This post is by Jeffrey Sparshott from Real Time Economics
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President Trump says tariffs on Mexico start Monday, Greg Ip likens a full-scale trade war to 1973’s Arab oil embargo, and a 50-year low for unemployment masks deep structural changes in the labor market. 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.
President Trump said 5% tariffs on goods from Mexico will start Monday unless the two sides come closer to a deal on immmigration, Josh Zumbrun, Louise Radnofsky and Juan Montes report.
- Mr. Trump this morning said the U.S. was having “a great talk” with Mexico. “We’ll see what happens. But something pretty dramatic could happen. We’ve told Mexico the tariffs go on. And I mean it, . And I’m very happy with it.”
- Mexico’s foreign minister, Marcelo Ebrard, said Mexico is “optimistic because we had a good meeting” and he believes that tariffs can still be averted.
- The tariffs, if implemented, would affect billions in imports, including 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. Tensions over the looming tariffs threaten to tilt Mexico’s economy into recession.
- Absent a deal, the tariffs could rise as high as 25% on Oct. 1. Deutsche Bank estimates that would raise the price of vehicles sold in the U.S. by an average of $1,300 each.
WHAT TO WATCH TODAY
The European Central Bank releases a policy statement at 7:45 a.m. ET, and ECB President Mario Draghi holds a press conference at 8:30 a.m. ET.
The U.S. trade deficit for April is expected to widen to $50.8 billion from $50.0 billion a month earlier. (8:30 a.m. ET)
U.S. jobless claims are expected to fall to 212,000 from 215,000 a week earlier. (8:30 a.m. ET)
U.S. productivity for the first quarter is expected to be revised to a 3.5% gain from a 3.6% gain. (8:30 a.m. ET)
The U.S. quarterly services survey for the first quarter is out at 10 a.m. ET.
President Trump meets with French President Emmanuel Macron as leaders mark the 75th anniversary of D-Day.
The Dallas Fed’s Robert Kaplan speaks at Boston College at 8:40 a.m. ET, and the New York Fed’s John Williams speaks at the Council on Foreign Relations at 1:00 p.m. ET.
The Bank of Japan’s Haruhiko Kuroda speaks at a forum in Tokyo at 11:50 p.m. ET.
For the U.S. economy, a full-scale trade war would be a supply shock akin to the 1973 Arab oil embargo. The U.S. until recently was as reliant on cheap manufactured products from China as it was in the 1970s on cheap oil from the Middle East. But just as the U.S. came to regret its dependence on Arab oil, many now want the U.S. to disentangle its economy from China’s. And, as in the 1970s, disrupting those bonds has a price, Greg Ip writes.
- As with the oil shock, adjustments could take years and add countless inefficiencies, chipping away at productivity.
- But by breaking the trade, investment and knowledge chains that tie the two economies together, it may in the long run make the U.S. less vulnerable to Chinese influence, which is what the Trump administration wants.
Oil’s Bear Market
U.S. crude futures sank into a bear market on Wednesday as global-growth worries were compounded by fears of a supply glut. The declines highlight investors’ fears that trade tensions will further undermine economic expansion around the world. At the same time, absent a recession, lower fuel prices tend to support economic activity, Amrith Ramkumar reports. Oil prices rebounded Thursday morning.
This is Not Your Father’s Labor Market
The U.S. unemployment rate hit a 50-year low in April, a clear sign of the labor market’s strength as the economic expansion enters its 10th year. But a lot has changed, especially who’s participating in that prosperity.
- Men: Back in 1969, prime-age men were all about as likely to be working or looking for work, regardless of education. While college grads today are nearly as likely to join the labor market as 50 years ago, those with less education are not—possibly because there are fewer low-skilled jobs and possibly because low-skilled jobs pay poorly.
- Women: The situation is markedly different for prime-age women, who today are more likely to hold down a job than 50 years ago regardless of education. The rise in participation is especially sharp for high-school grads and women with some college.
We’ll have more ahead of the jobs report Friday morning, and a special edition of the newsletter after the numbers are out.
The Enemy of My Enemy
Moscow and Beijing are cementing their political, economic and military ties. Chinese President Xi Jinping led an entourage of more than 1,000 Chinese officials and businessmen to Russia for a state visit and the country’s flagship annual investment forum. After three-hour-long talks with Mr. Xi, Russian President Vladimir Putin said relations between the two countries entered “a new era.”
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What Else We’re Following
California’s immigrant labor shortage has run smack into its housing shortage. Motels, apartments and single-family homes in California’s Central Coast agricultural region are being converted to dormitory-style residences for migrant farmworkers, tightening the supply of housing and pushing up already high rents.
Sen. Bernie Sanders is taking on Walmart over worker pay. The Vermont lawmaker appeared at Walmart’s annual shareholder meeting Wednesday to push the retail giant to raise its minimum wage, the latest sign that it can’t fully shake a reputation—in some quarters—as a bad place to work.
The U.S. service sector expanded last month, providing key fuel for the economy as global growth cools and trade tensions rise. The Institute for Supply Management said its nonmanufacturing index—tracking industries including health care, finance and restaurants—rose to 56.9 in May from 55.5 in April. A number above 50 indicates expansion.
India’s central bank on Thursday lowered its key lending rate for the third time this year. India’s growth slipped to a five-year low of 6.8% for the fiscal year ended March 31. Boosting the economy will be a key challenge for Prime Minister Narendra Modi, who was last week sworn in for another five-year term in power.
What Else We’re Reading
Pressure is mounting for the Federal Reserve to cut interest rates. “But because the Fed alone cannot address important multi-dimensional economic, financial, institutional and political challenges, this is unlikely to materially alter much the mounting longer-term risks to economic prosperity and financial stability,” Allianz SE chief economic adviser Mohamed El-Erian writes at Bloomberg Opinion.
Boris Johnson, potentially they next U.K. prime minister, won’t rule out a hard Brexit. “But while the majority of centrist Tories will not countenance a no-deal exit, he said that any government must prepare for it. ‘The more determined we are to pursue no-deal, the less likely we will have to deploy it,’ ” Sebastian Payne reports in the Financial Times.
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