With another 2 percent or so decline on Tuesday, U.S. stock indices have given up their gains for the year. The rout that started in tech stocks has moved to oil shares amid worries about global demand, as well as to retail stocks, which suggests concern about whether consumers will continue their pace of spending as asset prices fall.
It?s a legitimate worry. The job market has been strong, and small business confidence remains high, but those tend to be lagging indicators. With the world economy showing strains, the chances of a significant U.S. growth slowdown can no longer be ruled out. We?d note that our contributor Donald Luskin, the financial adviser and long-time growth optimist, has put himself on recession watch.
Another reason to worry is the nearby chart, which tracks the quarterly change in world trade volume from 2015 through mid-2018. Note the sharp decline in the rate of growth in global trade in the first half of 2018.
Trade flows aren?t a perfect proxy for GDP, but trade in an expanding economy tends to increase at a faster pace than overall growth. The average annual increase from 1987-2007 was 7.1 percent. Trade volume naturally fell during the recession but rebounded to 12 percent growth in 2010. But it stagnated at 3 percent from 2012-2014, and then went below 2 percent in 2015 when the economy barely escaped another recession.
Trade flows revived along with growth in 2017, but they fell again this year as Donald Trump unveiled his global tariff assault after tax reform passed. The World Trade Organization hasn?t yet reported third quarter trade data, but a fair guess would be continuing doldrums, as global growth has slowed and the threat of more tariffs hangs over supply chains, investment decisions and confidence.
We hope someone at the White House is listening to this trade canary. Mr. Trump is expected to meet Chinese President Xi Jinping later this month at the G-20 meeting, and the world will be watching to see if they strike a trade truce. The chances of a deal have seemed slim, but the logic of a truce grows stronger as the stock market falls further.
? The Wall Street Journal
