US-China trade war may drive economy to brink of recession

The latest escalation of the trade war is going to put the U.S. economy on the brink of a recession, according to Wall Street.

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Swiss bank UBS said Tuesday that it sees U.S. gross domestic product growth slipping to 1.8 percent in the fourth quarter before slowing to 0.5 percent in the first quarter of 2020 and 0.3 percent in the second quarter as the recent round of tariffs hits consumers' wallets.

“Consumption is almost 70 percent of the US economy, so its path largely determines the path of GDP,” UBS' chief economist Seth Carpenter wrote.

He added the 5 percentage point increase on existing and new tariffs on virtually all goods imported from China is "quite large" and that it materially increases the uncertainty surrounding the trade war's impact on U.S. businesses.

Carpenter isn’t alone in his call. Morgan Stanley equity strategist Michael Wilson also sees the tariffs having an impact on the U.S. economy as businesses are forced to pass the higher costs on to consumers.

“We think the latest increase in tariffs on the remaining $300B of Chinese imports will end up hitting consumer goods directly, which could lead to some demand destruction, particularly for low end shoppers who are more price sensitive,” Wilson wrote.

“Keep in mind that last year’s first round of tariffs happened when companies were still enjoying a massive profits/margins windfall from the tax cuts. With that windfall now gone, the ability to eat the tariffs is much lower today.”

Demand destruction wouldn’t be the first sign of a slowing U.S. economy. On Tuesday, the Institute for Supply Management said the U.S. manufacturing sector in August contracted for the first time in three years.

The report came just days after the second estimate of second-quarter gross domestic product was 2 percent, down from the first quarter’s 3.1 percent print.

The weaker data comes a few weeks after the spread between the U.S. two-year and 10-year yields turned negative for the first time in over a decade, sparking concerns that a recession was on the horizon. An inverted yield curve has occurred ahead of the last seven U.S. recessions, sometimes leading by as much as 24 months.

Still, the Trump administration remains confident that the U.S. economy is strong, and that recession fears are overblown.

“I don’t think the yield curve reflects a recession,” Treasury Secretary Steven Mnuchin told “Fox News Sunday.” “I think the yield curve reflects the fact that it anticipates the Fed is going to lower short-term rates.”

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He added that a number of trade deals are still in the works and that they'll “add significantly to growth.”