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Markets Are Shaken by New Signs of Global Economic Trouble

The global economy is under increasing stress as growth cools and trade tensions take a mounting toll. On Wednesday, the tremors were felt worldwide.

Shares on Wall Street were off sharply, only a day after they had rallied as President Trump narrowed the scope of his next round of tariffs. The S&P 500 was down 2.9 percent. And bond markets offered an ominous warning on American growth prospects, with yields falling to levels not seen in years.

The financial jitters, which continued Thursday as markets in Asia were down in early trading, came after new data showed the German economy hurtling toward a recession and factory output in China growing at its slowest pace in 17 years.

The trouble in two of the world’s manufacturing powerhouses indicated, in part, how hard both have been hit by Mr. Trump’s tariffs. And it increased concern that the United States, too, is headed for an economic reckoning.

“The global backdrop has slowed more than anticipated,” said Kathy Bostjancic, chief United States financial economist at Oxford Economics. “We’re not immune to the slowdown.”

Bank of America Merrill Lynch has put the odds of a recession in the United States in the coming year at one in three, citing factors like weaker industrial production and auto sales.

“Economic data have softened and are increasingly sending recession signals, particularly from the industrial side,” said Michelle Meyer, head of United States economics at Bank of America Merrill Lynch. “Trade is a huge part of it.”

The shock waves not only are a measure of the trade war’s impact, but also could complicate Mr. Trump’s ability to wage it.

Since the beginning of his trade battle with Beijing, the president has had a powerful ally: the United States economy. The first tariffs aimed solely at China, in the spring of 2018, coincided with the best economic showing of his presidency, with quarterly growth running at a 3.5 percent pace.

But growth is slowing, hitting 2.1 percent in the most recent quarter, and estimates for the current quarter are even lower. The president’s decision Tuesday to delay some duties on Chinese imports was meant to soften the blow to American consumers, easing the economic headwinds.

The Federal Reserve cut interest rates in July for the first time in more than a decade, a move that its chair, Jerome H. Powell, said was “intended to ensure against downside risks from weak global growth and trade tensions.” Another rate cut next month looks likely.

ImageCreditAleksandar Plavevski/EPA, via Shutterstock

Hours after the markets closed Wednesday, Mr. Trump took to Twitter, suggesting there was room for compromise in the escalating trade war. “Of course China wants to make a deal,” he wrote. “Let them work humanely with Hong Kong first!” In a subsequent tweet, after praising China’s president, Xi Jinping, he wrote “Personal meeting?”

Mr. Trump has pointed to the economy’s performance as a benchmark of his success and an argument for his re-election in 2020. And many indicators remain vibrant. At 3.7 percent, unemployment is low by historical standards, while consumer confidence is high. Even with Wall Street’s recent volatility, major stock indexes are close to record levels.

The United States is also more cushioned against economic turmoil than other big countries because exports account for just 12 percent of its gross domestic product. Germany, with its automaking prowess, and China, with its vast factories for consumer goods, are more dependent on international trade.

Exports are responsible for nearly half of Germany’s economic output and almost a fifth of China’s.

Still, there are nagging warning signs that the resilient American economic expansion that began a decade ago is running out of steam.

When investors are confident in the economy, they demand higher bond rates, partly to offset the risk that sustained growth could produce inflation and dilute the bonds’ effective returns. For that reason, rates on long-term bonds are typically higher.

But on Wednesday, for the first time since 2007, yields on two-year Treasury notes briefly exceeded the interest rate on the benchmark 10-year note. This pattern, called an inverted yield curve, is frequently cited as a harbinger of recession, although it can take quite some time to be proved right.

Earnings growth, which has helped drive Wall Street’s remarkable gains in recent years, is also showing signs of petering out.

Second-quarter profits for companies in the S&P 500 are coming in 0.7 percent lower than a year ago, according to data from John Butters, the senior earnings analyst at FactSet. If that figure holds — and more than 90 percent of the companies in the index have reported — it will mark the second straight quarter in which profits have declined, something often referred to as an earnings recession.

The slide was most pronounced among companies with the greatest exposure to the global economy and trade. Earnings at American semiconductor manufacturers, which rely on production networks in China and generate much of their sales there, fell about 25 percent.

More troubling for investors, profits seem likely to remain lackluster for at least the rest of 2019. Stocks bounced back strongly this year, in part, on optimism that the United States and China would inch closer to a trade deal and that earnings would rebound in the second half. That hope has faded as the trade tensions have ratcheted up with no end in sight.

Although China’s economy is growing more quickly than that of many Western competitors, it has slowed measurably since the start of the trade conflict. Wednesday’s reading on Chinese industrial production was weaker than expected, with July’s growth rate at 4.8 percent, the lowest since 2002.

United States tariffs have mostly been directed at China, but the Trump administration has also imposed levies on European steel and aluminum. Mr. Trump has often threatened to impose tariffs on German cars.

ImageCreditLam Yik Fei for The New York Times

There is evidence that the German auto industry is hurting plenty already. The German carmakers Volkswagen, Daimler and BMW all earn at least a third of their revenue in China, where auto sales have been slipping after years of explosive growth. One major factor in the slide is the barrage of trade threats that have unsettled Chinese consumers, discouraging them from buying big-ticket goods.

On Wednesday, the German statistics agency said the country’s economy shrank 0.1 percent from April through June after treading water for a year. Deutsche Bank analysts predicted that the contraction would extend to a second straight quarter, meeting the technical definition of a recession.

Germany’s economic performance in the second quarter was the worst among the countries using the common European currency, the euro, separate data from the European Union statistics agency indicated. Even Italy, long a weak link, did slightly better than Germany — its growth in the quarter was zero.

That is a humbling experience for Germany, which has lectured other countries on how to manage their economies and scolded them for having too much debt.

Germany was among the first European countries to bounce back from the debt crisis that struck the region in 2010, and its unemployment rate, at 3.1 percent, is still the lowest in the eurozone.

When Siemens, the German industrial conglomerate, missed analysts’ expectations for quarterly profits this month, its executives noted that “geopolitical and macroeconomic risks” — including the trade war — had “led to a clear slowdown in the global economic activity and deteriorating industrial sentiment.”

China and Germany have large trade surpluses with the United States, but they are also important customers for American products. Germany bought goods and services worth $72 billion from the United States last year.

“If this continues, it will eventually mean less demand for U.S. goods,” said Carsten Brzeski, chief economist at ING Germany.

Closely watched surveys of activity among industrial purchasing managers suggest that manufacturing is declining in China, Japan, Germany and Britain — the largest economies after the United States.

And prices for important industrial commodities like aluminum, copper and steel have fallen, confirming deep weakness in the industrial sector and crimping the profits of the companies that produce them. ThyssenKrupp, Nippon Steel, and ArcelorMittal — the world’s largest steel producer — have all reported losses or shrinking profits in recent weeks.

A decline in manufacturing doesn’t necessarily mean the broader economy is doomed to follow. Manufacturing endured a similar slump in 2016, tied in part to a sharp drop in oil prices and an investment slowdown in China, after a currency devaluation by Beijing in 2015 spooked global investors.

That industrial downturn weighed on growth, in the United States and around the world. But a full-blown recession never materialized, in part because oil prices recovered and major central banks worked to resuscitate growth.


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