By Diane Swonk, chief economist, Grant Thornton

Much of the discussion surrounding the impact of trade wars focuses on the direct tax that tariffs place on economic activity and the collateral damage of a sharp slowdown or contraction in growth elsewhere in the world. The outcome is not pretty. Such actions could tip the U.S. into a growth recession – which happens when the economy still grows but not fast enough to hold unemployment down – by the turn of the year. We have already seen the unemployment rate bottom at the same time participation in the labor force has fallen.

Participation of prime-age men (25-54 years old) remains woefully low. Little attention has been paid to the most immediate and costly impact of trade wars: sentiment. The experience of last December provides a cautionary tale. Retail sales collapsed, credit conditions tightened and business investment slowed, all in response to fears that the president would trigger a full-blown trade war with China.

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