And at the center of the conflict stands Supreme Commander Trump wielding executive orders like thermal detonators. His weapon of choice: the Reciprocal Tariff Doctrine, a blunt instrument forged in the fires of populist rage and aimed squarely at the twin moons of China and Europe. Meanwhile, the Allied Systems of Industry—Amazon, Tesla, and the House of Walmart—brace for impact as shipping lanes tremble and supply chains stretch to the breaking point. On the fringes, the defiant Fed navigates the asteroid field of inflation while small business rebels beg for credits, caught between galactic ambition and planetary cost.

 And thus, here we begin our saga of … TRADE WARS.

 

Welcome to this week’s Steak House Index update.

 

If you are new to my blog, or you need a refresher on the SHI10, or its objective and methodology, I suggest you open and read the original BLOG: https://www.steakhouseindex.com/move-over-big-mac-index-here-comes-the-steak-house-index/

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Why You Should Care:   The US economy and US dollar are the bedrock of the world’s economy.   But is the US economy expanding or contracting?

Expanding … according the ‘advanced’ reading just released by the BEA, Q3, 2024 GDP grew — in ‘current-dollar‘ terms — at the annual rate of 4.7%.

The ‘real’ growth rate — the number most often touted in the mainstream media — was 2.8%.   In current dollar terms, US annual economic output rose to $29.35 trillion.

According to the IMF, the world’s annual GDP  expanded  to over $105 trillion in 2023.   Further, IMF expects global GDP to reach almost $135 trillion by 2028 — an increase of more than 28% in just 5 years.

America’s GDP remains around 25% of all global GDP.  Collectively, the US, the European Common Market, and China generate about 70% of the global economic output.  These are the 3 big, global players.   They bear close scrutiny.

 

The objective of this blog is singular.

 

It attempts to predict the direction of our GDP ahead of official economic releases.  Historically, ‘personal consumption expenditures,’ or PCE, has been the largest component of US GDP growth — typically about 2/3 of all GDP growth.  In fact, the majority of all GDP increases (or declines) usually results from (increases or decreases in) consumer spending.  Consumer spending is clearly a critical financial metric.  In all likelihood, the most important financial metric. The Steak House Index focuses right here … on the “consumer spending” metric.  I intend the SHI10 is to be predictive, anticipating where the economy is going – not where it’s been.

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Taking action:  Keep up with this weekly BLOG update.  Not only will we cover the SHI and SHI10, but we’ll explore “fun” items of economic importance.   Hopefully you find the discussion fun, too.

If the SHI10 index moves appreciably -– either showing massive improvement or significant declines –- indicating growing economic strength or a potential recession, we’ll discuss possible actions at that time.

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The Blog:

 

Truth be told, I didn’t write today’s intro.   My good buddy ChatGPT was the author … and I found it so entertaining, I had to repeat it here word for word.   These days, I call him “G.”   Earlier today, I asked G to write a humorous introduction to serious topic of tariffs and the Trump team, and this is what he came up with.   Amazing.  Frankly, after this experience, I can truly understand why Hollywood screen writers are deathly afraid of AI.  Who can blame them?

But back to the topic du jour:  

 

America is now in a trade war with China.

 

And as I said above, unlike the movie Star Wars, this ‘Trade War’ will be coming soon to a shopping center near you.   I’ll get into more specifics below, but rest assured, the price of stuff we desire – primarily from China – is going up.  No one knows by how much.   And no one knows for how long.  But the one thing we know for certain:  the price of “stuff” is going up. 

And it’s not just the tariff thing.   No, it’s also the US dollar.   Have you noticed the price of gold is way up?   Well, that’s not completely accurate.   The price of gold — measured in dollars — is way up in part because the value of the dollar is down.   Quite a bit. 

 

 

This is the largest value decline in 30 years.  If this move holds, most imports from across the globe will become more expensive for Americans, much like the Brits experienced after Brexit.  You remember Brexit, right?   That was exceptionally bad policy — ironically it, too, was centered around trade relationships — that devalued the Pound and increased British inflation.  

Is this a bad thing?   Well, that depends on your perspective.   On one hand, one could argue that the decade-long flood of exceptionally cheap Chinese manufactured goods has done little for the average American beyond rendering many toys, clothing, appliances almost disposable.   Many are built to fail, fade or break after only a few uses.   Soon after, they are tossed out, filling our dumps and landfills.  

But this wouldn’t be the entire story.   This may be truer for consumer products, but it’s generally far more complex than that.  Let’s dig in.

China joined the World Trade Organization on December 11, 2001 – interestingly enough, that date was exactly 3 months after 9/11.   I’m guessing that’s why none of us noticed.  

But in my opinion, the impact on the culture and economy of the United States in the years following was, in many ways, just as cataclysmic as the 9/11 attack on NYC.   Again, in my opinion.  It’s worth mentioning that Larry Summers, the Treasury Secretary during the Clinton years when China ascended into the WTO, completely disagrees.  He believes China had earned the lofty trade status of “most favored nation” within the global trade framework decades before, and that China’s joining of the WTO removed no restrictions or barriers to make trade with China easier or more profitable.  He believes China joining the WTO had no bearing on the issue.   This may be true, but even if it is, I think this believe misses the real point. 

The fact is – and we know this today – that between 2001 and today, China’s trade policies successfully hollowed out American manufacturing.   Is wasn’t solely their fault:  The US willingly went along.   It was cheap.   It was a money-maker.  US businesses were seemingly incapable of saying ‘no.’   Like the mythical call of the Sirens in Homer’s Odyssey.  US businesses – and others around the world – were mesmerized by the potential increase in long term profitability.   And, here, in my opinion, is where the US erred.   Yes, capitalism is a great system – the best in my opinion – but even capitalists require reasonable government controls and restrictions in some cases to prevent abuses.   For example, America does not permit capitalists monopolies to thrive here; so we have to ask:  what could possibly explain why our leaders permitted China to takeover of global manufacturing and gut the American manufacturing infrastructure? 

Does my comment sound farfetched?   Consider the image below:

 

 

Between 2001 and the end of 2024, China’s annual exports increased from about $250 billion to almost $4 trillion — that’s a 16X increase.   Good for them. 

But, ultimately, not really good for the US.   The explosion in Chinese exports triggered an explosion of American imports, resulting in long-term destruction to our manufacturing sector.  To put these numbers in context, in the year 2000 US exported goods and services totaling about $1 trillion.   Today, they are about 4X larger, totaling about $4 trillion.  

Sure, it’s possible it’s coincidental that China’s exports rose like a rocket after their WTO admission, but I don’t think so.    Even if Dr. Summers is correct, and no barriers were removed to permit China’s exports to flourish, I contend barriers should have been erected by the US to slow China’s assent and prevent the near complete destruction of the US manufacturing base.   Sure, for decades leading up to the beginning of the 21st century this segment faced many other problems and challenges here in America, all of which conspired with China’s export ascendancy.   But as Americans fell in love with ever cheaper and more plentiful goods from outside our boarders, year after year, with China leading the charge, our leaders should have raised the alarm.   They did not.   Until now.   

Covid highlighted the problem as never before, revealing critical US vulnerabilities and weaknesses.   America found itself reliant on friends, foes, and “frien-i-mee” nations for essential goods and materials.    Things like medical supplies, pharmaceuticals, critical electronics and semiconductors, industrial components, and ‘rare-earths’ materials were no longer made in the good old US of A.   We import them.   Is this a bad idea?   Probably.  Is this the “problem” the Trump Administration is attempting to fix?  Perhaps … I suspect it is.   Do I love their approach … their methods?    Not really.   But no one asked me.  

However, I believe I now understand the issues, the problems, the timing challenges, and why the Trump Administration feels this trade war with China is critical … and must be fought now.  Whether I agree with the tactics or not, at least I understand the objective.  Permit me to explain further.

A few months ago, I was looking for a new toaster oven.   The old one, after 10+ years of hard work finally died.   The heating element failed.   50 years ago, I might have sought out an appliance repairman.   “Fix it, please” I may have asked.   But not today.  

Because today, if I desired, I could have a new one delivered in just one day by Amazon.   And the new one, a feature-heavy toaster Cuisinart oven that works exceptionally well, cost me a whopping $99.   Can you imagine a repairman competing with that?   Not a chance.  The old one was in the trash faster than I could phone a repairman.   Assuming I could even find an appliance repairman willing to do the work.   Good luck, right?

Cuisinart is an American company.   But their toaster ovens are primarily made in China.   Apparently, toaster ovens made in America are extremely rare.   The only one I could find that was completely made in the US is the “Wolf Gourmet” counter-top toaster oven.  My wife loves Wolf products.  I’m sure they make an amazing toaster oven.   But it costs between $650 and $750.   At that price, if it breaks in a year or two, I guarantee you I’ll be looking for a repairman. 

Most branded “American” toaster ovens, including those from popular companies like KitchenAid, Oster, Cuisinart, Hamilton Beach, Breville, and GE Appliances, are manufactured in China.  So, if you had your eye on a nice new one that used to cost $99 at Amazon or Walmart, in the not-too-distant future is it likely to cost closer to $200 – or more.  It’s really, really hard to tell … but the one thing I can say with certainty: The price is not going down.

Let’s now jump up to the big picture.  As you know, I’m a big believer in contextualization. In 2024, the United States engaged in substantial international trade, with total exports amounting to $3.19 trillion and total imports reaching $4.11 trillion. This resulted in a trade deficit of $918 billion.

For ease of use, let’s call it a trillion-dollar annual trade deficit. The US exports about 3 trillion worth of stuff, and we import about 4 trillion.

Much of that deficit is the result of trade with China.  In 2024, the US imported $463 billion worth of “stuff” from China. In contrast, China bought about a third of that amount from the US – a bit less than $150 billion.  So, in round numbers, our 2024 trade deficit with China was about $300 billion.   Our deficit with Mexico was about $170 billion; Vietnam, $125 billion; and we have a deficit of about $75 billion in each of Ireland, Germany, Taiwan, Japan South Korea and Canada. 

Ireland?   What do they make, you ask?   What’s the source of our deficit with Ireland?  Beer?   Potatoes?   Irish Whiskey?   No, nothing so mundane.   No, our deficit with Ireland is the result of Ireland’s exceptionally low corporate tax rate – only 12.5%.   As a result, Apple, Google, Meta, Microsoft and Pfizer set up their non-US headquarters in Ireland, where they “book a large portion of their global intellectual property revenue,” thereby reducing their tax burden.  So a bunch of American companies created a US trade deficit by locating in Ireland due to a tax treaty.   Insane. 

How about Mexico?   That’s a more legitimate deficit, but once again it is mostly self-inflicted and hard to calculate.  For example, a car part use in the final assembly of a car in Mexico may cross the US-Mexico border – back and forth – as many as 7 or 8 times before the car is sold here.  Two trade treaties known as NAFTA and now the USMCA created integration and complexity.   

But the deficit with China is a lot more straightforward.   The United States buys a LOT of stuff from China.  Why?   Because it’s cheap.  What China-manufactured goods, you ask, did Americans purchase in 2024? Here’s a list of product categories, from the largest down.

$100 BILLION: Computers & Electronic Products

This category encompasses smartphones, laptops, tablets, and other consumer electronics. Notably, China supplied 76% of U.S. smartphone imports and 78% of portable computers.

$60 BILLION: Electrical Equipment & Components

Includes items like lithium-ion batteries, electric motors, and generators. In 2023, the U.S. imported $13.1 billion in lithium-ion batteries from China.

$50 BILLION. Textiles & Apparel

Encompasses clothing, fabrics, and related products.

$40 BILLION. Furniture & Bedding

Covers household furniture, mattresses, and related items.

$30 BILLION. Toys, Games & Sporting Goods

Includes a wide range of recreational products.

$25 BILLION. Machinery (Including Industrial & HVAC Equipment

Encompasses various machines used in industries and for heating, ventilation, and air conditioning purposes.

$10 BILLION. Footwear

Covers all types of shoes and related products.

$10 BILLION. Plastic & Rubber Products

Includes various plastic and rubber goods used across industries.

$10 BILLION. Household Appliances

Encompasses items like refrigerators, dishwashers, and other home appliances.

$5 BILLION. Video Game Consoles & Accessories

Peter Navarro, one of the Trump Administration’s advisors, believes trade deficits matter.   He believes the a trade deficit reflects the shifting of American wealth to the surplus country.   Again, I’m not sure I fully agree, but I understand the debate.   In Navarro’s opinion, and the Trump Administration in general, a $1 trillion trade deficit means $1 trillion of American assets are now in the hands of another country — and the US is $1 trillion poorer.   Of course, in the aggregate the US has $1 trillion worth of “stuff”, but the argument is that “stuff” is not durable and the financial loss is.  

Think about the issue this way:   If you go to the grocery store and buy $100 of groceries, you have a trade deficit with the grocery store.   They have a surplus equaling the $100 you spent.   Is this a bad thing?   No.   You probably purchased consumables.   Hopefully some wine.  And after you earn some more money, you’ll probably go back to that same store and purchase more consumables.   While the grocery store has a $100 surplus, their actual net income, or net profit, is just a fraction of that total.  So does the surplus / deficit debate here really amount to much?   Probably not.

But in my opinion, here’s where it gets a bit more tricky.   Suppose for 25 years that grocery store reinvested its net profit into manufacturing improvements — improvements so amazing, so compelling, that you decided to only shop at that particular grocery store?   And not only was their “stuff” amazing, the variety of “stuff” became so diverse, you could find almost everything you need in that one store!    Right!   Just like Costco!   🙂

After 25 years, this grocery store was a powerhouse, delivering all the “stuff” you need, at great prices, on demand — they even deliver!   And now suppose that store made and sold you things like medical supplies, pharmaceutical ingredients, electronics, semiconductors, industrial components and even rare earths materials!   They sell everything!

But one day, years in the future, for some reason, you realize that if for some crazy, unknown reason, that store stopped selling you “stuff” you had no other place to get it!  What if that grocery store decided to limit who they sold to … or even worse, as they now have an effective monopoly, raise prices far above prior levels?  This issue, more than the underlying trade deficit / surplus math could be what the Trump Administration fears most.   I feel this might be the battle they are waging here, now.  

OK, back to the question of costs and future prices.  Are these tariffs, and the dollar devaluation, inherently inflationary?  Absolutely. As I said above, the price of “stuff” is going up. 

What impact might a 145% tariff have on each of these products?   Well, it’s hard to say beyond two or three high-level observations:

First, if a China-manufactured toaster over that previously cost $100 now costs the same consumer $245, over all fewer toaster ovens will be sold in the United States. 

 Second, over the mid-term, the manufacturer of that toaster oven, will find a different place to make it in order to reduce that tariff burden.   Countries with lower tariff burdens, like Vietnam, India or Mexico may benefit. 

 Finally, over the much longer term, should these tariffs remain in place, it is likely manufacturing would return to the US.    This return, of course, will be neither quick nor inexpensive.   But if the manufacture’s choice remained one between a 145% tariff or on-shoring their production, over time they would make the more cost-effective choice. 

Of course, this transition won’t be easy.   Because our manufacturing labor force is just a shadow of itself 25 years ago.  

 

 

Hold on, you say!   That graph doesn’t look too bad, right?   From it’s high water mark in December of 1979 of about 19.5 million people, today’s manufacturing labor force is close to 13 million folks.   Sure, it’s down, but not horribly one might say. 

Wrong.   In 1979, the US labor force was about 105 million folks strong.   Today, it measures over 170 million.   If we do the math, we see that our manufacturing labor force today is just 41% of it’s 1979 peak level. 

Transitioning the US into to a global exporting high-tech, high quality manufacturer could happen.   But it would take a lot of time and resource.  And this transition will happen at a time when underlying demographic changes are already stressing labor supply.  Baby Boomers are retiring en mass.   So I’m not sure how realistic that goal might be.   A more realistic goal might be to reestablish the US as a manufacturer of critical products and components such as medical supplies, pharmaceutical ingredients, electronics, semiconductors, industrial components and even rare earths materials.   That might be more achievable. 

Permit me one tangent:  Fascinating to me is the oil story.   Twenty years ago, the US ran about a $250 billion trade deficit in oil.   Total petroleum imports in 2005 were a bit over $270 billion.  That year, our total trade deficit was a bit over $700 billion – so, clearly, oil was a big part of that deficit.   But fast forward 20 years to 2024 and the picture is very different:   In 2024, the US had a $45 billion surplus in oil!

 

 

OK, let me summarize:  Measured in trillions of dollars, annually the US exports about 3 and import about 4.   That resulting 1 trillion-dollar trade deficit for the United States.  A country with a “trade surplus” accumulates foreign currency assets equal in amount to the surplus.   Whether we agree or not, the Trump Administration believes the surplus enriches the country with the trade surplus, as that surplus either remains held by the surplus country as cash (often bonds in the deficit-spending country), gold, additional investment into that country’s infrastructure, strategic lending to other countries, or it can be used to acquire non-cash assets.   But more important, I feel, are the underlying current and future supply chain relationships.  That, I believe, is the real battleground. 

Consider my mythical grocery store above thru this lens:  Today, the US depends on China to source rare earth elements (RRE).   In 2024, we imported $170 million worth of this stuff.    Against the total $463 billion of “stuff” we imported, this number is actually quite small.  But these minerals are important in various critical US manufacturing processes.   Currently, China refines more than 85% of global REEs.    Clearly, the US is heavily dependent on China for these industrial inputs.   Is this intelligent?   Nope.  Not so much. 

It’s a little fuzzy, but a Chinese REE embargo might act as a strategic choke point, exposing our supply chain vulnerability.  It would probably prompt a rapid pivot toward domestic sources — we have them, but they are expensive and environmentally unfriendly.  A pivot here would be smart.

OK, I’m running long here.   I could keep going … but you must be getting tired of me by now.   🙂

What do the steak houses tell us today?   Has the economic turbulence from TRADE WARS muted expensive eatery reservation demand? 

 

 

Nope.   Frankly, as you’ll see below, expensive eatery reservation demand remains fairly consistent:

 

 

The SHI10 suggests the affluent consumer is still buying expensive steaks.   How is the “average” consumer feeling?

Every month, the New York FED does a “SURVEY OF CONSUMER EXPECTATIONS” and posts those results.   The main findings from the March 2025 Survey are:

Inflation:  Median inflation expectations increased by 0.5% to 3.6% at the one-year-ahead horizon, were unchanged at 3.0% at the three-year-ahead horizon, and decreased by 0.1% to 2.9% at the five-year-ahead horizon.

Labor Market:  Median one-year-ahead earnings growth expectations fell by 0.2% to 2.8% in March, equaling its 12-month trailing average. The series has been moving within a narrow range between 2.7% and 3.0% since January 2024.

 Household Finance:   The median expected growth in household income decreased by 0.3% to 2.8% in March, falling below its 12-month trailing average of 3.0%.

So, what does all this mean?  Are we in a recession now?

Speaking earlier today, FED Chairman Powell commented:

“We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension … If that were to occur, we would consider how far the economy is from each goal, and the potentially different time horizons over which those respective gaps would be anticipated to close.”

My friends at Yardeni Research had this comment on precisely that same question:

“Consumption and industrial production are clearly set to decelerate. The questions are by how much and for how long. Negotiated bilateral trade deals in the coming months could ease the uncertainty and revive consumer and business activity, but the strong existing growth trends and TTT will be exerting competing influences on the economy. The outlook is definitely less rosy, but time will tell whether markets are paying too much attention to headlines out of Washington, as they often do.”

My 2 cents:   No, not now.   Perhaps a better answer is not yet.   No recession.   The financial markets seem to be repricing this risk right now.  Time will tell – as always.  

But at least, as I explained above, we understand the nature of the TRADE WARS battleground.   You can decide if you believe the fight is worth the pain.  And if so, you can decide if you feel this is the right time.   Me?  I’m still on the fence.   But I am watching unfolding events with a reasonably open mind.  

<:  Terry Liebman :>