Real Time Economics: The U.S. Moves Closer to a Trade War With Allies

This is the web version of the WSJ’s economic newsletter. You can sign up for daily delivery here. Good morning! Today we look at the Trump administration’s words and deeds on trade, good news for economic growth and productivity, firming eurozone inflation, the economics of sports in Switzerland, and why people go bankrupt when a neighbor wins the lottery. TRADE WAR: GAME ON The Trump administration is planning to make good on its threat to impose tariffs on European steel and aluminum. An announcement is expected as early as Thursday after U.S. negotiators were unable to win concessions from European Union counterparts, William Mauldin, Bojan Pancevski and Vivian Salama report. The move is almost certain to draw a response from the EU, which has threatened to retaliate with its own tariffs on American products such as motorcycles, jeans and bourbon. The numbers: 25% tariffs on imported steel, and 10% on . Don’t be surprised if Canada and Mexico follow, escalating trade tensions with U.S. allies. PROTECTIONISM: YOU’RE DOING IT WRONG So, how is the White House trade strategy working? “President Donald Trump routinely does protectionism badly, using the wrong tools on the wrong behavior and the wrong countries,” the WSJ’s Greg Ip writes. Targeting China’s intellectual property violations is a good step. But other actions are counterproductive: Quotas, threats of tariffs followed by negotiation and uncertainty, and picking fights with allies while going relatively easy on China—a serial violator of trade rules and the ultimate cause of global steel and aluminum overcapacity. Finally, Mr. Trump should have a long-term plan. “China’s protectionism is future-focused, seeking to become globally competitive in industries such as aerospace, renewable energy and robotics. Mr. Trump, by contrast, seems obsessed with the past, when American coal, cars and steel ruled the world.”
Should the U.S. slap tariffs on steel and aluminum from Europe, Canada and Mexico? Write to Jeffrey Sparshott at, tweet to @WSJecon and visit for the latest. WHAT TO WATCH TODAY The Federal Reserve’s preferred inflation gauge is out at 8:30 a.m. ET. The personal consumption expenditures price index for April is expected to advance 0.1% from the prior month. From a year earlier, that could push the measure down to 1.8% from 1.9% in March, suggesting little immediate inflation pressure. U.S. consumer spending and personal income accompany the inflation numbers. Spending is expected to rise 0.4% from the prior month. U.S. jobless claims, out at 8:30 a.m. ET, are expected to fall to 225,000. U.S. pending home sales for April, out at 10 a.m. ET, are expected to rise 0.4% from the prior month. Finance ministers and central bankers from the Group of Seven nations meet in Whistler, Canada, from Thursday through Saturday. Economic development is the headline theme, but expect trade friction and Italian political turmoil to grab plenty of attention. The Atlanta Fed’s Raphael Bostic speaks at 12:30 p.m. ET, Fed governor Lael Brainard speaks on economic and monetary policy at 1 p.m. ET, and the Dallas Fed’s Robert Kaplan speaks at 8:30 p.m. ET. TOP STORIES TRADE, JOBS AND PRODUCTIVITY U.S. trade numbers out Wednesday resulted in big upgrades for economic forecasts: Macroeconomic Advisers is now tracking 3.6% gross domestic product growth for the second quarter. Alongside moderate job gains—economists expect payrolls to rise by 190,000 in May—that suggests some improvement in productivity, the economy’s long-missing ingredient. Productivity, or how much a worker can producer in an hour, is the single most important factor affecting living standards. But the U.S. has been in a long-term slump, one reason for sluggish overall economic growth and tepid wage gains. A pickup in productivity will be especially important as the labor market tightens further and population growth slows.
WINDFALL Where will companies get money to invest and improve productivity? Possibly from the Republican tax cuts that went into effect on Jan. 1. A key measure of U.S. business earnings jumped a seasonally adjusted 7.8% in the first quarter after dropping 9.6% in the fourth quarter, Ben Leubsdorf reports. The swing reflected, at least in part, federal corporate tax cuts. The quarterly data is noisy, so it may take more time to establish a definitive trend. EUROZONE INFLATION WARMS UP Eurozone inflation picked up in May as energy prices increased, a development likely to reinforce the European Central Bank’s belief that the metric will return to its close-to-2% target over coming years. Even so, high levels of uncertainty continue to face policy makers, Paul Hannon writes. The pickup could fade if volatile energy prices give up their gains, or a first-quarter economic slowdown proves more durable than expected. More worryingly, political turmoil in Italy threatens a fresh outbreak of government debt and banking crises the ECB has worked hard to contain over the past six years. PUT ME IN, COACH When it comes to economic statistics, economists love “core” readings that strip out the most volatile numbers and give a cleaner picture of underlying trends. Switzerland has taken the bounce out of gross domestic product by reporting it excluding…sports? Swiss GDP rose a solid 0.6% on a quarterly basis. But excluding sporting events, first-quarter GDP grew a more modest 0.4%. It isn’t that Switzerland is particularly sports crazed. Rather, it is home to international sports organizations like the International Olympic Committee and International Federation of Association Football, organizer of the World Cup. These bodies generate license fees the years that the games take place, income that adds to GDP. This year is set up for a particularly strong effect because the Olympics and World Cup occur in the same year. - Brian Blackstone CHARTS OF THE DAY: JOBS! Friday is jobs day. It’s an exciting time for economists, economic reporters and other nerds, though the May report could be a bit of a dud. The forecast is for a net gain of 190,000 nonfarm payrolls, in line with average job gains so far this year.
The unemployment rate is expected to register at 3.9%, unchanged from the prior month. April, of course, saw unemployment fall to one of the lowest levels of the post-World War II era.
Wage growth will be a key focus. Economic theory holds that low unemployment should force businesses to bid up worker pay, which in turn will fuel inflation. But there hasn’t been a breakout, at least not yet.
Oh, and remember during the last election when it was a big deal because 94 million Americans were out of the workforce? The number has grown! Blame retirees.
QUOTE OF THE DAY “What we’re having with China is a trade dispute, plain and simple…. We lost the trade war long ago.”- White House trade adviser Peter Navarro, speaking on National Public Radio TWEET OF THE DAY [wsj-responsive-sandbox id = "0" ] WHAT ELSE WE’RE READING It’s not easy keeping up with the Joneses, especially if the Joneses won Powerball. Neighbors of lottery winners “(1) increased conspicuous consumption, (2) increased financial risk taking, and (3) increased debt outstanding,” Sumit Agarwal, Vyacheslav Mikhed and Barry Scholnick write in a Philadelphia Fed working paper. The bigger a person’s lottery win, the more his or her neighbors spent on stuff. That, in turn, led to more bankruptcies. Is air conditioning the most underappreciated technological development from the last century? Probably not. But it’s a big deal. Here’s more evidence: “Without air conditioning, each 1°F increase in school year temperature reduces the amount learned that year by one percent,” Joshua Goodman, Michael Hurwitz, Jisung Park and Jonathan Smith write in a National Bureau of Economic Research working paper. So without air conditioning, kids wouldn’t learn as much, especially in the hottest parts of the country. UP NEXT: FRIDAY The U.S. employment report for May is out at 8:30 a.m. ET. Economists expect a net gain of 190,000 jobs and an unemployment rate unchanged at 3.9%. The Minneapolis Fed’s Neel Kashkari speaks on the workforce at 8:55 a.m. ET. The Institute for Supply Management manufacturing index for May, out at 10 a.m. ET, is expected to tick up to 58.1 from 57.3, well into expansion territory for the sector. U.S. auto sales for May are expected to slip to an annual pace of 16.8 million from 17.15 million.

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