Trade War Could Shove US into a Recession, Morgan Stanley Says

Escalating conflict may slice corporate earnings and lower employment, firm warns.

The mounting trade war, which lately has seen President Donald Trump pump up tariffs on Chinese goods to 25% from 10%, threatens to push the US into a recession, according to Morgan Stanley.

The higher costs imposed on American companies from the levies will depress US corporate earnings, the firm’s chief US equity strategist, Michael Wilson, wrote in a note to clients.

“In the case of 25% tariffs on all of China’s exports to the US,” Wilson warned, “we are inclined to think this has the potential to tip the US economy into recession given the cost issues companies are already dealing with.”

Trump last Friday increased the tariff burden on $200 billion worth of Chinese imports. He added that he may extend the tariffs to another $325 billion worth of goods. Beijing on Monday retaliated by hiking tariffs on $60 billion in US imports, mainly agricultural products.

The US stock market sank on Monday amid fears of economic disruption. The S&P 500 fell 2.41% and Nasdaq slid 3.41%.

The first impact of heightened trade hostilities would be to slice 1% to 1.5% off US corporate earnings, Wilson indicated, with the higher end of that range most likely. Tariffs can harm corporate earnings through higher costs, lower demand, reduced confidence, and shrunken investment, he pointed out.

“With trade resolution now looking like a ‘show me’ story for US corporates and the market,” Wilson wrote, “lack of resolution will be a material potential drag on earnings growth that will be harder to mitigate than the market expects as other costs rise in tandem.”

Morgan Stanley listed a panoply of US companies that would suffer from the trade war. The top five are: General Motors, Ford, tech outfit Aptiv, athletic gear maker Nike, and Tapestry, a luxury goods business.

In Wilson’s estimation, affected US companies would be forced to cut back, which would harm now-towering employment rates: “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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