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When you buy a new t-shirt in Manhattan, some of the money goes to the manufacturer in China, and some of the money goes to the US company that sells the t-shirt.
Looking at the distribution of expenditures on imports shows that for China, 56% of the money paid stays in the US, and 44% goes to China, see chart below.
The bottom line is that more than half of the money paid for US imports from China stays in the US.
For more discussion, see also here.
Note: Chart shows how expenditures on imports are distributed between local content that stays in the US and the imported content that goes overseas to the trading partner. Sources: Federal Reserve Bank of San Francisco, Apollo Chief Economist See important disclaimers at the bottom of the page.
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Currencies normally move around with interest rate differentials. For example, when the Fed keeps interest rates higher for longer because of higher inflation, the US dollar goes up.
Since the trade war started, this relationship has broken down. Now the dollar is driven by forces other than interest rate differentials, and the chart below suggests EURUSD should be trading closer to parity.
In other words, the dollar is about 10% weaker than interest rate differentials would have suggested.
Note: 1-year yield differential = 1-year German government bill minus 1-year US T-bill. pp = percentage points. Sources: Bloomberg, Macrobond, Apollo Chief Economist See important disclaimers at the bottom of the page.
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After the China trade deal, the probability of a US recession in 2025 is now at 30%, and the tail risk coming from a complete collapse in trade between China and the US has been removed.
Looking ahead, the key issue for markets is to monitor the speed with which confidence is restored among consumers, corporates, and foreigners. Is trust and confidence going to rebound quickly, or is it going to take several quarters or several years?
One particular area to watch is tourism. Tourism into the US makes up 10% of the country’s GDP, and the observed 30% to 40% decline in visitor arrivals from Canada and Europe is having a negative impact on US airlines, hotels, and restaurants, see chart below.
The bottom line is that markets may recover quickly from this episode. But it will likely take some time before confidence is restored among consumers, corporates, and foreigners.
Note: The series is calculated using tourism-related output as % of GDP. Tourism-related output includes the direct output from tourist spending, as well as the indirect and induced effects captured through input-output multipliers.
Sources: Bureau of Economic Analysis, Apollo Chief EconomistSee important disclaimers at the bottom of the page.
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FDIC data shows that the banking sector is currently holding almost $500 billion in unrealized losses on investment securities.
In a stagflation scenario, the risk is that rates will be higher for longer and credit losses will begin to accumulate, in particular for lenders to tech, growth, and VC, where borrowers are characterized by having no earnings and low coverage ratios.
Sources: FDIC, Haver Analytics, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The inventory-to-sales ratio for retailers was 1.5 before the pandemic, and now it is 1.3, see chart below.
In other words, retailers will more quickly have empty shelves when goods no longer come in from China.
Sources: US Census Bureau, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The US is no longer importing cheap goods from China. As a result, the rest of the world will likely see a significant increase in imports of cheap Chinese goods that China can no longer sell in the US.
This creates a highly unusual macroeconomic situation, with upward pressure on inflation in the US and downward pressure on inflation in Europe, Canada, Australia, and Japan.
The consequence for markets is that rates will be higher in the US and lower in the rest of the world.
Source: Apollo Chief Economist See important disclaimers at the bottom of the page.
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I will be giving a presentation on “The Growing Role of Private Credit” today at the Hoover Institution during a conference celebrating John Taylor and the Taylor role. My slides are available here, and all presentations and panels can be watched live here.
See important disclaimers at the bottom of the page.
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The IMF just released their latest World Economic Outlook, and comparing their pre-tariff forecast from January with their forecast today shows that they expect the trade war to have a much bigger negative impact on the US economy than on other countries, including China, see chart below.
Sources: IMF, Apollo Chief Economist See important disclaimers at the bottom of the page.
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The trade war is all about goods. However, the US is also connected with China via sales of American products in China to Chinese consumers.
For example, McDonald’s has 6,820 restaurants in China, Walmart operates 364 stores in China, and Apple sold 43 million iPhones in China in 2024.
Calculations from FactSet’s Geographic Revenue Exposure Database show that China makes up about 7% of total annual revenue in S&P 500 companies. Comparing the magnitude of the trade deficit with the revenue generated by S&P 500 companies in China shows that US companies made $1.2 trillion in revenue selling to Chinese consumers—about four times more than the size of the trade deficit in goods between China and the US, see chart below.
The bottom line is that if the US has to decouple completely from China, it would result in a significant decline in earnings for S&P 500 companies no longer selling products to Chinese consumers.
Note: S&P 500 revenue is calculated as revenue exposure to China (6.7%) multiplied by LTM total revenue. Sources: FactSet, BEA, Apollo Chief Economist See important disclaimers at the bottom of the page.
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After Liberation Day on April 2, earnings expectations for the S&P 500 have been revised down significantly, and interest rate differentials no longer drive the dollar, see charts below.
Sources: Bloomberg, Apollo Chief Economist 
Note: Yield differential is DXY weighted. Sources: Bloomberg, Macrobond, Apollo Chief Economist See important disclaimers at the bottom of the page.
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