This post is by Jeffrey Sparshott from Real Time Economics
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The WSJ’s Jon Hilsenrath looks at threats to the 10-year expansion, U.S. factories are flashing some warning signals and Australia became the largest developed economy to cut interest rates so far this year. 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.
Keep on Truckin’
Economies don’t just wear down and peter out. Shocks and bad policy decisions knock them off course. The WSJ’s Jon Hilsenrath looks at what’s going right, and what could go wrong, as the U.S. expansion reaches its 10-year mark this month—and (probably) becomes the longest on record in July.
- The good. More than 20 million jobs have been created so far in the expansion that in mid-2009, and the net worth of American households has increased by $47 trillion.
- The bad. Though the U.S. expansion has been a long one, it has lacked vigor. The growth rate has been the most anemic on record, and the jobless rate took years to recede.
- The ugly. Risks are looming, most notably threats of tariff-driven trade wars. A central bank mistake with interest rates is also a concern. And—because of the country’s ballooning budget deficit—fiscal policy is in a weaker position to help.
- The really ugly. Moody’s Analytics estimates a full scale trade war would lead U.S. employment to drop by 3.1 million while the jobless rate would rise to 6.6% by mid-2021. Stock values would drop 37%.
WHAT TO WATCH TODAY
The New York Fed’s John Williams gives opening remarks at a financial services conference at 8:30 a.m. ET.
The Chicago Fed hosts a research conference as part of the Fed’s monetary policy strategy, tools and communications review. The Chicago Fed’s Charles Evans gives opening remarks 9:45 a.m. ET, Chairman Jerome Powell speaks at 9:55 a.m. ET, and governor Lael Brainardmoderates a panel on full employment at 3:45 p.m. ET.
U.S. factory orders for April are expected to fall 1.0% from a month earlier. (10 a.m. ET)
China’s Caixin composite purchasing managers index for May is out at 9:45 p.m. ET.
President Trump’s visit to London enters its second day.
U.S. factory-sector growth slowed in May as manufacturers confronted renewed trade tensions. The Institute for Supply Management’s manufacturing index fell to the lowest level since October 2016. Separately, figures from overseas indicate a broader slowdown in recent months, as trade tensions drag on businesses across global markets. JPMorgan ’s global manufacturing index slid in May to its lowest reading since late 2012 as production stagnated and new orders declined, Harriet Torry reports.
While the latest ISM figures show U.S. manufacturing is still expanding, there are other signs that American industry is bracing for tougher times. Job-cut announcements in auto and industrial goods sectors are the highest since 2010, according to executive search firm Challenger, Gray & Christmas.
The layoff announcements barely register in official U.S. employment data. But hiring in the manufacturing sector has tapered off. Employment in primary metals, a sector the Trump administration tried to protect with steel and aluminum tariffs, is actually down in recent months. The April jobs report, due out Friday at 8:30 a.m. ET, may indicate whether the manufacturing’s small jobs boom has fully stalled and should tell us how other sectors are faring.
Can’t You Hear, Can’t You Hear the Thunder?
Australia became the largest developed economy to cut interest rates in 2019. The Reserve Bank of Australia lowered borrowing costs for the first time in nearly three years to offset the effects of global trade tensions and a slowdown in China, James Glynn and Rachel Pannett report.
- Australia’s move follows a string of reductions by neighboring Asia-Pacific nations: Central banks in New Zealand, India, Malaysia and the Philippines have all lowered rates since April.
- Market participants, meanwhile, are growing more convinced thatthe Federal Reserve will cut rates later this year.
Eurozone inflation fell to its lowest level in more than a year. Consumer prices were just 1.2% higher in May than a year earlier, well below the European Central Bank’s 2% target, Paul Hannon reports.
- See You Thursday: The ECB’s rate-setting council meets Wednesday and Thursday to decide its latest response to a cooling economy. So far, policy makers have postponed an expected rise in their key interest rate and announced a fresh round of cheap loans for banks.
QUOTE OF THE DAY
“A downward policy rate adjustment may be warranted soon.” —St. Louis Fed President James Bullard
What Else We’re Following
The Trump administration rebuked China for “misrepresenting” why trade talks broke down. Chinese officials have chosen “to pursue a blame game misrepresenting the nature and history of trade negotiations between the two countries,” said the Office of the U.S. Trade Representative and the Treasury Department in a joint statement. The U.S. response to China’s policy statement suggests the two sides remain far from a deal.
Mexico is weighing its options to respond to the threat of U.S. tariffs. That includes possible retaliation, but the government would rather convince the Trump administration that a negotiated solution is in the best interest of both countries.
The Trump administration and Congress are targeting tech. Federal antitrust enforcers and lawmakers are poised to scrutinize the nation’s largest technology companies for potential anticompetitive practices, bringing a new regulatory focus to the vast markets for digital services. Google and Facebook appear to be closest to being in the agencies’ investigative crosshairs.
Q&A: Readers Respond
Q: If President Trump proceeds with tariffs against Mexico, what’s the economic fallout?
“A manufacturing recession (similar to 2016) is likely on the horizon if tariffs against Mexico ensue and the trade dispute with China is not resolved before year-end.” —Timothy Petersen
“I for one do not care if prices go up a little. I think America needs to send a message ‘we mean business.’ ” —Douglas Haraburd
“Prices go up as a result of paying more for the imported material. The U.S. company may ‘eat’ part of the increased cost but in the long run prices to the ultimate consumer go up. Therefore, some buyers will not buy or not buy as much. A slowdown in our economy results.” —Jake Reber
(Responses are lightly edited.)
WHAT ELSE WE’RE READING
Just how tight is the labor market? The University of Maryland’s Katharine Abraham and John Haltiwanger built a new model based on the ratio of vacancies to job searchers to help answer the question. “The best available evidence suggests that employer recruiting intensity was considerably lower at the end of 2018 than it had been in early 2001, implying a relatively lower level of labor market tightness during the later period.”
President Trump’s next trade war target: Chinese students. “The Trump administration has started taking aim at China’s best and brightest in the U.S., scrutinizing researchers with ties to Beijing and restricting student visas,” Bloomberg News writes in its China Next column.
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