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  • The trade war between the US and China is pushing America closer to a recession, according to UBS economist Seth Carpenter.
  • A new round of tariffs went into effect on September 1, and they trade war showing no sign of slowing.
  • Carpenter says it increases uncertainty for businesses going forward and could impact consumption and unemployment.
  • While UBS's house view is that the US will avoid recession, Carpenter says there are still downside risks.
  • For more stories go to the Business Insider SA homepage.

President Trump's trade war with China is pushing the US closer to a recession, according to a Tuesday report from UBS's chief US economist.

The commentary comes after a new round of tariffs went into effect on September 1. They included taxes of 15% that went into effect on $113 billion of goods imported from China to the US. Trump had previously planned to levy a 10% duty, but increased it as retaliation for further trade measures instated by China.

"The move clearly shows that 25% is not a ceiling on tariffs and thus must increase materially the uncertainty about the outlook for the trade war for businesses," wrote Seth Carpenter, chief US economist at UBS.

As tariffs have mounted, economic challenges have grown, wrote Carpenter. Data show that imports of goods have fallen 40% because of tariffs, and domestic spending has been consistently weak since tariffs were enacted last year, he said.

In addition, as more tariffs have been enacted, they've impact consumer goods. This will continue to disrupt production lines, which could lead to a decline in employment, Carpenter said.

"As a consequence, business investment and household spending suffer," he wrote.

Carpenter is also acutely focused on consumption, which he says represents almost 70% of the US economy and therefore largely impacts gross domestic product.

He says tariffs drag consumption in two ways: (1) higher prices lead to less spending and (2) businesses spend less as well, which can lead them to stop hiring and drive up unemployment. Carpenter expects that the economy will stall in the first half of 2020, and that historic low unemployment rates will tick up to 4.3% by the end of that year.

But Carpenter still sees the US narrowly avoiding a recession - although he does identify some clear downside risks.

"A further shock to the economy could result in contraction," Carpenter wrote.

He also says sectors such as energy and retail could slide further, while mounting political risks could also create formidable headwinds.

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