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WSJ I Real Time Economics: Slowing Economy Raises Pressure On China.
Real Time Economics
The U.S. and China are making progress but not yet close to a deal, the partial federal shutdown enters its 20th day and the Fed taps the brakes on rate increases.
Good morning. Jeff Sparshott here to take you through key developments in the global economy. We'll also look at deflation fears in China, Democrats' tax strategy, big auto layoffs in Europe and the most fertile states in America. Let us know what you think by replying to this email.
Concerns over deflation are resurfacing from an unlikely source: China. Consumer prices in December rose at their slowest pace in six months while prices charged by producers increased at the lowest rate in two years. Now, more economists are sounding the alarm about the rising risk of deflation, with slumping prices potentially eating into corporate earnings and hurting companies’ ability to repay debts. Weak prices add to the trail of recent bad economic news. To arrest the slowdown, Beijing is ramping up infrastructure spending, freeing up bank funds for lending and cutting taxes, Liyan Qi and Grace Zhu report.
Bottom line: The stuttering economy has increased pressure on Beijing to resolve the trade fight with Washington.
Progress but No Deal Yet
The U.S. and China wrapped up their first face-to-face trade negotiations since a temporary tariff truce last month, making progress but leaving the thorniest issues for higher-level talks, Lingling Wei reports. Over three days, midlevel trade officials moved forward on issues such as Chinese purchases of U.S. goods and services, as well as opening China’s markets further to American capital. But the two teams hadn’t yet made a breakthrough and more discussions are needed to resolve a trade fight that has unnerved global markets.
Outstanding issues: Chinese subsidies to domestic firms and protection of American intellectual property.
What to Watch Today
The European Central Bank releases minutes from its Dec. 12-13 meeting at 7:30 a.m. ET.
U.S. jobless claims are out at 8:30 a.m. ET.
Fed Chairman Jerome Powellheadlines a full roster of central bank speakers. Richmond's Tom Barkin speaks on long-term economic growth at 8:35 a.m. ET, Minneapolis's Neel Kashkari speaks on immigration and economic growth at 12:20 p.m. ET, St. Louis's James Bullard speaks on the economy and monetary policy at 12:30 p.m. ET, Mr. Powell speaks at the Economic Club of Washington at 12:45 p.m. ET, Chicago's Charles Evans speaks on monetary policy and the economy at 1 p.m. ET, and Vice Chairman Richard Clarida speaks on the economic outlook at monetary policy at 7 p.m. ET.
The WSJ's monthly survey of economists is out at 10 a.m. ET.
President Trump heads to the U.S.-Mexico border to talk about border security.
Negotiations to end a partial government shutdown broke down Wednesday. White House officials now say an increasingly likely option is for President Trump to declare a national emergency to fund the border wall and agree to sign a spending bill and reopen the government. While the declaration would likely face an immediate legal challenge, Mr. Trump would be able to tell supporters he did everything he could to build the wall, one of his top campaign pledges in 2016, Rebecca Ballhaus, Kristina Peterson and Natalie Andrews report.
Tax the Rich
The shutdown is overshadowing other policy fights. But get ready for taxes to resurface: The 70% marginal tax rate on income over $10 million floated by Rep. Alexandria Ocasio-Cortez (D., N.Y.) is getting plenty of attention, but that rate is just part of the puzzle.
Democrats are likely to search for a combination of policies that can generate revenue, reduce inequality and pass Congress if Democrats control the White House in 2021. They'll look at the 20% deduction for pass-through businesses such as partnerships, which are disproportionately owned by high-income households. They'll look at the ability of wealthy people to have their capital gains taxes wiped out at death on appreciated assets. And they will renew past proposals to expand the estate tax and impose the "Buffett Rule" 30% minimum tax on high-income households. As Democratic presidential candidates announce their campaigns and their policies, watch where they peg that top rate—but watch the other action, too. —Richard Rubin
Fed Hits the Pause Button
The Federal Reserve signaled it's unlikely to raise interest rates for at least a few months while officials assess the impact of recent market volatility on the U.S. economy. Minutes from the Fed's Dec. 18-19 meeting indicated officials thought they could be close to ending their recent series of rate increases. Two influential officials piled on, suggesting little urgency to lift them again soon, Nick Timiraos reports. Boston Fed President Eric Rosengren said the Fed “can wait for greater clarity before adjusting policy” and Chicago Fed President Charles Evans said muted inflation allowed the Fed to “wait and carefully take stock of the incoming data and other developments.” Both officials had supported all four rate increases last year.
Deficit? What Deficit?
The official federal budget statement for December may be delayed because of the government shutdown, but we still have a good idea what's happening with U.S. fiscal policy. The Congressional Budget Office estimates the deficit was $317 billion during the first quarter of fiscal year 2019, up $92 billion from the same period a year earlier. Revenues were about the same and outlays grew 9%. What's happening? The government is spending a lot more on interest to service the national debt. A drop in corporate tax receipts was largely offset by new Trump administration tariffs.
South Dakota, Utah Show Baby Bumps
South Dakota and Utah are the most fertile states in the U.S.—and the only two with birthrates high enough to sustain the current population. In order for the country’s population to essentially replace itself, researchers say that 2,100 babies should be born for every 1,000 women. In 2017, the nationwide fertility rate was 1,765. But new data show stark regional variation, with states in the Midwest and the Southeast much higher than the Northeast or West Coast. South Dakota had the highest rate at 2,227 births and the District of Columbia the lowest at 1,421, Brianna Abbott reports.
Low birthrates could disrupt the economy as the country’s population ages out of the workforce, though researchers say those effects could be offset by factors such as immigration.
Europe: Now Firing
Ford Motor Co. has launched talks with trade unions in Europe about job cuts that could run into the thousands as it shuts European plants and cancels production of unprofitable models. The move is the latest sign that waning demand and weaker profits in Europe are forcing auto manufacturers to aggressively prune their businesses, William Boston reports. The culprits: concerns around Brexit, trade, the demise of diesel engines and an economic slowdown in China.
The eurozone’s unemployment rate fell to its lowest level in more than a decade during November. But even after more than five years of economic growth, big differences across the currency area remained, with joblessness at 3.3% in Germany and as high as 14.7% in Spain, Paul Hannon reports.
Modern Monetary Theory is going mainstream. Freshman Rep. Alexandria Ocasio-Cortez has promoted it. A one-time Bernie Sanders adviser advocates it. Josh Barro explains it in New York Magazine:
"So while a conventional economic thinker might say you establish a new
government program and levy taxes (now or in the future) to pay for it,
an MMT thinker would say you establish a new government program and the
government prints the money to pay for it."
President Trump can't fire the Fed chairman, can he?
"Like other norms that Trump has violated, this one is more fragile
than it might first appear. The history of 'independent' agencies like
the Fed suggests their autonomy rests on custom and tradition rather
than bedrock law," the University of Georgia's Stephen Mihm writes at Bloomberg Opinion.
Up Next: Friday
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.
U.S. budget figures for December may be delayed due to the shutdown. (2 p.m. ET)