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Jan 2, 2019

Real Time Economics: China Stumbles; Shutdown’s Rising Cost

The Wall Street Journal.
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Real Time Economics
Happy New Year! In today's issue, China's manufacturing contracts, the federal government shutdown enters its second week, the world is getting better. I'm Greg Ip, here to take you through the latest economic news.

China Seems to be in Trouble

Global stocks are starting 2019 on a weak note thanks to new signs of a slowdown in China. The China Caixin manufacturing purchasing managers index fell to 49.7 in December, according to data released Wednesday, the first time below 50 since May 2017, suggesting manufacturing is contracting, Mike Bird reports. China's official purchasing manager’s index for manufacturing, released Monday, was even worse, falling in December to a two-year low. Asia-Pacific stocks sank  1% to 3% and futures point to opening drops of more than 1% in the U.S.
China is being buffeted by both domestic and external factors: the government is trying to arrest its growing debts which is hitting fixed asset investment while its exports face U.S. tariffs, and threats of more. The latest weakness has boosted expectations of stimulus from Beijing and lends urgency to settling the trade dispute with the U.S.

What To Watch Today

Markit Manufacturing index for the U.S. is released at 9:45 a.m. ET.
November advance trade data from the Commerce Department has been postponed because of the government shutdown.

Top Stories

Shutdown’s Costs Pile Up

The government shutdown's impact is growing as 380,000 federal workers enter their second week without pay. Ernest Johnson, a federal geologist, has deferred his car payment, applied for unemployment benefits and alerted his landlord that he may have to break his lease.  Macroeconomic Advisers, a forecasting firm, lowered projected growth for both the fourth and first quarters by 0.1 percentage points, to 2.7% and 1.5%, on expectations of a three-week shutdown. Furloughed employees typically get back pay, but contract workers are out of luck.
Trump invited congressional leaders to the White House Wednesday to discuss ways to reopen the government, but Democratic leaders haven’t confirmed their attendance, Peter Nicholas and Natalie Andrews report. When Democrats take control of the House Thursday they plan to introduce six separate spending bills, one of which funds the Department of Homeland Security but not the Mexican border wall that President Trump insists on.

World's Doing Well - Really Well

If you’ve been preoccupied by bad news about global warming, political extremism or a tottering stock market, here’s the reality: The world is getting steadily better. Poverty around the world is plummeting; half the world is now middle class; and illiteracy, disease and deadly violence are receding, I write in this week’s column. The  problems the world faces are far smaller than those it has already overcome and can be solved the same way: not by betting on miracles but by patiently applying knowledge and tools we already possess.

Worker Demand Crashes Visa Website

A Labor Department website that processes visa applications for foreign seasonal workers crashed on New Year’s Eve. U.S. law caps annual H-2B visas at 66,000, split between winter and summer. In recent years, businesses have bumped up against the cap, increasing the competition to file first. It’s another frustration for employers, who have found it harder in a tightening labor market to find enough lawn mowers, crab pickers and other temporary workers, Lalita Clozell and Ruth Simon report.

Powell Should Meet with Trump, Says Greenspan’s Biographer

Aides hope to defuse Trump's anger at Fed Chairman Jerome Powell by arranging for the two to meet. I asked Sebastian Mallaby, author of The Man Who Knew: The Life and Times of Alan Greenspan, if this was a good idea. His answer, lightly edited:
Fed chairmen cannot ignore the political system, and should be willing to engage with it. Paul Volcker had a prickly view of contacts with the Reagan administration, and ultimately that was bad for Fed independence because he was forced out earlier than he would have chosen. Greenspan always held the politicians close, even while pursuing independent monetary policy, most clearly in 1991-2. Powell could use a meeting with Trump to tell him politely that the Fed will be reasonable and data dependent but can't promise not to hike. Refusing to meet POTUS is both provocative and inconsistent: Fed chairs routinely meet the president's representatives, so why not meet the man himself?

Europe Plays for Time on Trade War

The European Union and U.S. have missed their own deadline to reduce tariffs and American patience with the EU’s trade surplus may be wearing thin. A senior European diplomat said the EU hopes to appease Mr. Trump until he either gives the 28-member bloc a pass or leaves office. “The objective is to keep the process alive and keep Washington happy,” the diplomat said. “How long can this go on? Very difficult to say.” Gordon Sondland, U.S. ambassador to the EU, tells WSJ's Emre Peker: “So long as the EU leadership plays the delay game, the more we’ll have to use leverage."

Trump Didn’t Kill the Global Trade System. He Split It in Two

The world trading system is realigning into two distinct systems. One, between the U.S. and its traditional, democratic trading partners, looks a lot like the system that has prevailed since the 1980s: free trade with a smattering of quotas and tariffs like those President Reagan once deployed, I wrote last week in my analysis of trade under Mr. Trump. The second reflects an emerging rivalry between the U.S. and China carrying echoes of the Cold War as the U.S. seeks to undo China’s integration into the world. The big questions: How far does the U.S. plan to decouple from China, and can it bring along allies alienated by Trump’s adversarial tactics?

Quote of the Day

Banking now is like a prostitution racket run by pimps. There’s just too much money involved.
Greek-born banker Minos A. Zombanakis, credited with pioneering the Euromarkets, in a 2016 interview. He died on Dec. 22.

What Else We are Reading

Trump has “a lot of flexibility” and “complete discretion” in deciding whether to impose tariffs on auto imports, Commerce Secretary Wilbur Ross told the Financial Times. The commerce department is finalizing a report, due by Feb. 17, on whether imported cars and car parts represent a threat to U.S. national security.
Jair Bolsonaro has announced Brazil’s “liberation from socialism, inverted values, the bloated state and political correctness” after being sworn in as the country’s 42nd president, the Guardian reported.
When U.S. Trade Representative Robert Lighthizer, who is leading negotiations with China, senses that anyone—even Mr. Trump—might be going a little soft on China, he opens a paper-clipped manila folder he totes around and brandishes a single-page, easy-reading chart that lists decades of failed trade negotiations with Beijing,  the New York Times reports, citing administration officials.

Up Next - Thursday

Nancy Pelosi is expected to reclaim the speakership when the House of Representatives begins the 116th Congress Thursday with Democrats in control.
The Institute for Supply Management releases its December manufacturing activity index.

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