Collapsing US export orders dragged down the widely-followed National Association of Purchasing Managers’ index for industrial production to the lowest level since 2009. Two days earlier, China’s Caixin manufacturing survey reported a second month of modest improvement. The two surveys show that China is suffering less from the effects of the trade war than the United States, quite the opposite of what President Donald Trump has insisted during the past year. I have been warning this would happen for more than a year.
Equity markets fell sharply on the news, with cyclical sectors like oil, transportation and industrials losing the most.
In a September 30 tweet, President Trump blamed the “pathetic” Federal Reserve for failing to cut interest rates sufficiently to reduce the value of the US dollar. The Federal Reserve governors “have allowed the Dollar to get so strong, especially relative to ALL other currencies, that our manufacturers are being negatively affected.” Trump added, “They are their own worst enemies, they don’t have a clue.”
The president isn’t fooling anyone, least of all the stock market.
It isn’t clear how Trump concluded that the Fed is responsible for the present industrial recession. Perhaps someone on his staff showed him a chart that looks like this:
The NAPM survey for export orders fell to just 41, the worst result since the depths of the 2009 Great Recession, while the dollar rose. Of course, the US dollar index stood at 100 in October 2016 when the NAPM export orders index climbed to 60. But one might infer a trade-off.
The trouble with this sort of thinking is that the export orders of all the world’s countries have fallen, whether or not their currencies have risen or fallen. Germany’s export orders have collapsed, leaving Europe’s largest economy on the verge of recession, despite the weakness of the euro.
The problem is that the overall volume of world trade has shrunk, and the volume of export orders for every major trading economy has shrunk even more. Even if President Trump moved quickly to a trade deal with China, which seems unlikely, the after-effects of uncertainty will depress economic activity for some months to come. His ill-conceived China policy endangers his chances of re-election in 2020.
Export orders from Germany and Japan, two of the three largest trading economies, have fallen by 8% in the past three months. The pie is shrinking, and it will not help the United States to reduce the value of the dollar.
Where US domestic lending is concerned, it is fanciful to argue that a lower overnight rate from the Federal Reserve will do much for businesses or consumers. The cost of long-term borrowing for US corporations rated Baa is only 3.91%, the lowest since 1956. Meanwhile the assessed interest rates on credit cards stands at 17%, the highest in history. Credit card interest rates have climbed despite the steady decline in the business borrowing rate. Banks are using the high rate to ration credit to consumers. The overnight rate has nothing to do with the matter.
Corporations meanwhile have taken advantage of historically low borrowing costs to increase their debt. But the present corporate borrowing boom has had little economic impact. As I reported in this space July 24 (“A Storm Warning for the Stock Market”), US corporations now give more money back to their shareholders in the form of dividends and buybacks than their total operating earnings. That has helped buoy equity prices while capital investment has shrunk. Reducing interest rates might encourage more of this sort of balance-sheet padding, but it won’t benefit the economy.
The dark cloud hanging over the US economy (and the economies of the rest of the world) is the trade war, which has frozen capital investment while corporations try to work out whether they will face punitive taxes if they put their supply chains in the wrong place.