States exports rise and the global economy, as a whole, gets substantiated as a result.
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