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Good morning. The PMI of Chinese services fell to a hollow of 7 months yesterday, adding to the proof that the country is hammered by declining the American demand. Other indices and sub-indexes have also arrived cooler than scheduled in April: construction, manufacturing and, in particular, employment. China is in a better political position than the United States to resist the tariffs of pain. But economic position seems to be weakening. Send us an email: Robert.armstrong@ft.com And aiden.reiter@ft.com.
The economic perspectives revisited
A few months ago, we made the next matrix of End of year potential results For the American economy and asked readers to place their bets on which quadrant was most likely:
The most popular answer was B, “too hot”, followed closely by D, “Stagflation”. But the image since then has undoubtedly changed. Inflation has decreased, and the extent and severity of Trump's pricing policies surprised the markets. While earlier this year, investors are betting on the drop in taxes and deregulation caused growth of the United States, fears of a slowdown, or worse, predominate.
So let's revive our expectations. Here are the arguments for each options, as we see them now:
R:
It seems a little eccentric while we are looking at a trade war with China and the possibility of world prices raised in two months when the “reciprocal” price break from Donald Trump ends. But inflation has evolved in the right direction, and the Fed seems to have room to maintain high rates. THE jobs The data was solid, even with a feeling of diving. The American president may well do chicken on prices (because Taco!), or reduce reasonable commercial transactions. And tax reductions and deregulation could maintain low growth and unemployment.
B: Too hot
This also seems less likely than in February, but it is always possible. If Trump is advancing on prices, even at current levels, this will probably increase higher prices. That we have not yet seen any inflation collection seems to be a matter of timing; Inventories of Tathed-Ahead imports will decrease over time and businesses could increase prices preventively. Omair Sharif with Inflation Insights thinks that we will see higher prices in the IPC report next week, starting with household furniture.
Prices at the current levels can lead to a slowdown in domestic activity and higher unemployment, but this is not guaranteed. The economy could remain hot if domestic production increased quickly. The clearer and more decisive policy of the White House, even if it includes higher prices, could also stimulate the investment and consumption of companies – for markets and many companies, uncertainty is the killer. But, even if we remain in the dark, there must not be a slowdown. “As the employment report in April may have shown it, companies are unlikely to freeze investments and hire entirely just plans due to uncertainty about future trade policy,” said Stephen Brown at Capital Economics.
And, for somewhat technical reasons, unemployment could remain low even if the economy slowed down. As Sharif and Brown do not note it, immigration flows are weak and adjusted for even lower. This means that the workforce will increase more slowly and that the United States will have to add less jobs each month to prevent the increase in unemployment.
C: Too cold
This option seems more likely than in February. Consumers, analysts and economists have started to bet that the American economy will slow down this year. Prices or uncertainty could bugger the consumption of both things and the prices of prices of prices are minimal.
However, there are obstacles. If Trump continues to retreat on the prices, there will probably be not too many big blow to American consumers – who have continued to spend heavily. And if it folds up, there will probably be an even greater price flow. In addition, if the prices remain limited and the economy slows down considerably, the Fed will have room to reduce, which can stimulate interior activity and potentially get back into the camp “just on the right”.
As Manoj Pradhan at Talking Heads Macro points out, it is also possible that a slowdown combined with a low migration pushes higher prices, not lower:
If the supply and demand for labor is not external, although this can maintain the stable unemployment rate, this implies higher wages growth, which results in higher inflation of services. . . (Combining this with) A lower capex implies that potential growth will be moderate, which would mean a less negative production gap – preventing inflation from lowering too much.
D: Stagflation
Each analyst we asked we think that it is the most likely result. We agree. Prices at current levels will slow growth and increase prices. To American consumers – especially richWho explains the majority of consumption – always have a decent financial cushion, so a slowdown may not kill inflation. Indeed, higher prices can happen.
A slowdown also seems more and more likely. Although a sharp increase in the unemployment rate can be prevented by slower growth in the workforce, most of the analysts we have spoken to always expect unemployment to reach 4.8%. And, although the economy has remained solid, there are disturbing storm clouds on the horizon: sustainable purchases have the bottom, manufacturers and service providers see price increases and trade with China is already slowing down, according to the Shipping data.
One of the worst characteristics of stagflation is that it puts the Fed in a dilemma: if inflation remains too high, they cannot reduce rates to protect employment. This leaves fiscal policy as the final joker and the last potential solution in addition to recovering the prices. For the moment, it seems that Trump's budget will increase the deficit, but will do it less than its predecessors; The level of budgetary stimulus will be somewhat diminished. But that could change, if a pronounced slowdown makes the bond market and the hawks of the republican budget more accommodating.
In the comments or by e-mail, please write us with your prediction (A, B, C or D), how sure you are and why.
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