The tit-for-tat trade war between the United States and China is not likely to cause a recession, according to MKM Partners, a Wall Street equity research and trading firm.
The growing conflict between two of the world’s largest economies is not enough to spark a major downturn because that can only start when demand declines from consumers and businesses, wrote MKM Chief Economist Michael Darda.
“The tariff tit-for-tat between the U.S. and China continues to escalate. Yet, markets have essentially shrugged off the consequences,” Darda wrote to his clients. “The market understands that recessions (at least in the U.S.) have always been associated with demand shocks not supply shocks.”
During the financial crisis of 2008, a negative demand shock was caused by several factors, including a slide in home prices, subprime mortgage fallout and a contraction in consumer spending.
Tariffs, on the other hand, impact the supply side of the equation. When the U.S. slaps another country with taxes on imports, it effectively increases the price Americans pay for foreign goods and decreases the volume of imports as a result. In other words, it can hurt growth but likely doesn't cause a recession outright.