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Jan 31, 2019

Real Time Economics: The Fed Chills Out; China Sends Shockwaves

The Wall Street Journal.
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Real Time Economics
The Fed put interest rate increases on hold. Just how fragile is the economy?
Good morning. Jeff Sparshott here to take you through the day's economic news, including how a slowdown in China is sending shockwaves around the world, recession in Italy and slack in Europe, and what to expect in Friday's jobs report. Send us your questions, comments or suggestions by replying to this email. 
 

Follow the Leader

It's not just the Fed. A slowing global economy and low inflation has central banks around the world rethinking plans to gradually pull back on financial stimulus. The reversal could soothe markets and support interest sensitive sectors like housing and autos, Brian Blackstone reports.
What's happening? The Federal Reserve had raised interest rates nine times since 2015. On Wednesday it signaled that it was done. The European Central Bank last week opened the door to new stimulus. Central banks in South Korea, Malaysia and Indonesia kept rates unchanged after raising them in 2018. Canada and England are on hold. There's no end in sight for the Bank of Japan's asset purchases and negative policy rate. And China’s central bank has taken steps to improve credit to businesses.

Pause Button

Central bankers have geared their messages toward pausing rather than imminently launching new stimulus. That’s because they doubt the global economy is going beyond a slowdown toward outright recession. But if the economy falters, the Fed is best equipped to slash rates. Europe and Japan have negative rates, giving central banks there little recourse but to buy large amounts of debt, or lend money to banks, if needed. 

What to Watch Today

U.S. jobless claims hit their lowest level since November 1969 in the week ending Jan. 19. They are expected to rise to 215,000 in the latest week. (8:30 a.m. ET)
The U.S. employment-cost index for the fourth quarter is expected to increase 0.8% from the prior quarter. (8:30 a.m. ET)
The Chicago purchasing managers index for January is expected to drop to 61.4 from 65.4 a month earlier. (9:45 a.m. ET)
U.S. new-home sales for November are expected to rise to an annual pace of 571,000 from 544,000 a month earlier. (10 a.m. ET)
President Trump meets with the China’s Vice Premier Liu He at 3:30 p.m. ET.

Top Stories

Don't Stop 'Til You Get Enough

The Fed’s monetary tightening hasn’t just paused; it may be over. That would be a breathtaking pivot since December. Yet the motivation remains somewhat mystifying: What changed in the past six weeks to justify it? The WSJ's Greg Ip highlights two possibilities:
1.) Perhaps, having been pilloried in December for sounding too hawkish, Fed Chairman Jerome Powell is compensating in a dovish direction. That could create a communications problems down the road. 2.) If the Fed thinks it’s done even if the economy performs as expected, that raises another, troubling possibility: that the neutral rate, adjusted for inflation, is only about 0.5%, compared with 2% in the past. If real rates above 0.5% are a threat, that suggests the economy is fundamentally more fragile than in the past.

China Sneezes

China’s slowing economy is sending shock waves around the world. Beijing’s struggle with domestic weaknesses, including a huge debt buildup, overinvestment and constraints on private businesses, are combining with trade tensions to drag down growth in the world’s second-largest economy to its slowest rate in three decades, Chuin-Wei Yap and William Boston report.
The falloff in factory production and consumption is taking a toll on how much China buys from companies in Asia, the U.S. and Europe. Over the last decade, China accounted for a fifth of the total growth in global exports and imports, and played a key role in supporting demand during periods of weakness. The result: Economic frailty in China now is felt everywhere. 

Could Be Worse

China’s factory activity remained weak in January, with soft domestic demand dragging down Beijing’s efforts to arrest an economic slowdown. The official manufacturing purchasing managers’ index rose a tick to 49.5, from 49.4 in December. While a slight improvement, a reading below 50 signals a contraction for the second month in a row.

Service with a Smile

The Trump administration this week is pushing to slash the U.S. trade deficit with China. But selling more pork, soybeans, natural gas and other commodities is only part of the solution. There is much more potential in business services—such as banking, insurance and consulting—where the U.S. has a significant comparative advantage and runs a growing trade surplus, Josh Zumbrun reports.
But...China places heavy restrictions on the ability of foreign companies to invest in these sectors. Even though the services trade is likely to grow with natural U.S. advantages, observers are pessimistic that the current round of talks will lead to a breakthrough. 

Europe Slows, Italy Stumbles

The eurozone economy grew at the weakest pace in four years during 2018, Italy slipped into a technical recession and Germany slashed its forecast for 2019. The eurozone's slowdown feeds growing concerns about the strength of the global expansion, which appears to be faltering across a number of major countries for a variety of reasons, Paul Hannon reports.
Italy's economy contracted in the final three months of 2018, the second straight quarter of declining output.

The Streak

The U.S. economy, by contrast, is chugging ahead. U.S. employers are expected to add 170,000 jobs to payrolls in January, which would mark 100 straight months of job creation. The streak, which began in Oct. 2010, is more than twice as long as the next longest stretch of continuous employment growth. But the intensity of hiring is relatively lackluster. Employers have added an average of 201,000 jobs per month during the current span. Only hiring during the expansion that ended in 2007—sometimes called the jobless recovery—was weaker. —Eric Morath
The monthly U.S. jobs report is out at 8:30 a.m. ET on Friday. Here’s what else to watch.

Let It Grow

The U.S. economy’s brief flirtation with 3% growth is over for now, cut short by a dimming global outlook, market tremors and sluggish business investment. Gross domestic product grew at a 2.6% annual rate in the fourth quarter, economists estimate in a Wall Street Journal survey. Output will grow at a 1.8% clip in the first quarter and a 2.5% rate in the second quarter, Josh Mitchell reports. That would average out to 2.3% growth for the nine-month period through this June. The Journal conducted the poll of 50 economists this week in lieu of the Commerce Department’s report on fourth-quarter gross domestic product, originally scheduled for Wednesday. 
 

Quote of the Day

Individuals earning the most can afford to pay more, and I have no problem paying higher taxes to address some of the fundamental challenges and inequities in our society.
JPMorgan Chase CEO Jamie Dimon, in a statement to Bloomberg

What Else We're Reading

Craigslist reduced violence against women. "We estimate that [Craigslist’s erotic services section] reduced the female homicide rate by 10-17 percent, with the reduction driven by street prostitution moving indoors and by helping sex workers to screen out the most dangerous clients," economists Scott Cunningham, Gregory DeAngelo and John Tripp write. The 2018 Fight Online Sex Trafficking Act led to the closure of such sites.
New neighborhood supermarkets help low-income children slim down. "Therefore, improvement in healthy food access could at least help reduce childhood obesity rates among certain population groups," Di Zeng, Michael Thomsen, Rodolfo Nayga  and Judy Bennette write in Economics & Human Biology.
 

Up Next: Friday

Eurozone consumer prices for January are out at 5 a.m. ET.
U.S. nonfarm payrolls for January are expected to increase by 170,000 from the prior month, a marked slowdown from December's 312,000 gain. The unemployment rate is expected to hold steady at 3.9%. (8:30 a.m. ET)
The Dallas Fed's Robert Kaplan participates in a moderated Q&A at 9:45 a.m. ET.
Markit's manufacturing purchasing managers index for January is expected to tick down to 54.8. (9:45 a.m. ET)
The Institute for Supply Management manufacturing PMI for January is expected to inch down to 54.0 from 54.1 a month earlier. (10 a.m. ET)
U.S. construction spending for November is expected to rise 0.2% from the prior month. (10 a.m. ET)
The University of Michigan's consumer sentiment index for January is expected to climb to 91.0 from 90.7 earlier in the month. (10 a.m. ET)
U.S. auto sales for January are expected to slow to an annual pace of 17.2 million from 17.55 million a month earlier.

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