How to tell if trade war is hurting the economy

There’s no question that some U.S. companies are feeling the bite of the trade war that the Trump administration is waging against much of the world.

As others have reported, a Missouri nail factory is laying off people because of tariffs on imported steel; Harley-Davidson plans to move some production to Europe in response to retaliatory tariffs; soybean farmers face a loss of income resulting from new Chinese import taxes.

But it is a mistake to assume that difficulties of individual companies and industries are the same as a force powerful enough to bend the overall trajectory of the U.S. economy.

“The direct effects on the U.S. economy are small, because the economy is really big, and it is mostly domestically driven,” said Beth Ann Bovino, chief U.S. economist at Standard & Poor’s Ratings Services. “Still, tariffs hurt, and we’re starting to see some precursors of an impact already.”

To assess how the trade war could affect growth, the job market and inflation at the macroeconomic level, you need data. The trouble is that much economic data operates with long time lags. By the time there would be solid evidence that the trade war was doing damage, the damage would already have been done.

But certain indicators are likely to provide early signs of trouble: data that is more big picture than individual anecdotes, but more timely than things like gross domestic product and the unemployment rate.

If you want a dashboard for evidence of economic damage from the trade war, here’s what should be on it.

Business confidence, capital spending: Look to surveys

One of the key ways trade tensions can slow a nation’s overall growth is by causing businesses to pull back on capital expenditures.

The hard data on business investment tends to be released with long delays. If executives become gloomier about the future, the earliest evidence will probably come from frequent surveys of them.

For example, the Federal Reserve Bank of Philadelphia surveys manufacturers about their plans for capital spending; that measure has fallen in the last few months. Other surveys, like one of small businesses by the National Federation of Independent Business, suggest more stable capital spending plans.

But while the evidence is uneven today, these market indicators and confidence surveys could amount to the canary in the trade war coal mine if they take a decisive turn for the worse.

“I am watching business sentiment very closely,” said Nathan Sheets, chief economist of PGIM Fixed Income. “If we started to see business sentiment turn, that would be an indication that key constituencies in the business community are getting nervous.”

Stock market: Exporters vs. the rest

The closest thing to a real-time indicator of the trade war’s possible effect on corporate profits is the stock market. Several household-name companies with deep exposure to global commerce, like Boeing, Caterpillar and John Deere, have become bellwethers for the trade war.

But to understand whether trade tensions are affecting the overall economy, it is worth watching whether dips in the stock market remain limited to those companies with direct exposure to global commerce or start to encompass even service industries and those with mainly domestic business.