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Trade War Hurting Chinese Economy

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Chinese Economy

New signs emerged Friday that President Trump’s tariffs on Chinese exports are beginning to seriously impact the overall Chinese economy.

The Chinese government reported that exports to the U.S. in July fell by 6.5%. It was the second month after Trump increased tariffs on $250 billion worth of Chinese goods to 25%. Imports from the U.S.. Also fell by 19.1%.

Perhaps more alarming, the country’s producer price index turned negative, falling 0.3% from flat levels in the previous month. It was the first time the PPI has been negative in three years.

Analysts say that the trade war with the U.S. Is forcing Chinese factories to sell their wares to wholesalers at a discount.

Another key indicator, the manufacturing purchasing managers’ index (PMI) – which measures factory owner sentiment, registered 49.7 in July. Although this was slightly above June’s levels, a reading below 50 is a sign that the industrial sector is still contracting.

The country’s National Bureau of Statistics reported Friday that the means of production – capital goods like machinery – fell by 0.7 % in the month.

Trump has expressed hope that the declines in the Chinese economy will force the Beijing government to agree to terms of a new trade agreement when the two sides next meet in September. But the Chinese have accused the U.S. of instigating unrest in Hong Kong and allowed their currency, the renminbi, to fall in value against the U.S. dollar, signs that relations are worsening rather than improving.

While U.S.-China trade has sharply declined since Trump began imposing tariffs a year ago, Beijing reported that trade with Europe and Southeast Asia rose in July.

One explanation for that rise is that Chinese companies are transshipping products through other countries, such as Vietnam and Malaysia, where they are minimally processed, before sending them on to the U.S.

Vietnam’s trade surplus doubled from $20 billion to $40 billion last year, and reached $21.5 billion in the first five months of the year. This has prompted growing concern among Trump administration officials.

Washington “has been clear with Vietnam that it has to take action to reduce the unsustainable trade deficit,” U.S. Trade Representative Robert Lighthizer told the Senate Finance Committee.

He said Vietnam should be “expanding its imports of goods from the United States and by resolving market access restrictions related to goods, services, agricultural products, and intellectual property.”

Trump recently hinted that the U.S. Might impose tariffs on Vietnam’s exports if the trade deficit didn’t improve.

“A lot of companies are moving to Vietnam, but Vietnam takes advantage of us even worse than China. So there’s a very interesting situation going on there,” Trump said.

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Trump says US Economy is Strong

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BERKELEY HEIGHTS, N.J. – President Donald Trump dismissed concerns of recession on Sunday and offered an optimistic outlook for the economy after last week’s steep drop in the financial markets.

“I don’t think we’re having a recession,” Trump told reporters as he returned to Washington from his New Jersey golf club. “We’re doing tremendously well. Our consumers are rich. I gave a tremendous tax cut and they’re loaded up with money.”

A strong economy is key to Trump’s re-election prospects. Consumer confidence has dropped 6.4% since July. The president has spent most of the week at his golf club in New Jersey with much of his tweeting focused on talking up the economy.

Aides sought to reinforce that message during a series of appearances on the Sunday talk shows.

Larry Kudlow, Trump’s top economic adviser, dismissed fears of a looming recession and predicted the economy will perform well in the second half of 2019. He said that consumers are seeing higher wages and are able to spend and save more.

“We’re doing pretty darn well in my judgment. Let’s not be afraid of optimism,” Kudlow said.

Kudlow acknowledged a slowing energy sector, but said low interest rates will help housing, construction and auto sales.

Kudlow also defended the president’s use of tariffs on goods coming from China. Before he joined the administration, Kudlow was known for opposing tariffs and promoting free trade during his career as an economic analyst. Kudlow said Trump has taught him and others that the “China story has to be changed and reformed.”

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“We cannot let China pursue these unfair and unreciprocal trading practices,” Kudlow said.

Democratic presidential candidate Beto O’Rourke said the U.S. needed to work with allies to hold China accountable on trade. He said he fears Trump is driving the global economy into a recession.

economy is strong

“This current trade war that the president has entered our country into is not working,” O’Rourke said. “It is hammering the hell out of farmers across this country.”

Last month, the Federal Reserve reduced its benchmark rate — which affects many loans for households and businesses — by a quarter-point to a range of 2% to 2.25%. It’s the first rate cut since December 2008 during the depths of the Great Recession. Federal Reserve Chairman Jerome Powell stressed that the Fed was worried about the consequences of Trump’s trade war and sluggish economies overseas.

“Weak global growth and trade tensions are having an effect on the U.S. economy,” he said.

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Breaking with historical norms, Trump has been highly critical of Powell as he places blame for any economic weakness on the nation’s central bank for raising interest rates too much over the past two years.

“I think I could be helped out by the Fed, but the Fed doesn’t like helping me too much,” Trump complained Sunday.

Peter Navarro, who advises Trump on trade policy, shared that sentiment.

“The Federal Reserve chairman should look in the mirror and say, ‘I raised rates too far, too fast, and I cost this economy a full percentage point of growth,’” Navarro said.

Trump acknowledged at least a potential impact on consumers when he paused a planned 10 per cent tariff hike for many items coming from China, such as cellphones, laptops, video game consoles, some toys, computer monitors, shoes and clothing.

“We’re doing (it) just for Christmas season, just in case some of the tariffs could have an impact,” the president told reporters in New Jersey.

Navarro would not go even that far, saying Sunday “there’s no evidence whatsoever that Americans consumers are bearing any of this.”

Kudlow was interviewed on NBC’s “Meet the Press” and “Fox News Sunday.” O’Rourke spoke on NBC, and Navarro appeared on CNN’s “State of the Union” and CBS’ “Face the Nation.”

Trump’s trade war with China has been a target of criticism by Democrats vying to challenge him in 2020.

“There is clearly no strategy for dealing with the trade war in a way that will actually lead to results for American farmers or American consumers,” said Mayor Pete Buttigieg of South Bend, Indiana, a Democratic presidential candidate. He said on CNN that it was “a fool’s errand” to think tariff increases will compel China to change its economic approach.

Trump maintained that China’s economy is struggling because of the tariffs and would like to make a trade deal with the U.S. He said he could make a “bad deal” and the stock markets would go up, “but it wouldn’t be the right thing to do.”

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B.C. economy will be drag on by Housing market

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A slowdown in residential construction investment will be a drag on the B.C. economy over the next year or two, but this will be offset by a boom in non-residential building, according to a forecast released August 16 by Central 1 Credit Union.

Housing starts in the province are currently high, supported by presales in the active markets of the past few years. But this will slow down along with current new home sales, wrote Central 1’s deputy chief economist Bryan Yu.

Yu wrote, “Starts are forecast to dry up. New housing is a lagging indicator of the market and a downshift is anticipated with the cooling of demand. Timing is uncertain particularly given the longer lead time for large, complex multi-family projects. A pull back in momentum in the second half of this year contributes to a four per cent annual decline in starts in 2019, with a decline of 15 per cent in 2020. Residential investment will be an increasing drag on the economy [although] rental construction may pick up some of the slack.”

He said that he expects residential investment spending to decline three per cent in 2020 “after eking out a small increase in 2019” and then it will stay flat through 2021.

However, Yu expressed confidence that non-residential construction growth, especially in major projects, will offset some of these losses to the B.C. economy.

“Rising non-residential construction is … indicative of firm growth. Building permits rose more than 60 per cent through May, with strong gains across private and public sector intentions. Government investments in schools and hospitals have lifted activity, alongside major private sector initiatives including new office space in Vancouver. Adding to this is ongoing engineering work on major projects such as the Site C dam in the Peace region and the liquefied natural gas activity in the northwest.”

Looking further ahead, Yu wrote that major capital projects will be key drivers of B.C. economic activity.

He wrote, “Major capital projects will be key drivers of growth over the coming years. Build out of the LNG Canada liquefied natural gas facility in Kitimat and associated pipelines through to 2023, coupled with ongoing construction of the Site C dam and twinning of the Trans Mountain pipeline will highlight the rising investment cycle. Public works projects including the Patullo Bridge replacement, extension of the subway line in the Vancouver Broadway corridor will also lift construction. These projects [will] drive strong gains in non-residential investment, particularly in engineering and building construction through to 2021 before declining in 2022. As the liquefied natural gas project moves closer to completion, natural gas production and to a lesser extent, natural gas exports, will pick up in 2022 onwards.”

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Confidence in American Economy drops in August

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Consumers might be more hesitant to shop and spend if they grow more worried about the economy. A survey of consumer sentiment fell in August to the lowest level of the year.

American Economy: A measure of consumer confidence fell in August to the lowest level since the start of the year, reflecting fresh worries about trade tensions with China and the possibility of a looming recession.

The consumer sentiment survey fell to 92.1 this month from 98.4 in July, according to a preliminary reading from the University Michigan. Economists surveyed by MarketWatch had forecast a reading of 96.8.

Just a year and a half ago, the index touched 101.4 to mark the highest level since 2004.

What happened: A gauge that measures what consumers think about their own financial situation and the current health of the economy fell to 107.4 from 110.7, leaving it at a nearly two-year low.

Another measure that asks about expectations for the next six months declined to 82.3 from 90.5 — also a two-year bottom.

The Trump administration’s decision to apply tariffs to more Chinese imports and the Federal Reserve’s move to cut interest rates over worries about the economy made consumers more anxious, said Richard Curtin, chief economist of the survey.

Big picture: By many measures the U.S. economy still appears quite stable, but the worsening trade fight with China has hurt manufacturers and exporters, unnerved investors and put central bankers on edge. The Fed cut interest rates last month as an “insurance” policy against recession and it’s likely to do so again in September.

That hasn’t been enough to soothe investors, who dumped stocks this week and drove down the yield on U.S. Treasurys to stunningly low levels.

So far consumers haven’t cut back spending even as their worries grow. But waning confidence could cause them to do so in the months ahead, potentially weakening the economy. Consumer spending represents about 70% of U.S. economic activity.

What they are saying? “The main takeaway for consumers from the first cut in interest rates in a decade was to increase apprehensions about a possible recession,’ Curtin said.

Market reaction: The Dow Jones Industrial Average

DJIA, +1.12%

and S&P 500 index

SPX, +1.43%

rose in Friday trading. The 10-year Treasury yield

TMUBMUSD10Y, +2.09%

edged up to 1.55%.

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