This post is by Jeffrey Sparshott from Real Time Economics
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Low inflation gives the Fed space to cut interest rates, the U.S. budget deficit is ballooning, and investors are wary of big Western economies. 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.
No Price Pressure
U.S. inflation slowed in May, restrained by weakening price pressures almost across the board. The consumer-price index, which measures what Americans pay for household goods and services, rose just 1.8% from a year earlier despite a strong labor market and moderate wage gains. The report is the last broad look at inflation before Federal Reserve officials meet Tuesday and Wednesday. Policy makers are debating whether to cut interest rates to bolster a U.S. economy, if not next week, then in July or later, David Harrison reports.
Muted inflation gives the Fed cover to cut interest rates. The central bank’s preferred inflation measure runs a little cooler than the CPI, so it likely fell short of the central bank’s 2% target last month. Economists at Goldman Sachs, for example, estimate it was up just 1.4% overall, Justin Lahart writes.
- Soft price gains on their own wouldn’t count as a reason to cut rates—not with the stock market near record highs and the unemployment rate at its lowest level since 1969. And as it stands, there probably hasn’t been quite enough evidence that the economy is at risk for it to immediately do so.
- But Fed policy makers lately have been more concerned about inflation falling shy of their target than in the past. Add in worries that global uncertainty and trade disputes are beginning to eat into U.S. growth, and the low inflation reading makes it easier for the Fed to signal a possible rate cut in July.
WHAT TO WATCH TODAY
U.S. jobless claims are expected to fall to 215,000 from 218,000 a week earlier. (8:30 a.m. ET)
U.S. import prices for May are expected to fall 0.3% from a month earlier. (8:30 a.m. ET)
The WSJ’s survey of economists is out at 10 a.m. ET.
China’s industrial output and fixed-asset investment for May are expected to hold steady. Retail sales growth likely recovered from multiyear lows. (8 p.m. ET.)
How to Adult
Alongside full employment and stable prices, the Federal Reserve has another, lesser known mandate: to be the adult in the economy. That’s especially true when events are whipsawed by unpredictable actors at home and abroad, Greg Ip writes.
- Fed Chairman Jerome Powell’s job isn’t just deciding whether to cut interest rates but also ensuring the decision is seen as deliberate, sensible and apolitical. This is plenty hard already: Mr. Powell is still mastering how to speak without being misinterpreted, while investors, pundits, and President Trump stand ready to savage him for any misstep.
Remember When Deficits Mattered?
The U.S. budget deficit is heading toward $1 trillion. The gap widened to $739 billion during the first eight months of the fiscal year, up 39% from a year earlier, Kate Davidson reports. Deficits typically shrink when the economy is strong. But the 2017 tax cuts constrained revenues and a two-year congressional budget deal boosted federal spending. Higher tariffs haven’t been nearly enough to fully offset shortfalls elsewhere—the Treasury collected $46 billion in customs duties from October through May.
Congress Asks for a Raise
Congress is considering a cost-of-living increase for itself for the first time since 2009. A 1989 law mandates a 2.6% annual pay bump for members of Congress, but appropriators have suspended the raises for the past decade, Gabriel T. Rubin reports. Rank-and-file House and Senate members earn a salary of $174,000.
“I do not want Congress, at the end of the day, to only be a place that millionaires serve,” House Minority Leader Kevin McCarthy (R., Calif.) said.
Go East, Young Man
Global tensions and signs of economic weakness are dimming the appeal of investing in large Western economies. South Asia is benefiting, Tom Fairless and Paul Hannon report.
- Foreign investment in the U.S. fell 9% to $252 billion last year, according to United Nations data. The likely culprits: Uncertainty about American economic policy, increased scrutiny of foreign investment, and China’s discouragement of large overseas transactions in real estate and entertainment.
- Germany saw foreign investment fall 30% last year, knocking it below Spain, Canada and France. The export-focused economy has been caught in the crosscurrents of trade tensions between the U.S. and China.
- Investment in Vietnam, Thailand, Bangladesh, India, Singapore and Indonesia all rose last year. Those increases may not be sustained, in part because the countries don’t have facilities to handle much larger exports, and in part because the U.S. may respond with fresh tariffs.
What Else We’re Following
For the first time since at least 1965, less than half of all foreigners living in the U.S. illegally are from Mexico, according to a new study from the Pew Research Center. The change reflects a decadeslong shift in which more migrants are fleeing violence and poverty in Central America while fewer Mexicans are coming to the U.S. for work.
U.S. mortgage applications posted their biggest weekly rise in more than four years, according the Mortgage Bankers Association. Refinances were up 47% from the previous week and purchase applications climbed 10%. The big reason: Rates for 30-year fixed mortgages have fallen below 4% in recent weeks for the first time since 2017. They were most recently at 3.82%, according to government mortgage giant Freddie Mac.
Employers are helping workers build emergency funds. A growing number of employers—such as Levi Strauss, Home Depot and Kroger—are helping workers start emergency savings accounts, reflecting concern over the impact money problems are having on productivity levels and workers’ ability to retire.
TWEET OF THE DAY
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WHAT ELSE WE’RE READING
President Trump isn’t the only one demanding the Federal Reserve cut rates. “A similar push is coming from a group founded this year by three left-leaning millennials—albeit for very different reasons. … The new group, Employ America, wants central bankers to place a higher priority on fostering job growth and sees looser monetary policy as a way to protect workers as the economy shows early signs of slowing. It is using research, and Twitter, to make its case,” Jeanna Smialek reports in the New York Times.
China is preparing to ride out a trade war. “Informing part of the decision to move on is the Chinese view of Trump as an erratic partner after four months of negotiations over a broad trade agreement broke down in May. U.S. officials blamed China for reneging on commitments; the Chinese blamed Trump’s ever-changing demands. That view has been bolstered by Trump’s retreat last week on his threat of tariffs as high as 25% on Mexico—even after negotiating an updated North American Free Trade Agreement that enshrined tariff-free trade,” Shawn Donnan reports at Bloomberg.
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