Month: April 2025

SERVICES PMIs

Note that data for these PMIs were collected 12-27 March, before “liberation day”, when tariff uncertainty was near its highest.

Growth picks up in March, but confidence in outlook remains subdued

The S&P Global US Services PMI Business Activity Index improved noticeably in March having slumped to a 15-month low during February. After accounting for seasonal factors, the index rose to 54.4, from 51.0 and the highest reading of 2025 so far. By remaining above the crucial 50.0 no-change mark in March, the index has signaled continuous monthly growth since February 2023.

Higher activity was principally linked to increased volumes of new work amid evidence of strengthened customer demand. Unseasonably warm weather was also noted to have supported an upturn in activity and sales. New business overall rose solidly and to a greater degree than in February, though growth remained slightly below trend and mainly domestic focused. Latest data showed that foreign sales rose only slightly in March (although this was an improvement on the declines seen at the start of the year).

Confidence in the outlook remained positive overall in March, linked to an expected improvement in economic conditions over the next year. Some firms pointed to the new administration’s economic policies as likely being supportive to growth. However, reflective of the uncertainty in the outlook, concerns persisted over the effects of federal cost cutting initiatives, and in particular, the role of tariffs in raising prices and dampening overall demand. Subsequently, confidence edged lower in March and was, with the exception of last September when sentiment was impacted by uncertainty ahead of the Presidential election, the weakest since December 2022.

With some growth forecast, and new business volumes increasing, a net rise in employment was recorded during March. It was the third time in the past four months that staffing levels have risen, although the net increase was again only modest and below trend. Service providers signaled only mild capacity pressures as work outstanding was up only marginally following a solid reduction during February.

Labor expenses were reported as a factor driving up operating expenses during March. Vendors were also reported to have raised their charges, which was linked by panelists to tariffs. The net result was a third successive monthly acceleration of input price inflation to its highest in a year-and-a-half.

Service providers sought to pass on higher costs to clients via an increase in their own charges. But output price inflation, despite picking up since February, remained below trend in March. Competitive pressures and efforts to sustain demand served to limit output price inflation.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence

(…) the rate of expansion remains below that seen throughout the second half of last year. Combined with a weak manufacturing reading for March, the survey data point to GDP having risen at an annualized rate of just 1.5% in the first quarter, down sharply from the 2.4% rate seen at the end of last year.

The focus turns to whether growth will also trend lower in the second quarter. In this respect, we note that some of the improvement in March reflected better weather, after adverse conditions dampened services activity in the first two months of the year at many companies. There’s a suggestion, therefore, that the expansion in March may exaggerate the true underlying growth momentum in the economy.

This gloomier picture is supported by the PMI’s future activity index, which showed optimism edging lower again in March. Business sentiment is now the lowest since the end of 2022 barring only the heightened uncertainty seen ahead of last year’s Presidential election.

Companies report heightened concerns and uncertainty around the impact of political change, ranging from DOGE-related budget cutting to tariffs and the degree to which foreign demand may be affected by recent policy initiatives. Concerns have also risen in relation to costs, which rose in March at the fastest rate in nearly two years as firms across both services and manufacturing reported intensifying supplier-driven price hikes, fueled by tariffs.

• Service Sector Activity Not Immune to Tariffs

The ISM services report tells us that activity is holding up, but firms are no longer hiring, orders have slowed to a crawl, backlogged orders are falling and businesses are having trouble getting their hands on supplies.

At 50.8 the services ISM index hit a nine-month low and sits only marginally above the 50-line designating expansion from contraction. The measure for business activity was higher, a modestly positive development even if it was somewhat out of synch with an otherwise downbeat take on the current state of the service sector.

While tariffs are targeted at goods imports, service-providers are not immune to uncertainly and tariff-related price pressure. (…) even as the prices paid metric fell in March for services, at 60.9 prices paid is still running at a rate consistent with a broad expansion input prices. It matches precisely the six-month moving average for prices paid, a period during which service price inflation has been particularly difficult for policymakers to get under wraps.

Orders and order backlogs both fell in March, for backlogs, the 4.3 point move takes that measure of pipeline business back into contraction territory. A purchasing manager in the wholesale trade industry spoke to how tariffs are certainly influencing behavior: “Tariff confusion and the variety of ways that suppliers are responding have had a strong effect on our purchasing decisions this month, causing us to shift spend and in some cases buy in advance of reported tariffs.” This is precisely the sort of Catch-22 that we envisioned months ago in our report Purchasing Manager’s Dilemma.

Ultimately just about everyone is trying to game out the impact of the litany of new tariff policies President Trump announced. In theory, it’s simple. If you shock any macroeconomic model with tariffs, you will get a stagflationary effect. The more tariffs, the larger the likely stagflation impulse.

In plain English the idea centers around the fact that tariffs raise costs for domestic importers and in an effort to mitigate those costs, businesses cut expenses elsewhere, with labor potentially on the chopping block. Inflation up, unemployment up, stagnant growth.

The labor market has shown signs of stabilizing after the slowdown in the late summer months of last year, which had encouraged the Fed to kick off its easing cycle. But we wouldn’t classify the labor market as overly strong or sturdy at the moment. The services ISM employment component fell 7.7 points in March, or the most of any underlying component, to a contraction reading of 46.2.

The labor data remain mixed but are softening. Data on job cuts have increased in recent months, but initial and continuing claims for unemployment insurance remain within what are considered normal ranges. We find some comfort in the fact that labor is in short supply.We continue to hear anecdotally that businesses are struggling to find ‘qualified’ talent today, but small business hiring plans have come down in recent months.

Source: Institute for Supply Management and Wells Fargo Economics

(…) Ultimately, while we still look for a few factors to have been supportive of employment last month, such as a rebound in leisure & hospitality hiring and the conclusion of a couple strikes, the March ISM readings point to payroll employment slowing below 100K as soon as the April jobs report.

The data may be different in some respects but the narrative is similar:

• Cold and then warm weather makes demand readings iffy but S&P’s “only mild capacity pressures” and ISM’s “pipeline business back into contraction territory” are not suggestive of strong demand.
• The ISM services employment component cratered 7.7 points into contraction territory indicating that larger firms are de-risking.
• Pipeline costs are surging across the economy but “competitive pressures and efforts to sustain demand served to limit output price inflation”. Good news (contained inflation), bad news (margin pressures). One certainty, demand is softening.

Canada: Severe drops in activity and new business recorded in March

Canada’s service sector economy endured in March its steepest cuts to activity and new business since the height of the COVID-19 pandemic. Tariff concerns, which led to a retrenchment of client spending, weighed on market demand and subsequently sector performance. With the outlook also extremely uncertain, confidence about the next 12 months fell to a near five-year low. Modest job losses were also registered.

Cost inflation meanwhile accelerated noticeably, but a challenging market environment meant service providers chose to broadly not pass on higher operating expenses to clients.

 

Euro area economy expands modestly in March

The eurozone private sector economy eked out another expansion in March, rounding off the first quarter of 2025 with a third successive monthly increase in business activity. Albeit the strongest since August 2024, the upturn was only modest overall and weaker than the long-run trend of the survey. Greater output volumes came despite a further contraction in new work intakes, although employment rose for the first time since last July.
Price pressures faded slightly during the latest survey period, with both input costs and output prices rising at their softest rates in 2025 so far.

The seasonally adjusted HCOB Eurozone Composite PMI® Output Index – a weighted average of the HCOB Manufacturing PMI Output Index and the HCOB Services PMI Business Activity Index – ticked up to 50.9 in March, from 50.2 in February, marking a third successive month in which the headline figure has posted in expansion territory (a reading above 50.0). Additionally, the index hit its highest level since August last year, signalling the quickest rate of growth in seven months. That said, the expansion was only modest overall and was weaker than the long-run trend of the survey (52.4). (…)

The HCOB Eurozone Services PMI Business Activity Index ticked higher in March to 51.0, from 50.6 in February, to signal a slightly faster pace of expansion in output.
New business volumes were down marginally again March, as was the case in February. Non-domestic markets were an area of weakness, with export sales falling at a quicker pace. Higher output and lower new orders meant that services companies cleared backlogs at a faster rate. The rate of depletion was the quickest in just over four years.

China: Services activity growth accelerates to three-month high

The headline Caixin China General Services Business Activity Index posted 51.9 in March, up from 51.4 in February. Scoring above the crucial 50.0 no-change mark for the twenty-seventh month in arow, the latest reading signalled another expansion of services activity in China. While modest, the rate of growth was the most marked since last December.

Higher new business inflows underpinned the latest improvement in services activity growth. The pace at which new orders rose was the quickest in three months, aided by supportive policies, marketing efforts and a broad improvement in demand conditions, according to panellists. The latest data indicated that the expansion of total new business stemmed mainly from firmer domestic demand, as the volume of new export business was unchanged in March.

Panellists also mentioned improvements in business efficiency at the end of the first quarter, which supported a third monthly reduction in the volume of backlogged work. That said, the rate of depletion remained marginal overall. Signs of spare capacity contributed to a renewed drop in employment in March. The pace of job shedding was the quickest in nearly a year, albeit modest.Some service providers also reported reducing their headcounts amid cost concerns.

Indeed, average input prices rose in March after falling fractionally in the prior month. Panellists often mentioned higher staff expenses and greater supplier charges as key factors driving inflation. That said, the rate of input price inflation was only marginal. Services firms generally opted to absorb any cost increases and lowered their charges for a second straight month.While only slight, the rate of discounting was the most pronounced in six months. Heightened market competition placed pressure on services firms to lower their selling prices to support sales, according to anecdotal evidence.

Overall, business sentiment in the Chinese service sector remained upbeat in March. Panellists often hoped that supportive domestic policies and business development efforts will boost sales and output in the next 12 months. Although still above the average recorded over 2024, the level of business confidence moderated from February, with some firms expressing concerns over theg lobal economic and geopolitical outlooks.

 

DEAL OR NO DEAL?

Ed Yardeni:

The worst-case scenario is a recession if high tariff rates stick, leading to a slowdown in business and consumer spending that cause layoffs. We raised our odds of a stagflation/recession scenario from 35% to 45% on Monday.

I hope these reciprocal tariffs get negotiated down and don’t trigger a 1930s-style tit-for-tat trade war. We’re hoping the art of the deal is still what motivates the president.

Art of the deal?

Resistance Is Futile, Make a Deal: Trump’s Tariff Message to the World Administration is trying to head off painful retaliatory measures, forcing big trading partners to decide whether fighting is worth it

Leaders from Canada, Europe and China are threatening stiff countermeasures against the U.S. in response to President Trump’s surprisingly steep tariffs on nearly all imports. The administration’s response is, don’t even think about it.

Trump is trying to short-circuit the trade war’s cycle of retaliation by threatening massive new tariffs on any country that responds, and by dangling the prospect of a better deal for those who hold their fire and negotiate. The highest tariffs—the so-called reciprocal duties for many countries with goods-trade imbalances with the U.S.—don’t go into effect until Wednesday, giving world leaders time to plead their cases with a president who considers himself a master dealmaker.

“Every country’s called us,” Trump told reporters Thursday. “That’s the beauty of what we do. We’re in the driver’s seat.”

Will he make deals to lower tariffs? “It depends,” Trump said. “As long as they are giving us something good.” (…)

Administration officials have indicated that Trump isn’t willing to budge on the broad outlines of his trade policies. Almost every import will now be subject to at least a 10% tariff, a level that officials described as a floor. But there is negotiating room regarding the higher tariffs on select countries that have large trade surpluses with the U.S. (…)

So far, much of the world is holding out hope for a deal. Anthony Albanese, the prime minister of Australia, which has a free-trade agreement with the U.S. but now faces 10% tariffs, said his government wouldn’t join a “race to the bottom” by retaliating. Japan, which will be subject to 24% tariffs, didn’t immediately announce plans to retaliate. India, facing a 26% tariff, according to Trump’s executive order, indicated it had no plans to retaliate.
(…)

Late yesterday: “I think that maybe China will call and say, ‘well, we’re upset with the tariffs,’ and maybe they want to get something a little bit in order to get TikTok approved,” Trump said, while cautioning he had “no knowledge” that Beijing would seek that approach.

Today:

China Hits Back at Trump Tariffs with 34% Duties on All US Goods

China retaliated against new US tariffs with a slew of measures — including levies on all American imports and export controls on rare earths — delivering on a promise to strike back after President Donald Trump imposed duties and escalating a trade fight.

Beijing will impose a 34% tariff on all imports from the US starting April 10, matching the level of Trump’s so-called reciprocal tariffs on the world’s second-largest economy.

Chinese authorities also said they will immediately restrict exports of seven types of rare earths, start an anti-dumping probe into medical CT X-ray tubes from the US and India, and halt imports of poultry products from two American companies. Additionally, it’s adding 11 American defense companies to an unreliable entity list, and imposing export controls on 16 US firms.

The Rest of the World Is Bracing for a Flood of Cheap Chinese Goods President Trump’s ‘Liberation Day’ tariffs risk domino effect across the globe as Chinese goods look for new markets

President Trump’s jumbo tariffs on China threaten to create a new problem for a global economy already stressed over trade: a $400 billion deluge of Chinese goods looking for new markets.

U.S. consumers and businesses learned Wednesday that, from April 9, Chinese imports will face tariffs of around 70% on average, after Trump walloped China with stiff new duties as part of his “Liberation Day” trade broadside. The new tariffs will likely push up prices in the U.S. for products ranging from consumer electronics and toys to machinery and essential components for manufacturing.

That towering tariff wall also risks diverting some U.S.-bound Chinese exports into a global market already swimming in China-made goods, worsening a so-called China shock that is facing pushback from countries around the world, according to economists. Other major exporters, such as Vietnam, South Korea and Japan, could also see barriers to their exports proliferate as U.S. spending on imports falls and their exports get shunted to new destinations. (…)

Chinese imports will be slapped with a 34% duty. That new tariff rate was stacked on top of a 10% tariff levied in February, another 10% added in March and a range of other tariffs imposed during Joe Biden’s presidency and Trump’s first term in office. That lifts the average rate on Chinese imports to around 70%, according to economists.

It will be hard for other countries to absorb Chinese exports that normally went to the huge U.S. market. The U.S. in 2024 imported around $440 billion of goods from China, according to Census Bureau data. China in 2023 was the source of a fifth of iron and steel products imported into the U.S., more than a quarter of its imported electronics, a third of its imported footwear and three-quarters of its imported toys, according to data from the International Trade Centre, an agency of the United Nations and the World Trade Organization. Ninety-one percent of U.S. umbrella imports came from China. (…)

Here and there:

• The discordant result is that U.S. adversaries like Iran (10%) and Venezuela (15%) will pay lower rates than friends in Europe (20%), Japan (24%) and Taiwan (32%).  BTW, Russia = 0.
• Mr. Trump hits Vietnam with a 46% tariff, which means Nike will have to rethink where to make low-margin shoes. Mr. Trump seems to think they should be made in America. Mr. Trump’s tariffs may have the U.S. investing to create jobs in shoe-making when it should invest in AI. This misallocation of capital will not make the U.S. more competitive against China.
• “He’ll be in a negotiation with every country,” said Steve Bannon, a former senior White House strategist who remains close with Trump and his aides. “Every day will be like Christmas. At the end of the day, what really excites him is talking about a deal with Canada, having Witkoff update him on Russia—the deals.”
• “The chips are starting very soon,” Trump said. “The pharma is going to start coming in, I think, at a level that we haven’t really seen before. We are looking at pharma right now. Pharmaceuticals. It’s a separate category. We’ll be announcing that sometime in the near future. It’s under review right now.”
• Trump’s justification hinges on a naive belief that treats trade imbalances as if they were the profit and loss account of a business, and not the culmination of highly specialised supply chains. He also considers factory work to be the fount of economic development, ignoring how decades of free trade has enabled America to rise up the industrial value chain and become a global leader in services and innovation. (FT)
• America’s now shut-out trade partners ought to focus on expediting free trade initiatives among themselves. After all, the US accounts for just 13 per cent of global goods imports, and with the exception of those in the White House, the economic imperative of comparative advantage continues to be widely understood. (FT)
• He’s gambling that generations of politicians, economists, CEOs, small-business owners, academics and even some of his own staffers are wrong — and that he’s right. Trump feels wholly confident he’ll be vindicated — if not instantly, then soon. Officials tell us he’s never felt more confident and happy than in pushing maximal tariffs, a lifelong aspiration.
• The president feels like a real estate mogul with a full inventory of mansions under his sole control, insiders tell us. Despite public comments, Trump sees this as maximal leverage to work the phones for weeks or months — cutting deals to force better terms for the U.S.
• Everyone around him — from top staff to top Republicans in Congress — fear disagreeing with him. Even if they had the stones to confront him, they seem convinced it’d be futile. They’re as all-in on Trump as Trump is on tariffs.

John Authers:

The greatest issue concerns the dollar. Relative to the rest of the world, US assets have boomed ever since the Global Financial Crisis and went into overdrive after the pandemic stimulus programs in 2020. At that point, America let the liquidity flow, and attracted massive flows from other countries into its stock market. Following Julian Brigden of MI2 Partners, you could call this “vendor financing.”

The growth in European holdings of US stocks has been breathtaking:

This has been helped by a virtuous circle. The flows push up the dollar, which increases the returns for foreign investors and fosters confidence that the US is unstoppable, thus drawing in more funds. It’s a classic example of what the hedge fund manager George Soros, mentor of US Treasury Secretary Scott Bessent, calls reflexivity, or the ability of the market to create its own reality.

The problem arises when something obtrudes. (…)

The profits European investors are still sitting on are considerable, and they’ll now have an incentive to take those profits, which could be needed for investing in a much more difficult trade war environment at home. US stocks, particularly Big Tech, have been a kind of piggy bank for the world. The risk now is that foreign investors will smash the piggy bank. For an idea of what’s at stake, look at Apple Inc., which stands to be grievously hurt by the new tariff regime. Its market cap almost touched $4 trillion three months ago. Now it’s nearly back to $3 trillion. (…)

If trade flows are going to fall, as is more or less inevitable if these tariffs are imposed for any period of time, the risk is that capital flows will have to follow. That’s bad for the US, which attracts masses of capital, but the danger is evident in this chart from London’s Absolute Strategy Research:

Capital can move much more quickly than goods can. The risk is that the virtuous circle will turn vicious and upend the US financial system.

BUY NOW, PAY LATER:

Americans Rush to Buy TVs, Soy Sauce, Lululemon Workout Gear Trump’s new tariffs spur some shoppers to stock up. ‘Now is the time to buy.’

(…) On the Bluesky social-media platform on Wednesday afternoon, Mark Cuban, the billionaire businessman and TV personality, suggested to his followers that they might want to start stockpiling. “From toothpaste to soap, anything you can find storage space for, buy before they have to replenish inventory,” Cuban said in a post. “Even if it’s made in the USA, they will jack up the price and blame it on tariffs.” (…)

“My dad used to call this going broke saving money,” (…)

Most Canadians Support Building an Oil Pipeline That Would Sidestep US Market

(…) Nearly all of Canada’s crude exports go to the US because of a lack of pipelines running to Canadian ocean ports. Even the pipelines that carry oil from Alberta to eastern Canadian refineries cross through the US on their routes, a potential vulnerability in a trade war.

The poll showed strong support for a new pipeline that would flow across Canada. Some 77% support or somewhat support the idea of the national government funding a pipeline’s construction, according to the survey. Just 15% are opposed or somewhat opposed, and the rest were unsure. (…)

Trump’s New Protectionist Age Blowing up the world trading system has consequences that the President isn’t advertising.

The WSJ Editorial Board

President Trump unveiled his new “liberation day” tariffs on Wednesday, and they are another large step toward a new old era of trade protectionism. Assuming the policy sticks—and we hope it doesn’t—the effort amounts to an attempt to remake the U.S. economy and the world trading system.

Mr. Trump’s tariffs look “reciprocal” in name only. First he’s hitting every nation in the world with a 10% “baseline” tariff to sell in the U.S. market. For those he calls “bad actors,” he’s adding up the country’s tariff rate on U.S. goods, plus an arbitrary estimate of the cost of its “currency manipulation” and non-tariff barriers. He then takes that total number and applies half of that in tariffs on the country’s exports to the U.S.

He’s hitting China with a 34% tariff, but our Japanese friends will pay nearly as much at 24%. The European Union gets whacked with 20%, India with 24%. We’ll assess the details further in coming days, but for today let’s consider some of the consequences already emerging in this new protectionist age:

• New economic risks and uncertainty. The overall economic impact of Mr. Trump’s tariff barrage is unknowable—not least because we don’t know how countries will react. If countries try to negotiate with the U.S. to reduce tariffs, the damage could be milder. But if the response is widespread retaliation, the result could be shrinking world trade and slower growth, recession, or worse.

There will certainly be higher costs for American consumers and businesses. Tariffs are taxes, and when you tax something you get less of it. Car prices will rise by thousands of dollars, including those made in America. Mr. Trump is making a deliberate decision to transfer wealth from consumers to businesses and workers protected from competition behind high tariff walls.

Over time this will mean the gradual erosion of U.S. competitiveness. Tariffs that blunt competition invite monopoly profits while reducing the need to innovate. This is the story of the American steel and car industries in the 1950s and 1960s before global competition exposed their deficiencies.

• Harm to American exports. One longtime U.S. trade goal has been to expand markets for American goods and services. Administrations of both parties pursued trade deals, bilateral and multilateral, to do so. Apollo Global Management says 41% of S&P 500 firms’ revenues come from abroad.

Mr. Trump’s unilateral tariffs blow up those arrangements and invite retaliation. U.S. exports will suffer directly from retaliatory tariffs. And they will suffer indirectly as other countries strike trade deals that give preferential treatment to non-U.S. firms. Think of Brazil’s soybean bonanza after Mr. Trump’s China tariffs in his first term.

• A bigger Washington swamp. Tariffs impose costs that businesses will want to avoid. They will thus be a windfall for Beltway lobbyists as companies and countries seek exemptions from this or that border tax.

Mr. Trump is saying there will be no tariff exemptions. But watch that promise vanish as politicians, including Mr. Trump, see exemptions as a way to leverage campaign contributions from business. Liberation Day is Buy Another Yacht Day for the swamp.

• The end of U.S. economic leadership. Britain played this role through World War I, but it was too weakened by war to continue. The U.S. didn’t take up the leadership mantle until after depression and World War II. U.S. leadership and the decision to spread free trade produced seven decades of mostly rising prosperity at home and abroad. The U.S. share of global GDP has been stable at about 25% for decades, even as industries rise and fall.

That era is now ending, as Mr. Trump adopts a more mercantile vision of trade and U.S. self-interest. The result is likely to be every nation for itself, as countries seek to carve up global markets based not on market efficiency but for political advantage. In the worst case, the world trading system could devolve into beggar-thy-neighbor policies as in the 1930s.

The cost in lost American influence will be considerable. Mr. Trump thinks the lure of the U.S. market and American military power are enough to bend countries to his will. But soft power also matters, and that includes being able to trust America’s word as a reliable ally and trading partner. Mr. Trump is shattering that trust as he punishes allies and blows up the USMCA that he negotiated in his first term.

• A major opportunity for China. The great irony of Mr. Trump’s tariffs is that he justifies them in part as a diplomatic tool against China. Yet in his first term Mr. Trump abandoned the Asia-Pacific trade deal that excluded China. Beijing has since struck its own deal with many of those countries.

Mr. Trump’s new tariff onslaught is giving China another opening to use its large market to court American allies. South Korea and Japan are the first targets, but Europe is on China’s list. Closer trade ties with China, amid doubts about access to the U.S. market, will make these countries less likely to join the U.S. to impose export controls on technology to China or to ban the next Huawei.

This is far from a comprehensive list, but we offer them as food for thought as Mr. Trump builds his new protectionist world. Remaking the world economy has large consequences, and they may not all add up to what Mr. Trump advertises as a new “golden age.”

The FT asks:

As the White House appears to lurch towards some form of new American autarky, a crucial question is whether Trump will be able to sustain these aggressive trade policies for an extended period or will eventually reverse them under the weight of economic, market, political and even legal pressure. S&P 500 futures were down 3 per cent after Trump’s announcement.

• Trump has also appeared to be less disturbed by market turmoil and the potential for economic pain than he has in the past, which may mean he will stick with the tariffs for longer.
• The Trump administration said the tariffs could be reduced if trading partners took “significant steps” to change their policies, but also that they could increase if trading partners retaliated.
• “I hope that [Trump] will roll some of this back, because I think it combines an economic policy that is not productive with a foreign policy that is not productive,”

What’s the formula for calculating reciprocal tariffs?

We’ve invested considerable effort into dissecting the methodology Washington uses to calculate so-called reciprocal tariff equivalents. Surprisingly—or perhaps alarmingly—the formula is incredibly basic: simply divide the U.S. trade deficit with a given country by the total value of U.S. imports from that country. That’s it.

In essence, the formula treats any trade deficit as evidence of unfair treatment or protectionism by the partner country—without accounting for legitimate economic realities such as comparative advantage, integrated supply chains, or structural trade patterns.

Despite Washington’s claims, we found no evidence that the so-called ‘effective tariff’ the U.S. is supposedly facing actually accounts for currency manipulation or non-tariff barriers.

Also, if the U.S. runs a trade surplus with a country, that country is still hit with a 10% tariff—which appears to serve as a new baseline charge for access to the U.S. market.

At least for now, Canada and Mexico remain exceptions, thanks to their status under the USMCA.

• Reciprocal tariffs: you won’t believe how they came up with the numbers There is some method to the madness — it’s just a nonsensical method

(…) Let’s look at Bangladesh as an example. The US imported $8.4bn of goods from Bangladesh in 2024, giving it a $6.2bn trade deficit with the country. 6.2 divided by 8.4 is 0.738. And what do you know? The White House says that the country has “charged” 74 per cent “tariffs” against the US, “including currency manipulation and trade barriers”. Trying to assign a macro narrative to this calculation method is enough to make even a hack strategist’s blood run cold.

Is the US . . . implying that all trade deficits are the result of unfair practices or currency manipulation? What about comparative advantage? David Ricardo is surely spinning in his grave. What about bananas? They don’t grow in the US! Is it worrying that some posters got this method when they asked major LLMs about easy ways to impose tariffs? This is bananas. (…)

This does not bode well for fans of coffee or bananas or other produce that doesn’t grow in the US. (…)

A McEnroe Moment

As John McEnroe once said to a Wimbledon umpire: “You can NOT be serious!”

(…) Tariffs at these levels would turn America into its own economic island, trading only with itself. Horizontal links with the rest of the world are out. (…)

Sonola described the announcement as a “game changer” for the US and the rest of the world: “Many countries will likely end up in a recession. You can throw most forecasts out the door, if this tariff rate stays on for an extended period of time.” (…)

“Trump said he wanted $600 billion and he got it. This represents 2.2% of GDP and twice the size of the largest tax increase in modern US history.” Recall that three months ago, everyone was looking forward to tax cuts. (…)

This is not a serious way to proceed, and it’s insulting to put such huge restraints on allies’ trade with such weak explanation — particularly in a speech that accuses the rest of the world of “raping and pillaging” the US. Under the common understanding of reciprocity, trade negotiators would go through product by product (involving many difficult definitions), and make sure that each individual tariff is balanced. That would have been very difficult, but would appear fair. This appears arbitrary, because it is. Presenting it as “kind” adds salt to the wound.

World leaders will have to keep their cool better than McEnroe did. But taken together, this isn’t the action of serious people, even though its consequences could be very serious indeed. (…)

The obvious intention is to spark a negotiation. But it’s politically difficult for foreign leaders to negotiate with a US president who has just insulted their country, while the obscure math makes it difficult even to start a discussion. “I don’t see how many leaders could pick up the phone to negotiate after this,” commented Tchir. (…)

Tina Fordham of Fordham Global Foresight argues that an important unintended consequence of the trade rhetoric to date has been “the fomenting of a growing anti-US alliance, including between such strange geopolitical bedfellows as China, Japan and South Korea — historically bitter rivals” who had already indicated a joint response to US tariffs. Europe’s sudden moves toward coordinating investment for defense are another example. (…)

Trump might just badger the rest of the world to find new trading partners, and to borrow money to create their own growth. That would be much better for the global economy. It wouldn’t bring back US manufacturing jobs.

J.P. Morgan’s initial assessment:

The resulting hit to purchasing power could take real disposable personal income growth in 2Q-3Q into negative territory, and with it the risk that real consumer spending could also contract in those quarters.

This impact alone could take the economy perilously close to slipping into recession.

And this is before accounting for the additional hits to gross exports and to investment spending. Headlines about retaliatory measures by US trading partners are already coming out, and we expect to learn more in coming days.

The somewhat confusing nature of today’s news, coupled with uncertainty over how long these tariffs will remain in place, should make for an even less friendly environment for investment spending (though that is one way to narrow the saving — investment imbalance and hence narrow the current account deficit).

So, the “in-depth assessment of bilateral trade relationships” originally announced is in fact a weird combo of incomplete facts (bananas, “services” anybody?) “adjusted” by spurious subjective factors (non-tariff barriers, currency “manipulation”, etc.).

The only constant is that every country is equally treated as an enemy, some getting the additional label of “bad actors”.

Analysts and strategists will be scrambling to face the new reality that few thought possible only yesterday.

The formula is:

• % increase in inflation x
• % decrease in demand x
• % decline in margins =
• % impact on profits x
• % decline in P/E multiple to account for additional uncertainty + lost credibility =
• % decrease in equity allocations by Americans +
• % decline in USD x
• % increase in U.S. equity selling by foreigners

Can we “hope” that:

• Trump will soon begin to negotiate country by country into a swampy global trade deal based on what his electoral base seems capable of accepting as wins, however small they can be;
• Trump will begin to understand that his place in history may not be on the best side of the ledger and find a way to tell us that someone(s) at the WH went haywire;
• The Fed will try to be the adult in the backroom and find a magical way to deal us out of this “golden age”.

Daydreams and nightmares!

This was before yesterday:

J.P. Morgan: The probability of a recession now stands at 40%

In light of heightened trade policy uncertainty, J.P. Morgan Research has raised the probability of a global recession taking hold in 2025 to 40% — up from 30% at the start of the year. (…)

A new slate of tariffs is set to be announced in early April, which will likely move the effective U.S. tariff rate above 10% and result in a 0.5 percentage point drag on 2025 U.S. and global GDP. “Even after accounting for retaliatory actions, this drag is not large enough to threaten an expansion that stands on fundamentally solid ground. Our concern, however, is that three related impulses magnify the size of this drag,” Kasman observed.

Firstly, the new set of tariffs could undermine the view that the Trump administration will maintain a business-supportive policy stance, creating a large shock to business sentiment. Key sectors of the North American economy could also be disrupted as the administration moves to restrict trade and immigration. Finally, there could be less room for pre-emptive Fed policy to cushion these magnifying effects if near-term inflation expectations move higher.

J.P. Morgan’s global manufacturing expectations index (MEI) fell sharply during the 2018–2019 trade war but has, somewhat counterintuitively, moved higher in recent months. “We attribute this lift to the front-loaded pickup in global industry that is offsetting a potential drag from rising trade war concern. Although this will likely prove transitory, it may be serving to delay a brewing sentiment shock,” Kasman said. On the other hand, the Fed’s recent regional surveys showed a stepdown in U.S. capex spending intentions, indicating that business sentiment has taken a hit.

In addition, consumer confidence is souring in the U.S., slumping to a three-year low in March, according to a recent survey by the University of Michigan. “The linkage between consumer confidence and spending has been weak during this expansion and we would not expect a sentiment-driven pullback in spending, absent a compression in real income. Here, the main near-term risk is the threat of an inflation-driven squeeze on purchasing power,” Kasman noted.

A slowdown in U.S. growth could in turn spill over to the rest of the world. Analysis by J.P. Morgan Research indicates that the typical beta of a U.S. GDP shock to the world is around 1-for-1. “A U.S.-led recession would likely have a nonlinear impact working through financial conditions that would weigh heavily on Economic and Monetary Union (EMU) growth. While this outturn would likely unwind U.S. outperformance, a global recession would be no reason to view the resulting growth rotation positively,” Kasman added. (…)

The 60% “Resilience” probability rests on U.S. animal spirits, exceptionalism and 20% odds of Goldilocks where everything gets to normal.

What follows is from The Yale Budget Lab and takes into account “Liberation Day” stuff:

The Fiscal, Economic, and Distributional Effects of All U.S. Tariffs Enacted in 2025 Through April 2

• The April 2nd action is the equivalent of a rise in the effective US tariff rate of 11 ½ percentage points. The average effective US tariff rate after incorporating all 2025 tariffs is now 22 ½%, the highest since 1909.
• The price level from all 2025 tariffs rises by 2.3% in the short-run, the equivalent of an average per household consumer loss of $3,800 in 2024$. Annual losses for households at the bottom of the income distribution are $1,700 (apparel prices rising 17% under all tariffs).
• US real GDP growth is -0.5pp lower in 2025 from the April 2nd announcement and -0.9pp lower from all 2025 tariffs. In the long-run, the US economy is persistently -0.4 and -0.6% smaller respectively, the equivalent of $100 billion and $180 billion annually in 2024$.

• Food prices are also disproportionately affected, rising 1.6% from the April 2^nd policy (roughly equivalent to the last year’s worth of grocery inflation in CPI) and 2.8% from all 2025 tariff actions. Fresh produce rises 2.2% and 4.0%, respectively.
• Motor vehicle prices are largely untouched by the April 2^nd announcement but rise by 8.4% under all tariff action to date, the equivalent of an additional $4,000 to the price of an average 2024 new car.

But no account is taken of likely forthcoming retaliations. After all, these are reciprocal, right?

Also before yesterday:

Warning signals flash for U.S. economy

The March University of Michigan Sentiment Survey recorded the most negative balance of opinion on purchasing power improvement in its history—surpassing even the lows seen during the high-inflation era of the 1980s.

The combination of elevated inflation and declining purchasing power—hallmarks of stagflation—paints a troubling picture for the U.S. economy and future volume sales for American corporations. According to the Atlanta Fed’s GDPNow estimate, as of March 28, the economy is on track for an annualized contraction of 2.8% in Q1 2025. With one month remaining before the first official GDP release—and potential upward revisions still possible—this marks the weakest growth estimate in GDPNow’s history since its 2011 launch, excluding the COVID recession.

A clear economic slowdown—let alone an outright contraction—stands in stark contrast to the current consensus, which still anticipates 11% EPS growth in 2025. This forecast includes positive contributions from all major sectors except Real Estate and Energy. In our view, there remains considerable room for downward earnings revisions in the months ahead.

From Mauldin Economics:

If a recession is coming, many families will focus on their ability to pay the bills. The mortgage payment is often the largest single expense. How much is it? This chart shows those who bought homes in the last three years are paying $2,000 per month or more.

The lines present mortgage payments for someone who bought a median-priced home at the then-prevailing mortgage rate. Barring a sharp drop in those rates, most would see little benefit from refinancing. This means a job loss or other financial stress could put many families in distress.

The good news is that lenders have become more adept at assessing repayment ability, so systemic problems seem unlikely. But the pain may be significant for some homeowners.

This chart shows where the US federal debt may be going, though with many assumptions.

The “current policy” line assumes the 2017 tax cuts are extended. “Current law” assumes they will expire as scheduled at the end of this year. “Balanced budget” is the result if we somehow balance the budget now and keep it that way.

The discouraging part is that even a consistently balanced budget will need a decade to return debt to where it was around 2015, which was bad. A recovery to the pre-2008 kind of debt burden looks decades away.

Wait, this was before Liberation Day. It omits any recession scenario…

Here and there:

• “This is not a negotiation,” a senior administration official told reporters. “This is a national emergency.”

• “Any country that thinks that they can simply make an announcement promising to lower some tariffs is ignoring the big central problem of their massive non-tariff barriers,” the official said.

• “I wouldn’t try to retaliate,” Scott Bessent told Bloomberg Television. “As long as you don’t retaliate, this is the high end of the number.”

• Including tariffs imposed during Trump 1.0, the average U.S. tax on Chinese imports will be 76%, according to Chad Bown, a senior trade fellow at PIIE.

• Any manufacturers who shifted production to Vietnam to avoid China tariffs are out of luck: That country will now face a 46% tariff.
• Canada and Mexico received better treatment than we expected. The executive order continues to exempt USMCA-compliant imports from the 25% tariff on Canada and Mexico. We had expected at least an incremental tariff increase on both countries. The order states that if the exemption ends in the future, USMCA-compliant goods and energy products would receive duty-free treatment while non-compliant products would face a tariff rate of 12%, excluding energy and potash which would be duty-free. This 12% rate might signal the upper bound for tariff rates for Canada and Mexico. (GS)
• Other Asian exporters also face much higher tariff rates, including Vietnam (46%), Taiwan (36%), Thailand (36%), and Indonesia (32%), among others. This appears due to the simplified methodology the US Trade Representative’s office used, described above.
• De minimis treatment will remain in place except for China. The order temporarily preserves tariff-free treatment for personal shipments under $800 for countries subject to the reciprocal tariff until the Sec. of Commerce can certify that systems are in place to apply tariffs to these smaller shipments. A separate executive order President Trump signed today rescinds de minimis treatment for shipments from China in particular, which currently account for a substantial share of total de minimis volume.

Links to ING comments:

• ‘Beautiful’ tariffs risk turning the growth outlook ugly Trump’s tariffs mean a painful transition ahead
• Europe’s worst economic nightmare just came true Trump’s tariffs and what they mean for Europe
• Trump’s reciprocal tariff surprise will prompt stronger China response Trump’s higher-than-expected China tariffs could prompt bigger response
• Asia takes big tariffs hit: Vietnam, Thailand most affected, while exemptions ease impact for India, Singapore US tariffs increase downside risks to growth and inflation, possibly accelerating monetary policy easing
• Without domestic support, dollar is left a little naked Tariff blowback to the US keeps dollar offered against liquid defensive currencies

FYI: At 7:36 this a.m., I received a text message from a golf cart vendor in Florida warning of huge price increases due to tariffs on various golf cart imports (22 brands were actually listed).

The vendor went on to inform golfers that

Due to additional tariffs being implemented this week, Sunshine Golf Cart has received notices from several vendors regarding upcoming price increases on certain parts and accessories. This includes select EZGO accessories and products from other suppliers.

Additionally, Trojan lead-acid batteries will see a 5% price increase starting April 2nd.

Quick check: EZGO carts are manufactured in Augusta, Ga. and Trojan lead-acid batteries in Santa Fe Springs, Ca., Sandersville and Lithonia, Ga..

Finally,

Tuesday was no MAGA day:

• The conservative candidate in Wisconsin’s Supreme Court race lost by 10 points in a 50-50 state.
• While Republicans won two House special elections by about 15 points, those were drops from over 30-point margins in the same districts just last November.