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Seth Golden posted an update 4 years, 8 months ago
Bernstein US Economist discusses the increased risks to the cycle with the trade war entering a new phase. He still sees the direct linkages of trade wars as too small to derail the US cycle and also don’t think the trade war can be used to justify inflation concerns.The real question is the impact on the economy though the confidence channel. Business confidence has already been hit with reduced non-residential fixed investment but consumer confidence remains strong given its close linkage with labour market fundamentals. He would be worried by a sizeable crack in the labour market with an uptick of 40bps in the unemployment rate, which would break consumer confidence and start a recession. This risk is growing as Trump’s political strategy appears to be to offset the trade war damage by effecting more rate cuts. The problem with this is that there is a weak connection between business investment and interest rates. An escalation in the trade war could impair business confidence enough to hit the labour market and lower rates are going to struggle to offset that.