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.

MANUFACTURING PMIs

USA: Production declines in March as order book growth slows on tariff uncertainty

The seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI^®) remained above the crucial 50.0 no-change mark for a third successive month in March, but only just. Recording 50.2, down from 52.7, the PMI signaled a marginal improvement in operating conditions that was the weakest of the year so far.

A drop in production for the first time since December weighed heavily on the headline index. The modest fall in output was in stark contrast to the fastest rise in production for nearly three years seen during February and partly reflected fewer instances of output being raised to front-run tariffs.

Market uncertainty was also frequently reported, linked to concerns over tariff implementation and federal government policies. This served to weigh on new order book growth, which was modest overall in March and the lowest of the year so far. Where orders rose, panelists noted success in capitalizing on some positive underlying demand via trade shows and the release of new products. Latest data also hinted at efforts to fulfil orders ahead of any tariff implementation as new export orders stabilized following nine months of contraction. Orders were reported to have increased from clients based in Asia, Canada and Europe during March.

Confidence in the outlook softened again in February, dropping for a second successive month to its lowest level since December. This was linked to uncertainty over the impact of federal government policies on activity in the year ahead, although some firms expect in time to see benefits from tariffs through an increase in domestic demand and improved market share.

Employment was unchanged in March, following a four-month run of growth. Sluggish demand growth and elevated costs weighed on hiring activity, according to anecdotal evidence. Capacity nonetheless remained sufficiently high to comfortably deal with overall workloads.

Levels of work outstanding declined in March at the fastest rate since December, to thereby extend the current period of contraction to two-and-a-half years.

Against a backdrop of falling output and slower order book growth, manufacturers signaled a modest cut in purchasing activity. Instead, firms preferred to utilize existing inputs in production wherever possible, recording a drop in stocks of inputs following marginal growth in February.

Despite weaker demand, average lead times for the delivery of stocks nonetheless continued to lengthen, extending the current downturn to six months. Insufficient stocks at vendors were noted, although some firms reported delays at customs as a factor behind the slower delivery of ordered inputs.

Vendors were generally seen as raising their prices during March. This was in part related to tariffs, with metals like steel reported to have increased in cost. Overall, input price inflation spiked higher in March, hitting its highest level since August 2022.

The steep increase in input prices fed through to a greater rise in manufacturing selling prices during March. Latest data showed that output price inflation picked up for a fourth successive month to a 25-month high.

• ISM Manufacturing Back in Contraction as Tariff Pressure Bites

Tariff-related uncertainty was seen throughout the March ISM release. The overall index came in at 49.0, indicating manufacturing activity contracted again after expanding the prior two months. Out of the five components that feed directly into the headline metric, manufacturing inventories was the only one to expand last month, as a pull forward in demand ahead has led to stockpiling of inputs among manufacturers. The inventory component hit 53.4, which is the highest level since late 2022, when the economy was dealing with pandemic-related supply snarls. Today many are rushing to secure inputs ahead of tariffs to mitigate the initial cost impact.

This mad dash to secure inputs is also manifesting in higher prices. The prices paid component rose 7.0 points to 69.4 in March. That also marks the highest since mid-2022, and as seen by the nearby, input prices have been trending higher over the past four months.

Price pressure appears broad with 15 of 18 industries reporting higher prices and looks mostly tariff related. The accompanying release notes prices were, “driven by dramatic increases in steel and aluminum prices as a result of recently deployed tariffs. Corrugate, copper and plastic resins have all experienced price growth as companies move to minimize their exposure to foreign-made goods, causing domestic prices to rise amid new demand.” A reported 46% of companies reported higher prices in March, up from a 12.2% low hit just five months ago.

Source: Institute for Supply Management and Wells Fargo Economics

With everyone trying to secure product, business are strained in their ability to meet accelerated deliveries. This was evident in still-high supplier deliveries, despite the measure coming in a bit to 53.5 last month. But despite the tariff-related flurry of demand, underlying conditions remain depressed. New orders hit 45.2, which is the lowest index reading in a year and a half and production also slipped back into contraction in March as most businesses halt investment.

The employment situation also remains grim within manufacturing. Only one industry reported hiring in March (primary metals) and the index reading slipped to 44.7 after briefly expanding at the start of the year. The release noted “freezing and attrition were the primary tools used for the second straight month, in lieu of the more dramatic and costly layoff process.”

While this may smooth the hit to broader nonfarm employment, out Friday, lower net hiring figures leave little room for layoffs to rise. While hiring figures are stable, the labor market has weakened and the Fed’s task on fully stomping out inflation is made all the more challenging in this environment.

Source: Institute for Supply Management and Wells Fargo Economics

Canada: Steepest drop in new orders since May 2020 drivesfurther deterioration of manufacturing sector

New orders declined to the greatest degree since the height of the COVID-19 pandemic. Overall, the contraction was the steepest since May 2020 and therefore amongst the fastest recorded in the survey history (data were first collected in October 2010).

Export trade especially suffered, with latest data signalling the joint-second steepest reduction in exports in the survey history (surpassed or equalled only by the falls registered in April-May 2020).

Production, purchasing and employment were all reduced noticeably. Confidence in the outlook slumped to its lowest level in the respective series history.

On the price front, tariffs already applied on metals products, plus uncertainty over when customs surcharges could be levied on a wider range of goods, resulted in input costs and output charges rising at noticeably steeper rates.

Mexico: Business confidence takes a hit as downturn in sales intensify

(…) In addition to the challenging operating environment reported for March, firms downgraded output growth forecasts for the year ahead. Anecdotal evidence showed that panellists foresee headwinds from investment retrenchment, reduced client numbers and tariffs.

Amid tariff announcements and reports of cashflow problems among clients, new business intakes decreased in March. The latest fall was the ninth in successive months and the sharpest in over three years.

Weighing on overall order book volumes was foreign demand, which worsened to the greatest extent since March 2021. The US stood out as the main source of lower external sales in the qualitative part of the survey. (…)

Wells Fargo starts its analysis of ISM data with “Tariff-related uncertainty “. Reading through all these surveys, I only see certainty: U.S. demand for goods is falling rapidly:

• Weak new orders, domestically and to Canada and Mexico.
• Backlogs declined in March at the fastest rate since December
• Employment was unchanged in March
• Price pressures appear broad, even domestic prices rose from import substitution

U.S. manufacturing is in stagflation.

New orders also declined in the Eurozone but at a slower rate dans in previous months.

China saw rising new orders, even “the fastest rise in new export orders in just under a year”, leading to backlogs increasing for the 6th consecutive month.

John Authers today:

(…) But the eye-catching data came on the balance between new orders and inventories. As the chart shows, inventories exceed new orders by the greatest amount in four decades, with the sole exceptions of the worst months of the Global Financial Crisis and the Covid lockdowns:

This is not healthy. If companies have a lot of stuff on hand, and few orders, they will likely do less business and activity will fall. By contrast, when inventories are low, there’s a chance of a restocking boom as companies ramp up to meet demand. On this occasion, tariffs are an obvious explanation. Companies brought forward their imports to beat duties. They now have excessive inventories and the odds are that they’ll be reducing production in the months ahead. That could be a total blip when it turns out tariffs don’t change the landscape much; it might be transitory, as they soon return to old practices but now paying tariffs on goods they import; or it might prove to be a lasting change. On its face, however, it’s bad. (…)

What’s most interesting is that while US manufacturers are having to pay more for inputs, their counterparts in the rest of the world are not. This chart is from Ariane Curtis, senior global economist at Capital Economics:

Manufacturers elsewhere will have to await news on retaliation by their own governments, so it makes sense that the US encounters this issue first. For now, it makes US assets less attractive, and points toward a nasty dose of stagflation. Retaliation can be expected to turn the other lines upward.

February JOLTS: Uncertainty Can Be Paralyzing

After a solid fourth quarter, labor demand is showing additional signs of moderating in the early innings of 2025. Job openings slipped to 7.57 million in February and the ratio of job openings to unemployed workers fell back to 1.07—its lowest since September 2024. With renewed headwinds to growth, further declines in vacancies risk signaling outright weakness rather than a return to a balanced labor market. (…)

With the ratio of job openings to unemployed workers having fallen back to 1.07—its lowest since September of last year, when cracks in the labor market inspired a 50 bps cut from the Fed—further decreases in openings will look more like outright weakness than a stabilization of labor supply and demand. (…)

This JOLTS is for February. The more current Indeed Job Openings (through March 27) point to an even weaker print in March, setting the stage for Friday’s employment report.

Brazil Looks Like a Winner in the Global Trade War Exporters bank on higher Chinese demand as Latin American power looks for new trade opportunities

Chinese buyers are already stockpiling Brazilian soybeans as Beijing retaliates against President Trump’s tariffs with levies on U.S. agricultural producers. Brazilian suppliers of everything from cotton to chicken are banking on higher Chinese demand. (…)

The preparations reflect a trade relationship between Brazil and China that has expanded significantly in recent years. Rich in beef, iron ore and oil, Brazil has raw materials that China’s vast population needs. China, meanwhile, has capital that Latin America’s biggest economy needs to build much-needed infrastructure. (…)

Brazilian President Luiz Inácio Lula da Silva last week visited Japan, where he agreed with Prime Minister Shigeru Ishiba on measures to open the country to Brazilian beef imports. Japan currently imports some 40% of its beef from the U.S. under a 2019 agreement, a deal analysts said could now be in doubt after Trump announced tariffs on global auto imports.

“Trump is not the world’s sheriff—he’s only president of the United States,” da Silva said during the visit. “We need to overcome protectionism and make sure that free trade can grow.” (…)

U.S. farmers lost almost $26 billion in agricultural exports in 2018 and 2019, according to the Agriculture Department. (…)

Since overtaking the U.S. as Brazil’s biggest trading partner in 2009, China has invested more than $70 billion in the Latin American country, courting business leaders and politicians alike. Chinese companies control around 10% of Brazil’s electricity supply, built many of its ports and roads and are constructing hundreds of miles of railroads. Chinese-made cars are now ubiquitous in São Paulo, Brazil’s financial center. (…)

Deeper trade ties between Brazil and China have strategic implications for Washington. U.S. officials have said they see an economic and military threat in the deep presence China has in Latin America, particularly in projects that could have military use, such as a deep water port completed last year in Peru and a satellite-tracking station in Argentina.

Brazil has recently focused on expanding its limited rail network to cut costs and tackle food inflation. In its inaugural project in the country, the state company China Railway has been building part of the so-called Fiol railroad that connects Brazil’s central farming belt to ports in eastern and northern Brazil. (…)

• China senses an opportunity in Trump’s cultural revolution Policymakers in Beijing believe they will benefit from the destruction of America’s global credibility

Martin Wolf just spent 2 weeks in China.

(…) It has dawned on just about everybody by now that Trump’s signature is worthless. A man who is trying to demolish the Canadian economy is not going to be a reliable friend to anybody else. So, the alliances the US will need to balance China in its own neighbourhood or, for that matter, anywhere else are likely to be very fragile.

This applies even to Japan and South Korea, let alone other neighbours. In this environment, China, the Asia-Pacific’s principal trading power, as well as a rapidly rising military power, is bound to dominate not just the region, but well beyond that. Even Europe, concerned about Russia and so openly abandoned by the US, will seek a friendlier relationship with China. Trump’s “America First” is bound to mean America alone. (…)

DeepSeek has given the Chinese a big boost in confidence. They believe that the US can no longer block their rise. (…) This is not just about DeepSeek, but also about Chinese domination of the “clean energy sector. (…)

China Restricts Companies From Investing in US as Tensions Rise

China has taken steps to restrict local companies from investing in the US, according to people familiar with the matter, in a move that could give Beijing more leverage for potential trade negotiations with the Trump administration.

Several branches of China’s top economic planning agency, the National Development and Reform Commission, have been instructed in recent weeks to hold off on registration and approval for firms that are looking to invest in the US, the people said, asking not to be identified discussing sensitive issues.

While China has previously placed restrictions on some overseas investments for reasons linked to concerns about national security and capital outflows, the new measures underscore tensions playing out between the world’s two biggest economies as Donald Trump ramps up tariffs. China’s outbound investments into the US totaled $6.9 billion in 2023, according to the latest available figures. (…)

It’s unclear what prompted the NDRC to halt the processing of applications or how long this suspension might last. (…)

While the latest restriction mostly applies to corporate investment in the US, the move adds uncertainty for firms that are seeking to shift production abroad to bypass the trade barriers and attempt to navigate an intensifying global standoff. (…)

China Ties US Talks to Tariff Removal as Stalemate Deepens

China’s top diplomat called on the US to remove tariffs it imposed on Chinese goods for Beijing’s alleged role in America’s fentanyl crisis before holding any talks on the matter, deepening a stalemate weighing on trade ties between the world’s two largest economies.

“If the US side really wants to solve the fentanyl problem, then it should cancel the unjustified tariff increase and engage in equal consultation with the Chinese side,” Chinese Foreign Minister Wang Yi said in an interview with Russian state-run news service RIA Novosti on Tuesday.

Wang’s demand came over a week after US President Donald Trump’s ally Steve Daines met with top Chinese officials and asked Beijing to stop the flow of the drug’s ingredients into the US as a condition for talks. The opposing requests dim the prospect of high-level talks to ease tensions a day before the US president is set to announce his so-called reciprocal tariffs on global trade partners. (…)

Wang made the comments during a visit to Moscow where he met with Russian President Vladimir Putin and Foreign Minister Sergei Lavrov. During his discussions — taking place just over one month ahead of a planned visit to Russia by Chinese leader Xi Jinping — Wang reiterated the importance of China-Russian ties, describing the two nations as “forever friends and never enemies.” (…)

SENTIMENT WATCH

Investors Bet Clarity on Tariffs Will Bring Stability to Markets Stocks have calmed with Trump poised to unveil trade agenda on Wednesday

Stocks’ calm this week shows investors continue to bet that clarity on trade will bring stability to markets. (…)

Investors and analysts have offered several explanations for the stock market’s resilience. Those include:

• Investors’ continued confidence that Trump won’t stick with any tariff policy that would cause a serious drag on growth.

• Their view that they need to see more signs that the economy is actually in trouble before they bet on a recession.

• A belief that more information about Trump’s tariff plans will reduce the uncertainty rattling stocks.

(…) Most investors acknowledge that Trump is more committed to tariffs than Wall Street had generally assumed at the start of the year. (…)

Trump, though, has also already twice backed down from imposing broader tariffs on Canadian and Mexican imports. And he has cheered investors with talk of being flexible and “lenient” with other countries.

One worry is that the back-and-forth about tariffs, almost as much as tariffs themselves, could hurt the economy by causing businesses to delay investments.

Though some are hopeful that “peak uncertainty” might already have passed, few investors expect complete transparency soon, with Trump’s impending moves set to kick off a turbulent period of negotiations, retaliations and lobbying among countries and businesses. (…)

Confused about Trump’s intentions, investors have tried their best to at least get a sense for how the economy is doing now—arguably at the height of tariff uncertainty.

The results, for many, have been encouraging. Repeated surveys have shown a sharp drop in consumer and business sentiment. But so-called hard data has shown a much more moderate decline in their actual spending, providing a lift for markets in recent weeks.

According to one recent report, consumer spending rose 0.4% in February—a touch below economists expectations but a jump from a 0.3% decline in January when cold weather helped depress demand. The latest monthly jobs report for February showed still solid payrolls growth, with the unemployment rate continuing to hover just above 4%. (…)

Is this red marker really “encouraging”?

And the JOLTS report was for February, missing all the “fun” since.

Are CEOs seeing something investors don’t want to see? Apollo shows that their recent collapsing confidence is the worst since 2007 other than covid (my red circle).

BTW: The influential BCA Research tomorrow will present its “Second Quarter Strategy Outlook: The 2025 Recession” discussing

• The underestimated impact of the trade war on global growth.
• Why monetary and fiscal policies won’t be enough to prevent a downturn.
• How Europe’s fiscal policies may slow growth in the near term.
• Why China’s stimulus efforts will remain reactive rather than proactive.
• His bearish outlook, including an end-2025 S&P 500 target of 4450.

We’ve been having the “S” word (stagflation) which few investors know about, but if we start getting the “R” word …

AI CORNER

A Big Coal Plant Was Just Imploded to Make Way for an AI Data Center The country’s largest natural gas power plant is planned east of Pittsburgh

The owner of what was once Pennsylvania’s largest operating coal plant just imploded it to make way for a giant AI data-center campus that will be powered by natural gas instead.

The site in Homer City, Pa., about 50 miles east of Pittsburgh, is expected to house what would be the country’s largest gas-fired power plant, according to owner Homer City Redevelopment.

At up to 4.5 gigawatts, the plant could nearly power Manhattan. Its output would more than double that of the original coal facility and be roughly equivalent to Georgia’s Vogtle plant, the country’s largest nuclear power site.

The race to build advanced training models for artificial intelligence requires massive amounts of electricity and land, which is sending the tech industry into rural America. Big Tech is a major backer of clean-energy projects, but the amount of round-the-clock power the companies need as quickly as possible has them leaning on new natural-gas projects to fuel their AI ambitions. (…)

New data centers are increasingly being built near some of the country’s largest oil and gas reserves for access to the city-sized amounts of power that they need to train large AI models. (…)

The site can provide power to both the New York Independent System Operator and PJM Interconnection, the regional transmission organization and electricity market serving Washington, D.C., and 13 states.

A capacity auction last year in PJM, the nation’s largest wholesale electricity market, signaled a shortage of power plants that can provide baseload supplies. The retirement of aging plants and increased electricity demand from new customers such as data centers are helping push prices higher.

The site has the ability to draw about 1 gigawatt of power from the grid in the near term, with more power becoming available for data centers and the grid as the plant is built. (…)

Big Oil Morphs Into Big Gas in China as EVs Slash Fuel Demand

The nation’s gas output is poised to surpass that of crude oil for the first time this year, with each of the three state-owned majors — PetroChina Co., Cnooc Ltd. and Sinopec — setting higher production targets for the cleaner-burning fuel. To deliver that growth, the firms are expanding into technically challenging areas including unconventional shale fields and deep-water reserves.

The shift to gas has been underway for years, initially spurred on by the government’s desire to clear the coal-fired smog that used to choke its megacities. But the transition has become more urgent as the electric-vehicle boom slams the brakes on oil consumption, leaving gas as the only upstream growth market for drillers. (…)

The production push in the world’s largest gas importer threatens to add to a coming wave of global supply, led by new liquefied natural gas export plants that are due to come online in places like Qatar and the US over the next few years. More gas is also being piped overland from Central Asia and Russia, China’s strategic partner since the invasion of Ukraine.

With economic growth constrained by the slowdown in the real estate sector, Chinese energy firms are being forced to resell unneeded cargoes of the fuel to other buyers in Europe and Asia. Domestic gas prices in China are already showing signs of weakness. China produces enough gas to meet about 60% of its own consumption. (…)

The gas boom is needed to replace the industry’s traditional oil business, which is struggling as China rapidly adopts EVs. Refining profits last year were battered after overall oil consumption dropped 1.2% compared to a 7.3% rise in gas demand.

MAGA’s brutal jolt

The Democratic win in the Wisconsin Supreme Court race was huge: 10 points (55% to 45%, with 98% of the vote, or 2.3 million votes in).

In Florida, Republicans won both their U.S. House special elections but Democrats cut Trump’s margin by 22 points in Matt Gaetz’s old seat, and 16 points in national security adviser Mike Waltz’s district.

The three results show real midterm danger for Republicans. (…)

In Wisconsin, Republicans were drubbed even with $25 million poured in by Elon Musk.

He campaigned in Wisconsin and cast the race in apocalyptic terms: “A Supreme Court election in Wisconsin might determine the fate of America,” he tweeted last week, later topping that with saying it “might decide the future of America and Western Civilization.”