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Jan 24, 2019

Real Time Economics: Will the U.S. Economy Come to a Screeching Halt?

The Wall Street Journal.
Percentage logo.
Real Time Economics
The partial government shutdown, now into its 34th day, may do lasting damage to the U.S. economy. 
Good morning. Jeff Sparshott here to take you through key developments in the global economy. We'll also look at the latest out of Davos, Europe's economic malaise, where U.S.-China tensions linger, and the (World Bank) presidential race. Let us know what you think by replying to this email.
 

How Low Can You Go

The Trump administration’s top economist said the U.S. economy may not grow at all in the first quarter if the shutdown continues. “It is true that if we get a typically weak first quarter and then have an extended shutdown, that we could end up with a number that’s very, very low,” Council of Economic Advisers Chairman Kevin Hassett said on CNN. The White House estimates the economy loses “a little more than” one tenth of a percentage point of growth for each week that the partial shutdown persists, Paul Kiernan and Vivian Salama report.

Damage Control

Mr. Hassett said the economy should recover any lost ground when the government reopens. Other economists are less sanguine. In an economy powered by spending and investment, which boil down to little more than consumers’ and businesses’ confidence in their future job and growth prospects, an extended shutdown could threaten broader collateral damage.
"Estimates commonly cited in the media (e.g. subtract 0.1% from quarterly GDP growth for every week or two weeks of shutdown) are misleading in that they are linear. We believe the longer the shutdown goes: 1) the impacts get bigger, and 2) the impacts are more permanent," says Wilmington Trust CIO Tony Roth. 

What to Watch Today

The World Economic Forum annual meetings are in Davos. You can follow the WSJ's coverage here.
The European Central Bank releases a policy statement at 7:45 a.m. ET.
U.S. jobless claims are expected to rise to 218,000 from 213,000 a week earlier. (8:30 a.m. ET)
Markit's U.S. flash manufacturing and services indexes for January are out at 9:45 a.m. ET.
The Conference Board's leading economic index for December is expected to fall 0.1%. (10 a.m. ET)
The Senate is scheduled vote on separate proposals to end the shutdown. Neither is expected to pass, but it could be the beginning of the end of the stalemate. Follow the WSJ's latest shutdown coverage here.

Top Stories

China to U.S.: Step Off

China’s Vice President Wang Qishan delivered a thinly veiled rebuttal of U.S. attacks on its technology companies and policies at the World Economic Forum. “It is imperative to respect national sovereignty and refrain from seeking technological hegemony,” Mr. Wang said in Davos. He condemned “conducting, shielding or protecting technology-enabled activities that undermine other countries’ national security.”
The remarks appeared to be a response to escalating U.S. pressure against China and its technology companies, notably Huawei Technologies. The U.S. has discouraged the use of Chinese-made equipment and pressed other countries to do the same, Paul Hannon and Greg Ip report.

Stuck In the Middle

Canada’s ambassador to China said the U.S. extradition case against Huawei's CFO is no sure thing. The remarks caught political and legal watchers off guard and underscore the growing unease in Ottawa about its role in the feud between Washington and Beijing, Paul Vieira reports. Canadian authorities arrested Huawei CFO Meng Wanzhou at the behest of U.S. authorities. Ms. Meng faces charges in the U.S. related to violations of Iranian sanctions, which she has denied.

Bring In 'Da Funk

Europe's political funk is holding back its economy. The continent is still in shock from the financial crisis that started more than a decade ago. In its wake, it has left “polarization, reactionary populism and inequality,” Spain’s Prime Minister Pedro Sánchez told the World Economic Forum.
The result: Brexit, France’s street protests, euroskeptic governments in Italy and Eastern Europe, and a backlash against immigration. That's clouded the path forward, while also threatening to undermine the continent's recovery, Stephen Fidler reports. 

Lowdown on the Slowdown

Underscoring Europe's malaise, key gauges showed the eurozone economy continues to slow. IHS Markit said its composite Purchasing Managers Index—a measure of activity in the manufacturing and services sectors—fell to its lowest level in five-and-a-half years, Paul Hannon reports. "Both the manufacturing and service sectors are close to stagnation," said Chris Williamson, chief business economist at IHS Markit.

Sacre Jaune!

France's "yellow-vest" protesters want to move from the streets to the halls of power. Under the Rally for Citizen Initiatives banner, 79 yellow-vest protesters plan to run in the European Union elections in May, Noemie Bisserbe reports. The gilets jaunes’ entry into European politics aims to establish its supporters as a durable threat to the pro-business agenda of French President Emmanuel Macron.

Ford Tough

Ford Motor’s bottom line suffered last year as the auto maker lost money in China, Europe and other regions. The lone bright spot: the U.S. Ford financial chief Bob Shanks said 2019 could be an improvement over last year, but that many variables remain out of the company’s control, including trade uncertainty and commodity costs. “The external environment has been quite volatile. Policy matters have been unpredictable,” Mr. Shanks said. Tariffs, for example, cost the company more than $750 million last year, Mike Colias reports.

First Female President

The race to select the next president of the World Bank could be shaped by a strong international desire for the institution to have its first female president. The White House hasn’t settled on a pick, but diplomats, former World Bank officials and close observers of the bank agree that were Washington to nominate a woman, it would discourage other countries from challenging the American pick, Josh Zumbrun reports.
Several Americans could fit the bill. The White House has confirmed it is considering former PepsiCo CEO Indra Nooyi. Another candidate could be Dina Powell, a Cairo-born Goldman Sachs executive who was former deputy national security adviser for President Trump.
 

Quote of the Day

I have never seen people as depressed in Davos as this year.
Investec Group co-CEO Hendrik du Toit, in an interview with CNBC

What Else We're Reading

Are stay-at-home moms more common among the rich or poor? Yes. "Among mothers married to husbands who work full-time and year-round...there is a U-shaped curve between mothers’ chances of being out of the labor force and their husbands’ earned income. That is, the real housewives of America are most likely to be found among women married to men earning just a little or quite a lot," Robert VerBruggen and Wendy Wang write at the Institute for Family Studies
Airbus has a stern warning about a potential no-deal Brexit. “Please don’t listen to the Brexiteers’ madness which asserts that, because we have huge plants here, we will not move and we will always be here. They are wrong,” Chief Execitive Tom Enders said. (via the Financial Times)
U.S. universities are ditching telecom equipment made by Huawei Technologies. "These actions...signal universities’ efforts to distance themselves from Chinese companies that for years have supplied them with technical equipment and sponsored academic research, but which are now in the crosshairs of the Trump administration," Heather Somerville and Jane Lanhee Lee report at Reuters.
 

Up Next: Friday

U.S. durable goods orders and new home sales for December are delayed because of the shutdown.

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