Back in March, President Trump tweeted:

When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win.

Will Trump’s boast prove true? The answer is simple. No one wins a trade war. Especially not the stock market, which closed mixed Friday as the tariff battle escalated again. The Dow Jones Industrial Average and S&P 500 eked out slight gains; the Nasdaq closed in the red. Trading was choppy as stocks seesawed between losses and gains.

News broke today that Trump has instructed aides to move forward with tariffs on $200 billion more in Chinese products.

Washington already has imposed duties on $50 billion worth of Chinese imports. Beijing has retaliated with its own tariffs and vows to match the White House’s trade sanctions, tit for tat. The Trump administration now threatens to slap tariffs on all Chinese exports, to the tune of $505.5 billion.

Make Investors Grate Again…

Despite Trump’s green-lighting of new tariffs, negotiations between the world’s two largest economies continue, which poses a maddening inconsistency for investors.

One day the trade war is on. Next day, it’s off. It’s enough to make investors gnash their teeth.

As we saw yesterday when stocks soared on trade optimism, Wall Street succumbs to wishful thinking whenever a government official makes a soothing statement about trade.

Fact is, Trump is in no hurry to end this trade conflict, especially as he strives to appear “tough” to his electoral base ahead of the midterm elections. To think otherwise is delusional.

Ironically, Trump’s supporters in the Farm Belt get badly hurt by tariffs, but they’re happy to see the president bash overseas boogeymen. The upshot: you should expect trade-induced volatility for at least the rest of the year.

Contributing to Wall Street’s frustration today were mixed economic numbers.

The Commerce Department reported that retail sales inched up by a less-than-expected 0.1% in August, the smallest rise since February. Economists had forecast retail sales increasing 0.4 % in August.

Consumers reduced their purchases of motor vehicles and clothing. It’s likely that higher gasoline prices are dampening consumer spending in other areas.

However, despite the slowdown last month, retail sales are still growing at a fast annual clip, rising a robust 6.6% in the past 12 months:

In a separate report Friday, the Labor Department said import prices fell 0.6% last month, the biggest decline since January 2016. The drop in import prices probably reflects the strengthening U.S. dollar.

Cooling consumer spending and inflation won’t alter the likelihood that the Federal Reserve will announce an interest rate hike at its Sept. 25-26 meeting. The rate boost would constitute the third one this year.

Inflation may be moderating but it’s still a clear and present danger. Annual wage growth increased at its fastest pace in more than nine years in August. One person’s wage growth is another person’s price increase.

The U.S. economy remains on track for strong growth in the third quarter and the rest of this year. The economy expanded at a 4.2% annualized rate in the April-June period, the fastest in nearly four years. Tax cuts are a major factor behind this growth.

However, over the long haul, the rising federal deficits caused by those tax cuts will come back to haunt investors.

Deficits are a drag on the economy. Investors opt to buy government debt instead of making the type of private investments that generate growth and jobs.

Massive deficits are occurring during the latter stages of a recovery, not during a downturn when stimulus would make sense. When the next recession hits and tax receipts are in free-fall, rates will have to rise to entice investors into buying Treasurys to finance the federal government.

Corporate tax receipts have plummeted to a 75-year low and continue falling at a rate typically witnessed only during recessions. The Congressional Budget Office recently reported that in the first six months of 2018, collections fell by $50 billion compared to the same period a year ago, a decline of about 30%.

The culprit, of course, is the lowering of the top corporate tax rate from 35% to 21%, but the revenue shortfall is considerably larger than expected. The annual deficit is on course to reach $1 trillion in 2019 and will remain above that level for the foreseeable future. We’re overdue for a recession and when it comes, policymakers will be bereft of tools to ameliorate it.

So when you hear Wall Street pundits praise the $1.5 trillion tax cut package, don’t assume its benefits for average investors will last very long. Let’s do the numbers.

Friday Market Wrap

• DJIA: 26,154.67 +8.68 (0.03%)
  
• S&P 500: 2,904.98 +0.80 (0.03%)
  
• Nasdaq: 8,010.04 -3.67 (0.05%)
  

Friday’s Big Gainers

• Invitae (NYSE: NVTA) +14.39%

Genetic testing firm files for equity offering.

• Owens-Illinois (NYSE: OI) +9.92%

Glass container maker plans sale of European business.

• Kirby (NYSE: KEX) +6.54%

Petrochemicals boom lifts tank barge operator.

Friday’s Big Decliners

• NIO (NYSE: NIO) -14.57%

China-based electric vehicle maker struggles with production goals.

• NiSource (NYSE: NI) -11.75%

Natural gas distributor owns utility involved in Boston-area explosions.

• Vitamin Shoppe (NYSE: VSI) -7.35%

Wall Street downgrades nutritional supplements retailer.

Letters to the Editor

“Do trade deficits really matter?” — Patricia J.

A persistent trade deficit can harm a country’s economic growth. If imports are more in demand than exports, domestic jobs may be lost to those abroad. However, the numbers can be misleading, because they tend to emphasize lower-skilled manufacturing jobs and underestimate the importance of value-added services.

Send your questions and comments to: mailbag@investingdaily.com

John Persinos is the managing editor of Investing Daily.