Don't Blame The Global Slowdown On Trump's Trade War

Ever since last year, nothing has grabbed economists' attention as much as the whipsawing evolution of the US-China trade war. Just last week, the IMF downgraded its global growth forecast for 2020, citing trade and geopolitical tensions.

But economic forecasters are misunderstanding the primary cause of the current global slowdown, which means that they'll also miss what's coming next.

In hindsight, it's clear that actual global industrial production growth started slowing at the end of 2017. In other words, the year-over-year pace of increase in the world's total industrial output began a sustained decline in late 2017. That's the definition of a global industrial slowdown.

Most analysts focus on the global purchasing managers' index (PMI) data for their read on global growth because it's published each month about a month and a half before the actual production data. While the global PMI generally has a positive correlation with global industrial production growth, it doesn't measure actual industrial production, as it's based on a survey of purchasing executives about conditions facing their companies. It's really a proxy for industrial production growth, which measures real output for all companies within the manufacturing, mining and utilities industries.

In this case, while the global manufacturing PMI also started easing at the end of 2017, its decline didn't become evident until a few months into 2018, when the sustained nature of the downturn became increasingly difficult to dismiss as meaningless "noise." Coincidentally, that's just about when President Trump began his trade war, slapping tariffs on washing machines and steel and aluminum imports. Because the trade war was front and center, economists thought it was to blame for the drop in PMI and global industrial growth.

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