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Dec 14, 2018

Real Time Economics: What’s the Biggest Risk for the Economy?

The Wall Street Journal.
Percentage logo.
Real Time Economics
Which do you think is the bigger economic wild card for 2019: The White House or the Federal Reserve?
Good morning. Jeff Sparshott here to take you through key developments in the global economy. We'll look at China's slowdown, shifting supply chains, another bad sign for the housing market, growing U.S. budget deficits and what exactly the European Central Bank got for its $3 trillion bond-buying spree. Let us know what you think by replying to this email.

2019's Big Threat: Trade

Economists think a trade war between the U.S. and China is the biggest threat to the U.S. economy in 2019. Nearly half who responded to a survey by The Wall Street Journal said a U.S. dispute with Beijing was a greater risk than macroeconomic or financial disruptions, Harriet Torry reports.
President Trump, in contrast, recently told the Journal the Federal Reserve was the biggest risk to the economy, because it has been raising interest rates. Just 7.3% of economists, or four respondents in total, agreed that Fed rate increases were the biggest threat in 2019. 

What to Watch Today

U.S. retail sales for November, out at 8:30 a.m. ET, are expected to rise 0.1% from the prior month.
U.S. industrial production for November, out at 9:15 a.m. ET, is expected to rise 0.3% from a month earlier.
Markit's U.S. flash manufacturing index for December, out at 9:45 a.m. ET, is expected to inch down to 55.0 from 55.3 at the end of November. The flash services index is expected to slip to 54.5 from 54.7.
European Union leaders meet Thursday and Friday to discuss Brexit, budget, migration and other issues.

Top Stories

China Slows

China’s downturn deepened last month. Industrial production, weighed down by automobile makers and property markets, advanced at the slowest pace since early 2016. Growth in retail sales fell to the lowest level in more than 15 years.
“A downward cycle hasn’t finished yet, and we’ll probably see more weakness in the first half of the year,” said Standard Chartered's Shuang Ding.

Winners and Losers

Not everyone is a loser in a U.S.-China trade war. As tensions intensify, global companies are actively diversifying their supply chains away from China. This is good news for countries receiving that investment and for the banks and supply-chain consultants that are helping with the transition. Popular destinations include Vietnam, Indonesia the Philippines and Cambodia, Aaron Back reports.
Case study: Steve Madden CEO Edward Rosenfeld said the company is “aggressively shifting production out of China to other countries, primarily Cambodia.”

What Happens In Vegas

The national housing slowdown is spreading to markets like Las Vegas and Phoenix, where prices still haven’t reclaimed their pre-crisis peaks. After home values rose sharply this year, the Las Vegas market has shifted in recent weeks. Prices fell slightly in November while the inventory of unsold homes has roughly doubled compared with a year earlier, Laura Kusisto reports.
This year’s slowdown began in some of the hottest markets like Seattle and Denver. Now these cities are looking less like an exception and more like leaders of a broader national slump. 

Mo' Money Mo' Problems

The U.S. budget gap widened in the first two months of the fiscal year as tax collections lagged behind federal outlays, Kate Davidson reports. Customs duties during October and November rose 86% to $11.8 billion due to an increase in tariffs. But that was hardly enough to offset the month's $205 billion shortfall. The deficit is headed toward $1 trillion this fiscal year.

A Trillion Here, A Trillion There

The European Central Bank confirmed Thursday it is ending new bond purchases under its quantitative easing program after nearly four years and 2.6 trillion euros ($3 trillion). So what did they buy? Higher inflation, but uneven effects on growth and unemployment, Pat Minczeski and Brian Blackstone write.
The eurozone economy is on more solid footing now than it was when the ECB announced the program. But recoveries have been disjointed, with Germany leading the way and Italy lagging behind.

Ditto for unemployment.

One clear effect of QE has been on inflation, which is back to the ECB’s target near 2%.
Here’s how ECB President Mario Draghi summed it up: “Especially in some parts of this period of time, QE has been the only driver of this recovery.”

Quote of the Day

We are moving into a state of stagflation, which we haven't seen in this country for quite a while. It's slow. It's progressive.
Former Fed Chairman Alan Greenspan, speaking on Fox Business News

What Else We're Reading

Nominally communist China isn't exactly like the actually communist Soviet Union. But it's economy is more Soviet than you think. "And despite its capitalist trappings, the Communist Party is piloting China's economy in a direction similar to that of the Soviet Union in its twilight," The Economist writes.
Mandatory handgun purchase delays cut suicide rates. "We find that the existence of a purchase delay reduces firearm-related suicides by between 2% and 5% with no statistically significant increase in non-firearm suicides. Purchase delays are not associated with statistically significant changes in homicide rates," Griffin Edwards, Erik Nesson, Joshua Robinson and Fredrick Vars write in The Royal Economic Society's Economic Journal.
The U.S. budget deficit has never been so high when the economy was so strong. "Rarely have deficits risen when the economy is booming. And never in modern U.S. history have deficits been so high outside of a war or recession (or their aftermath)...Now would be the time to act: today's relatively strong economy offers policymakers the opportunity to reduce deficits without fear of worsening a recession or disrupting a fragile recovery," the Committee for a Responsible Federal Budget writes.

Source: The Wall Street Journal