Trump’s threatened tariffs ‘would likely lead’ to a ‘recession’, says Morgan Stanley’s Wilson

Article From marketwatch.com | By Chris Matthews

Published: May 14, 2019 9:03 a.m. ET

Autos, electrical equipment and machinery, and textiles are at risk

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U.S. equity investors aren’t thrilled with a recent unraveling of U.S.-China trade talks, but the situation for stocks could worsen, and ultimately lead to a recession, if President Trump follows through with recent threats to implement tariffs on the Chinese imports that haven’t yet been hit with duties.

If a fresh round of duties are put in place, “the potential cost” of these duties could represent a decline of 1% to 1.5% of S&P 500 SPX, +0.88% companies’ net income. Even worse, “the demand destruction and ailing confidence increase the potential impact well beyond just higher costs and would likely lead to an economic recession in our view,” wrote Mike Wilson, Morgan Stanley’s chief investment officer, in a Monday note to clients.

The Trump administration raised duties on roughly $200 billion in goods from China to 25% from 10% on Friday, and China responded Monday with promises to increase levies on roughly $60 billion in imports. U.S. President Trump is ready to strike again if need be, as he has ordered staff to prepare for levies on the more than $300 billion worth of goods that China exports to the U.S., translating to tariffs on all goods from the country.

Wilson explained that higher prices are just a fraction of the ultimate harm of tariffs on corporate bottom lines. Companies will now likely expand and accelerate their plans to “build out alternative supply chains while continuing to source from China,” he wrote. Rising tariffs will reduce productivity growth, he argued, as companies are forced to shift production in ways that reduce efficiency and will generally make corporate executives more wary of investing in their companies’ futures.

“Tariffs can impact corporate earnings in a number of ways: rising costs, lower demand, lower confidence, lower investment and increased volatility that tightens financial conditions are just a few examples,” Wilson added.

“Given other cost pressures and stubbornly low inflation, we are unconvinced that companies will generally be able to fully offset tariff costs through raising prices or through costs efficiencies elsewhere, meaning tariffs will press on margins,” Wilson wrote.

“In the case of 25% tariffs on all of China’s exports to the U.S., we are inclined to think this has the potential to tip the U.S. economy into recession given the costs issues companies are dealing with,” he argued. “Surely they would attack labor costs aggressively in such a scenario and unemployment would rise materially—the essence of an economic recession.”

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