This post is by Jeffrey Sparshott from Real Time Economics
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China and Mexico want to talk trade, U.S. factories are struggling and the Fed is trying to figure out how to hit its inflation target. Good morning. Jeff Sparshott here to take you through key developments in the global economy. Send us your questions, comments and suggestions by replying to this email.
Something to Talk About
China and Mexico both signaled a willingness to negotiate with Washington over escalating trade issues, Josh Zumbrun and Yoko Kubota report.
- Beijing released a government policy paper Sunday accusing Washington of scuttling trade negotiations. It said the Trump administration’s “America First” program and use of tariffs are harming the global economy and that China wouldn’t shy away from a trade war.
- But China’s government appears ready to return to negotiations. “We’re willing to a cooperative approach to find a solution,” Vice Commerce Secretary Wang Shouwen said.
- Mexico, meanwhile, rushed a delegation to the U.S. to discuss immigration issues.
- The White House is threatening an escalating 5% tariff on all Mexican imports, or about $350 billion of goods, starting June 10, while also warning of a 25% tariff on an additional $300 billion of Chinese imports that could begin later in the month.
WHAT TO WATCH TODAY
IHS Markit’s U.S. manufacturing index for May is out at 9:45 a.m. ET.
The Institute for Supply Management’s manufacturing index for May is expected to tick down to 52.3 from 52.8 a month earlier. Today’s release will be watched closely to see if trade tensions are denting business confidence. (10 a.m. ET)
U.S. construction spending for April is expected to climb 0.4% from the prior month. (10 a.m. ET)
Fed Vice Chairman Randal Quarles speaks about Libor at 9:10 a.m. ET, the Richmond Fed’s Thomas Barkin speaks on women’s labor-force participation at 12:40 p.m. ET, and the St. Louis Fed’s James Bullardspeaks to the Union League Club of Chicago at 1:25 p.m. ET.
President Trump is in London to mark the 75th anniversary of the D-Day embarkations.
U.S. manufacturers are having a hard time mounting an encore to last year’s strong performance. Factories are on track for their weakest showing this year since 2016. Manufacturing job growth has stalled and output has fallen in three of the past four months as demand for business equipment and commodities weakens, Bob Tita writes.
- U.S. companies with overseas operations are facing slower sales growth and a resurgent U.S. dollar, which further weakens their foreign sales and profit.
- U.S. manufacturers also face higher costs for many components and metals because of U.S. tariffs. Beijing’s retaliatory tariffs on U.S. farm products, meanwhile, have slashed U.S. exports to China and weighed on sales of farm machinery.
It’s Not Just the U.S.
The rest of the world’s factories are aren’t doing great, either. IHS Markit’s final reading for the eurozone showed the manufacturing sector in contraction for the fourth straight month. The Caixin China manufacturing index in May was unchanged from April at 50.2, barely above the 50 level that separates expansion from contraction.
President Trump’s threatened tariffs on Mexico could affect as much as $360 billion in goods and would represent his biggest imposition to date of such duties on a U.S. trading partner. The 5% tariffs would hit sectors that previously had little exposure to the administration’s aggressive trade initiatives: about $34 billion of passenger cars, $34 billion of trucks and buses, more than $14 billion of crude oil and about $14 billion of fruits and vegetables, Josh Zumbrun and Anthony DeBarros report.
- The U.S. auto industry is worried. Mexico-built cars accounted for 17% of Detroit auto makers’ overall U.S. sales in 2018, including some of the industry’s biggest moneymakers, large pickup trucks.
- Trump’s threat is tripping up companies that moved operations to Mexico to avoid tariffs on Chinese exports. Those firms now face the prospect of new levies over immigration, which may drive up costs for American consumers.
- Farm groups warned the White House. “American pork producers cannot afford retaliatory tariffs from its largest export market,” said David Herring, president of the National Pork Producers Council.
- Mexico accounted for 9% of all U.S. crude imports last year. Tariffs could raise prices at the gas pump.
- The WSJ’s Greg Ip looks at the bigger picture: In the short run, weaponizing trade may serve the U.S. interest. But in the long run, it could do the opposite, by emboldening everyone to ignore international conventions that reserved tariffs and sanctions for specific purposes. The U.S. may also find its ability to get other countries to cooperate out of shared mutual interest diminished.
Should the Federal Reserve encourage inflation to rise above its 2% targetmore often? The question is animating a yearlong policy review culminating with a two-day research conference that starts Tuesday in Chicago, Nick Timiraos reports.
- The Fed seeks to keep inflation around 2%. But since adopting that target in 2012, it’s mostly run below that target, raising concerns the public will think Fed officials aren’t committed to their goal. That could cause consumers and businesses to expect weaker inflation, becoming a self-fulfilling prophecy.
- Some officials believe a more relaxed approach—allowing inflation to exceed 2% more often—would signal the Fed’s commitment to bolder action to boost growth after a recession.
- The Fed’s preferred inflation gauge, the price index for personal-consumption expenditures, was up 1.51% in April from a year earlier.
Kevin Hassett is leaving his post. President Trump said the chairman of the Council of Economic Advisers is leaving the job and a replacement would be named soon.
WHAT ELSE WE’RE READING
The Trump administration considered imposing tariffs on Australia. “Some of President Trump’s top trade advisers had urged the tariffs as a response to a surge of Australian aluminum flowing onto the American market over the past year. But officials at the Defense and State Departments told Mr. Trump the move would alienate a top ally and could come at significant cost to the United States,” Ana Swanson, Maggie Haberman and Jim Tankersley report at the New York Times.
Former New York Mayor Mike Bloomberg says he’s as much of a capitalist as you will ever find. “But anyone who believes that unfettered capitalism works hasn’t read history. … Industry consolidation has reached record levels, and is suppressing competition and choice. And more and more Americans–especially in your generation–are questioning whether capitalism is capable of creating a just society. Their faith in America–and all that we represent–is being shaken,” he told Harvard Business School graduates.
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