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WSJ I Real Time Economics: Recession Odds Are Rising.
Real Time Economics
Economists are raising the odds of a U.S. recession, the partial government shutdown enters its 21st day, the Fed is going to use a little patience and high-level trade talks with China are set for the end of the month. Good morning. Jeff Sparshott here to take you through key developments in the global economy. Let us know what you think by replying to this email.
Economists see a growing risk of recession in the U.S. The big worries: trade tensions with China, rising interest rates and market volatility. Economists surveyed by The Wall Street Journal said there was a 25% chance of a recession in the next year, the highest level since October 2011. More than half, 56.6%, said they expected a recession to start in 2020, a presidential election year, while another 26.4% expect a recession in 2021, Harriet Torry reports.
The WSJ's Josh Zumbrun notes that while economists didn't have a consensus forecast for the last recession, they did sharply raise the odds of one in 2007. It's not a meaningless warning.
What to Watch Today
The U.S. consumer-price index for December is expected to fall 0.1% from a month earlier and rise 1.9% from one year earlier. Core prices, which exclude food and energy, are expected to rise 0.2% on the month and 2.2% on the year. (8:30 a.m. ET)
Soft and steady inflation is a key reason the Fed is staying patient on interest rates.
U.S. budget figures for December may be delayed due to the shutdown. (2 p.m. ET)
President Trump is still weighing whether to declare a national emergency to get a border wall built and end a partial government shutdown. White House officials are divided, while efforts on Capitol Hill to cobble together a compromise collapsed, Michael C. Bender, Kristina Peterson and Peter Nicholas report.
The shutdown will become the longest in U.S. history if it lasts until Saturday.
Truth or Consequences
JPMorgan Chase lowered its forecast for first-quarter economic growth to 2% from 2.25%. “The primary reason for the downward revision is the economic impact of the ongoing shutdown of the federal government,” chief economist Michael Feroli says.
Fed Chairman Jerome Powell: “A longer shutdown is something we haven’t had. I do think that would show up in the data pretty clearly.”
The shutdown is also distorting data or leaving policy makers all together in the dark. Commerce Department economic reports, for example, aren't coming out. That meant no report Monday on national factory orders or Tuesday on the U.S. trade deficit. It could mean no report next week on retail sales and at the end of the month on fourth-quarter GDP.
The Labor Department is funded, so its employment report will come out Feb. 1, as scheduled. But it could be ugly—with an elevated unemployment rate and scant jobs growth or possibly even losses for the first time in more than eight years. Federal workers who are neither working nor getting paid count as unemployed. That tots up to about 380,000 Americans tossed into the jobless pool. Depending on how long the shutdown lasts, that could mean a net employment loss for the first time since 2010 and an unemployment rate jump to about 4.1% from 3.9%. There are caveats: the report is based on a survey, not a hard count so the federal worker tally could vary; if the shutdown ends and workers get back pay, payroll losses would likely be erased.
The global economy is not immune to uncertainty generated by trade wars, Brexit and other disruptive policies. The IMF's Hites Ahir and Davide Furceri, and Stanford University's Nicholas Bloom built an uncertainty index that measures economic and political developments against market volatility and economic growth. The verdict: Uncertainty has risen markedly since 2012, with U.S. policy helping lead a resurgence in 2018.
"The world is struggling with increasingly polarized and unpredictable politics, and it’s holding back growth," Mr. Bloom said. "Trade wars, the budget shutdown and Trump attacks on the Fed are key factors behind the stock-market slump. This is leading to a rapidly increasing risk of a recession."
All We Need Is Just a Little Patience
Federal Reserve Chairman Jerome Powell said the central bank would be patient in raising interest rates this year after global growth worries gripped financial markets in recent weeks. “We are in a place where we can be patient and flexible and wait and see what does evolve,” he said. He used the word “patient” or “patiently” five times during a Thursday interview when referring to the path of interest-rate increases, Nick Timiraos reports.
The markets and economists are listening. A WSJ poll found roughly 60% of the economists expected Fed officials would leave their benchmark federal-funds rate unchanged through May or longer.
Honey, I Shrunk the Portfolio
Discussions inside the Federal Reserve are heating up over the central bank's portfolio of bonds and other assets. The talks suggest the Fed is leaning toward carrying a larger portfolio than seemed likely a few years ago and that those holdings could be weighted towards short-term Treasurys, Nick Timiraos reports. The Fed's portfolio grew to more than $4.5 trillion in 2014 from less than $1 trillion before 2008. In late 2017, it started allowing some holdings to mature without replacing them—setting it on a path to reach $3.5 trillion by mid-2020. President Trump has called on the Fed to stop shrinking its portfolio and some investors argue it is disrupting markets.
Here He Comes Again
China's top economic official is scheduled to visit Washington at the end of January for high-level trade talks. Vice Premier Liu He is planning to meet with U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin, Lingling Wei reports. The meeting suggests both sides believe they're making progress in their dispute, though they remain far from a breakthrough.
The meeting could be delayed by the partial U.S. government shutdown.
Hostile Economic Environment
Top economists are grappling with a problem they say robs the profession of talent and insight: How it treats women. “We have a very low ratio of women in terms of our professional ranks and, unfortunately, a reputation for hostility towards women and minorities seems to be an important reason why many women choose not to become economists,” former Fed Chairman Ben Bernanke said at last week's meeting of the American Economic Association. Mr. Bernanke and Janet Yellen, his successor at the Fed, are working to address the issue, Eric Morath reports.
What Else We're Reading
Historically, big cities offered better pay and better jobs for lower-skilled workers. "Today, that pattern holds for highly educated workers—and has in fact grown much stronger. For workers without any college education, the added wage benefits of dense cities have mostly disappeared," Emily Badger and Quoctrung Bui report in The New York Times.
Trade tensions and a slowing economy are putting pressure on jobs in China. The Economist visits Foxconn's giant iPhone complex and finds hours have been cut, overtime is gone and hiring has stopped—and it's not the only factory or sector getting battered.