Perspectives

The slowdown continues

EcoPerspectives // 4th quarter 2019  
3
economic-research.bnpparibas.com  
United States  
The slowdown continues  
The contraction in world trade, exacerbated by President Trump’s tariff offensive against China, has begun to spread to the United  
States. The economic slowdown, which can also be attributed to domestic factors, has prolonged throughout the summer of 2019,  
and business surveys do not suggest any improvements in the months ahead. Corporate investment will remain downbeat, while  
household consumption, which has been resilient so far, should begin to falter. In the face of this environment, the Federal Reserve --  
which no longer provides forward guidance on upcoming policy moves  is bound to lower its key rates again.  
During the summer months, the US economy continued to slow  
1- Growth and inflation  
although it seemed to be fairly resistant to the headwinds affecting  
world trade. The annual GDP growth rate dropped to 2%, one point  
below the 2018 level, which is still an enviable performance when  
seen from Europe, where recession is looming in countries like  
Germany, Italy and the UK. Yet, taking a closer look, the US  
economic slowdown is more severe than it might seem. The only  
factors limiting the fall in year-on-year GDP growth were public  
spending and inventory building in anticipation of new tariffs  
imposed by President Trump. Foreign trade provided a negative  
contribution, but the bulk of the slowdown was essentially due to  
domestic factors. It can be attributed to the decline in private  
investment, which was first seen in residential construction, and  
then spread to all sectors with the exception of software. Although  
consumption and employment are both resilient, they seem to be  
losing momentum. Lastly, business surveys are depressed and do  
not signal any improvements in the near future.  
 GDP Growth (%)  
 Inflation (%)  
Forecast  
Forecast  
2.9  
2
.4  
2.4  
2.2  
2.1  
1.8 1.8  
1.6  
1.5  
1.3  
16  
17  
18  
19  
20  
16  
17  
18  
19  
20  
Source: National accounts, BNP Paribas  
2
- Downturn in the investment cycle  
Corporate investment, vol., y/y  
Oil output, mb/d (lhs)  
▪▪▪ Number of drillings (rhs)  
Downgraded prospects  
(lhs)  
The drop in the Institute for Supply Management (ISM) index for the  
manufacturing industry, as well as the reversal of the capacity  
utilization rate, suggest a further decline in capital goods spending.  
The drop could be particularly severe in the very capital-intensive oil  
and shale gas sectors, where the first signs of over-investment have  
emerged (chart 2). With production volumes at an all-time high of  
▪▪▪ New industrial orders (rhs)  
15%  
70 14  
1 800  
1 200  
6
6
5
5
0
5
12  
10  
8
10%  
5
%
%
8
million barrels per day (b/d), the profitability of new wells can no  
600  
longer be taken for granted. Producing less than expected after  
being drilled too close to one another and operated by heavily-  
indebted industry players, the number of new wells is trending  
0
50  
6
1
-5%  
45  
4
0
downwards .  
2013 2015 2017 2019  
2013 2015 2017 2019  
US household consumption  which at USD 14,000 billion a year is  
five times higher than French GDP is by far the most powerful  
driving force of domestic demand. In 2018, the combination of tax  
cuts, job creations and consumer credit created a rather high-octane  
fuel, but the mixture has weakened in 2019. Companies are not only  
re-assessing market outlets and scaling back investment, they are  
also slowing the pace of hiring. Net job creations have fallen to a  
monthly average of 161,000 between January and September, the  
lowest number in nine years. Given the population inflow into the  
labour market (1.8 million on average in 2018), job creations hardly  
suffice to bring down the unemployment rate, already standing at  
Source: Institute for Supply Management, US BEA, IEA.  
all-time low (3.5% in September). Farmers and purchasing  
managers are no longer the only segments of the population  
suffering from President Trump’s trade war. Even though consumer  
goods are not affected much, higher import tariffs are having a non-  
negligible impact on inflation (see box 3). Faced with higher prices  
for capital goods and inputs manufactured in China, there has yet to  
be a significant shift in demand towards other countries . US  
companies are bearing the costs, modulating the efforts granted by  
suppliers and their reactions to exchange rates. In the end, the  
2
1
2
The Wall Street Journal (2019), Shale Boom Is Slowing Just When the World  
French Treasury (2019), Impact of first US-China trade tensions, Lettre Trésor-  
Needs Oil Most, Sept. 29  
éco n°244, September  
EcoPerspectives // 4th quarter 2019  
4
economic-research.bnpparibas.com  
impact on prices paid by end consumers is estimated at a few  
tenths of a point . After holding to a slowing trend recently, core  
3
- Escalation of the US-China trade war  
3
The facts. On 6 July 2018, the United States opted to apply a 25%  
tariff on a first list of products imported from China for a total of  
USD 36 bn, a decision immediately followed by retaliatory measures  
(see the tit-for-tat chronicle of events below). A little over a year after  
the hostilities were launched, some USD 250 bn in annual imports to  
the US from China (or about half of all purchases) are now taxed at an  
average tariff of 25%. This essentially comprises intermediate products  
and industrial capital goods (80%) while the remaining 20% is for end  
consumer goods. In retaliation, China has applied variable tariffs on all  
of its imports from the United States (USD 110 bn a year) and  
suspended soybean purchases.  
inflation rebounded to 2.4% in August. This has lowered the growth  
of real disposal income for US households.  
Consumer credit is also less buoyant, which is not unusual at this  
stage of the business cycle: household non-mortgage debt has  
increased 55% from the 2009 low, coming back to relatively high  
levels as regard of disposable incomes. Car sales have matched all-  
time highs, so that the fleet has been largely renewed. Lastly, banks  
are tightening lending conditions at a time when transformation  
conditions have deteriorated due to the inversion of the yield curve  
4
(
Wheelock, 2018) .  
Additional risks. In the heat of August, President Donald Trump said  
he wanted to increase the tariffs already applied to Chinese imports  
from 25% to 30%, and to impose tariffs on all Chinese imports that  
were not already taxed, representing an additional amount of  
USD 272 bn a year. This threat was supposed to take effect on  
More key rate cuts  
In the months ahead, the Federal Reserve (Fed) will need to  
steepen the yield curve, which means further monetary policy  
easing. The Fed funds target rate has already dropped from 2.5% to  
1
September 2019, but the date was pushed back to give the United  
2
%, and we think it could be lowered further, to 1.75% at end-2019  
States and China time to restart negotiations and try to reach a  
compromise, undoubtedly during the second week of October.  
and 1.25% at end-2020.  
Of course, the official position remains cautious and does not signal  
such a move. Having foregone “forward guidance”, Federal Reserve  
Chairman Jerome Powell has linked any policy changes to  
upcoming economic publications. He also pointed out that monetary  
Date  
United States  
China  
July-Aug.  25% on $50 bn ($36 bn  
2018  
 5% to 25% on $50 bn of  
imports from the US  
(list 1)  
5
+$16 bn) of imports from  
China (lists 1 & 2)  
easing phases can sometimes be very short . Yet he did not cite the  
most pertinent example: the Fed cut its key rates in the fall of 1998  
to counter the potentially systemic effects of the quasi-bankruptcy of  
Sept.-Nov.  10% on $200 bn of  
2018  
imports from China  
list 3)  
May 2019 10%  25% on $200 bn of  
imports from China  
 5% to 25% on $60 bn of  
imports from the US  
6
an entire hedge fund , not to accompany a cyclical downturn, as  
(
now seems to be the case.  
(list 2)  
Suspension of soybean  
imports  
 (list 3)  
Sept. 2019  10% on $120 bn of  
 Higher tariffs on $60 bn  
of imports from the US  
imports from China  
(
list 4A)  
(
list 2)  
Oct.-Dec.  25%  30% on $250 bn  China attempts to ease  
2
019?  
of imports from China  
(lists 1 to 3)  
tensions by postponing  
certain planned tariff  
increases and resuming  
soybean imports.  
Threats  
15% on $272 bn of  
imports previously without  
tariffs (list 4)  
Consequences. Based solely on the measures already taken (and  
using the 2018 value of trade), the weighted average US tariff rate  
would rise from 1.7% in 2017 (one of the lowest rates in the OECD) to  
7.7% in 2020 (one of the highest rates). China would be hit hardest. Its  
sales to the US have already declined (by 20% for the year for targeted  
products, a figure amplified, however, by early shipments in 2018) and  
US tariffs would cost its economy as much as 1 point of GDP in 2020.  
Yet there are no winners, and the IMF estimates that the shock has  
cost the US 0.7 points of GDP.  
3
Jean S. & Santoni G. (2018), How Far Will Trump Protectionism Push Up  
Inflation?, CEPII Policy Brief n°23, December. The two authors estimate that the  
sanctions already imposed on China (25% tariffs on USD 250 billion in annual  
imports) triggered a 0.25%-0.38% increase in inflation.  
Source: French Treasury (op. cit.), IMF, BNP Paribas  
4
Wheelock D. (2018), Can an Inverted Yield Curve Cause a Recession?,  
Federal Reserve Bank of Saint Louis Blog, Dec. 27  
5
Powell J., Press conference following the Monetary Policy Committee meeting  
of 18 September 2019  
6
In this case, Long Term Capital Management (LTCM)  
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