August PMI Data Seemingly Discredits the View that the U.S. Will Win a Trade War and Incur Minimal Collateral Damage

September 3, 2019

The Institute of Supply Management’s monthly reading of the U.S. manufacturing purchasing managers index slipped below the 50 level for the first time in 43 months, signifying that the sector is no longer merely expanding more slowly but in fact has begun to outright deteriorate. The survey’s diffusion index for orders, which are sensitive to export demand, also fell through the 50 level, dropping 3.6 index points to 47.2. Indices for jobs and production likewise moved from 50-something to 40-something, dropping by 1.3 points and 4.3 points.

Among other countries, manufacturing indices rose 0.5 points in Euroland (see below) and China and dipped 0.1 point in Japan. The U.S. still enjoys a manufacturing sector advantage relative to the euro area, but its edge is by the smallest margin in sixteen months. A separate U.S. manufacturing purchasing managers survey conducted by IHS stayed barely above the 50 level in August but at 50.3 was the lowest level since September 2009, just three months into the now record-long U.S. business upswing. The IHS survey also revealed an intensifying slide in exports.

From the onset of the trade war, the Trump Administration has adamantly insisted that winning the fight would be easy and quick, and that the U.S. economy would incur no more than minimal inconvenience. But taking a longer-term look at comparative manufacturing PMI readings over the past eleven months suggests otherwise. The U.S. PMI score was 59.5 last September versus reading of 54.6 in Euroland, 50.0 in China, and 52.5 in Japan. Over the ensuing 11 months, the U.S. index dived 10.4 points against declines of 7.6 points in Euroland and 3.2 points in Japan. China’s reading actually increased by 0.4 points. In the seven months between January and August, moreover, the U.S. manufacturing PMI dropped 7.5 points versus a 2.4-point rise in China’s index and declines of 1.0 point in Japan’s and 3.5 points in Euroland’s.

A trade war dampens two-way commercial trade. Exports and imports for just about all countries slide together. This dynamic was a key characteristic of the 1929-1933 period and is famously illustrated in a well-known economic chart from that period. Beyond damaging the interconnected web of globalization, trade wars spawn general economic uncertainty because such barriers are dictated by political whim, not economic forces. Uncertainty, in turn, strengthens the dollar, which weakens U.S. price competitiveness and thus undermines the use of tariffs as a vehicle to reduce trade imbalances.

U.S. President Trump has not disguised his strong liking of former President Andrew Jackson, the portrait of whom is often featured prominently in videos from Trump’s oval office in the White House. It is not coincidental that Jackson in his time was also a tariff man, and many historians agree that besides the polarizing matter of slavery, “an increasing push to place protective tariffs favoring Northern business interests and which every Southern household paid the price” also contributed mightily to pushing America into its costliest war. For political as well as economic reasons, the U.S. reliance on tariffs to resolve unfair trading conditions is a much riskier strategy than the Trump Administration admits.

Mfg PMIs	U.S.	Euroland	Spread	EUR/USD
Jan 2013	53.1	47.9	+5.2	1.330
February	53.1	47.9	+5.2	1.334
March	51.5	46.8	+4.7	1.295
April	50.0	46.7	+3.3	1.301
May	50.0	48.3	+1.7	1.299
June	52.5	48.8	+3.7	1.319
July	54.9	50.3	+4.6	1.309
August	56.3	51.4	+4.9	1.331
September	56.0	51.1	+4.9	1.335
October	56.6	51.3	+5.3	1.364
November	57.0	51.6	+5.4	1.349
December	56.5	52.7	+3.8	1.370
Jan 2014	51.3	54.0	-2.7	1.361
February	54.3	53.2	+1.1	1.366
March	54.4	53.0	+1.4	1.380
April	55.3	53.4	+1.9	1.380
May	55.6	52.2	+3.4	1.374
June	55.7	51.8	+3.9	1.360
July	56.4	51.8	+4.6	1.354
August	58.1	50.7	+7.4	1.332
September	56.1	50.3	+5.8	1.290
October	57.9	50.6	+7.3	1.268
November	57.6	50.1	+7.5	1.247
December	55.1	50.6	+4.5	1.232
Jan 2015	53.5	51.0	+2.5	1.162
February	53.3	51.0	+2.3	1.135
March	52.3	52.2	+0.1	1.083
April	51.6	52.0	-0.4	1.081
May	53.1	52.2	+0.9	1.116
June	53.1	52.5	+0.6	1.123
July	51.9	52.4	-0.5	1.101
August September October	51.0 50.0 49.4	52.3 52.0 52.3	-1.3 -2.0 -2.9	1.114 1.123 1.121
November December Jan 2016 February March April May June July August September October November December Jan 2017 February March April May June July August September October November December Jan 2018 February March April May June July August September October November December Jan 2019 February March April May June July August	48.4 48.0 48.2 49.7 51.7 50.7 51.0 52.8 52.8 49.4 51.7 52.0 53.5 54.5 56.0 57.6 56.8 55.3 55.5 56.7 56.5 59.3 60.2 58.5 58.2 59.3 59.1 60.7 59.3 57.9 58.7 60.0 58.4 60.8 59.5 57.5 58.8 54.3 56.6 54.2 55.3 52.8 52.1 51.7 51.2 49.1	52.8 53.2 52.3 51.2 51.6 51.7 51.5 52.8 52.0 51.7 52.6 53.5 53.7 54.9 55.2 55.4 56.2 56.7 57.0 57.4 56.6 57.4 58.1 58.5 60.1 60.6 59.6 58.6 56.6 56.2 55.5 54.9 55.1 54.6 53.2 52.0 51.8 51.4 50.5 49.3 47.5 47.9 47.7 47.6 46.5 47.0	-4.4 -4.8 -4.1 -1.5 +0.1 -1.0 -0.5 0.0 +0.8 -2.3 -0.9 -1.5 -0.2 -0.4 +0.8 +2.2 +0.6 -1.4 -1.5 -0.7 -0.1 +1.9 +2.1 0.0 -1.9 -1.3 -0.5 +2.1 +2.7 +1.7 +3.2 +5.1 +3.3 +6.2 +6.3 +5.5 +7.0 +2.9 +6.1 +4.9 +7.8 +4.9 +4.4 +4.1 +4.7 +2.1	1.076 1.090 1.087 1.111 1.114 1.134 1.130 1.124 1.106 1.120 1.121 1.103 1.078 1.054 1.063 1.064 1.069 1.072 1.106 1.124 1.153 1.182 1.191 1.176 1.174 1.184 1.220 1.234 1.234 1.227 1.181 1.167 1.169 1.155 1.166 1.148 1.136 1.138 1.142 1.135 1.130 1.123 1.118 1.130 1.121 1.112

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