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Why investors should worry about an economic slowdown

Kenneth Underwood
Senior Producer

As the U.S and China scramble to find a new place to sign phase one of the trade deal, the latest economic data stresses the need to get it done, and fast.

Chicago PMI sank to 43.2 in October, missing expectations, hitting its lowest level since December 2015.

“We’re getting quite worried that it's spreading,” Deutsche Bank Securities Chief Economist Torsten Slok told Yahoo Finance’s On the Move. “If you look at the national ISM has been trending lower, essentially since the breakout of the trade war…we're beginning to see the same trend in the non-manufacturing meaning the services sector.”

The Chicago PMI comes after its first reading of third-quarter GDP topped expectations, but still showed a slight slowdown from the second quarter.

ISM lNew Exports Orders (3-Month Lead) vs ISM: PMI Compositie Index

Slok said you have to look at the whole picture. “The story told from the bottom-up perspective, and you look at earnings, and cash flow, and even how companies generally are doing, is actually relatively strong. Whereas the top-down perspective of the, well, wait a minute, this cloud of uncertainty keeps on hanging over us, it may not have resulted yet in a sharp slowdown in the broader GDP numbers, but the fact that the GDP yesterday had this really relatively significant decline in business spending, I mean, business spending is essentially another way of saying, if you add more business spending, you also have to add more workers. So, if we all agree that there's actually now less business spending, you also come to the logical conclusion, well, at some point, you will probably also begin to see an impact on the labor utilization data, meaning, ultimately, unemployment.”

Trade war hits the board room

President Trump tweeted Thursday that both he and Chinese President Xi Jinping still intend to sign phase one of the trade deal, despite Chile’s decisions to cancel the upcoming Asia-Pacific Economic Cooperation (APEC) summit. Despite that promise, Slok said the more important thing is what is happening in the C-suite.

“The main conclusion here is not really so much what's happening in D.C. and what's happening in Beijing, it's really what's happening inside the minds of CEOs in the U.S. and Corporate America,” he said. “Are they going to spend a lot? Does this phase one deal mean that they will open the drawer, and take out all the capex plans, and say, now is the time to spend?”

CEO Business Confidence Survey vs ISM Manufacturing

Slok also warned that even with a signed trade deal, the list of additional trade issues are piling up. “You have potentially more tariffs coming in China, at least this is what's going to] happen on the imports from China on December 15. You have talk about de-listing of Chinese companies. You have Hikvision, Huawei, all those issues, which many in the administration keeps on saying this is not something that has to do with the trade war,” he said. “So, our worry is that it still actually looks more like we have an escalation of the trade war in the pipeline rather than a de-escalation. If that's the case, and if that's been the reason why things have been falling, we're a little bit more worried.”

Kenneth Underwood is a senior producer for Yahoo Finance.

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