Mike Baker

Welcome back to the PDB.

We've been tracking the economic fallout from the conflict in Iran for weeks, and for a while, China looked insulated.

But with energy prices staying elevated, cracks are beginning to emerge.

Now, if you rewind to where the numbers stood just a month ago, the data actually seemed to support that Beijing was largely insulated.

The New York Times reports growth held steady through March, and on paper, it looked like China's state-managed system could absorb the shock without much disruption."

But that appears to be breaking down, and the first signs are appearing among consumers.

Car sales in China, which are one of the clearest early warning signs for the economy, dropped off sharply.

We're talking about a 26% plunge in early April compared to a year ago, with gasoline-powered cars down nearly 40%.

Some of you, well, may be thinking, it could be in part due to expiring electric vehicle incentives, and you'd be right.

But gasoline cars are falling even faster, which suggests weakening demand.

And when that happens in China, it doesn't stay contained.

Because cars aren't just another purchase, they're the second largest expense for most households after housing.

So when consumers pull back, it ripples through steel and glass, manufacturing and other industrial supply chains.

As a result, factories across China are cutting production.

Output dropped 27% earlier this month.

Dealership lots are reportedly filling up with unsold cars, and inventories are building across the system, exactly what you'd expect when demand fades faster than production can adjust.

And we're seeing it show up across the broader Chinese economy.

Retail sales rose less than 2% in March.

That's a sharp slowdown from earlier in the year.

It's another signal that consumer confidence is slipping as costs begin to rise.