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Real Time Economics: Small Business Sends a Warning Signal
Real Time Economics
Last week's jobs report was unabashedly good news. Let's start this week with a more sober look at flagging small business optimism and worsening data on global trade. Good morning. Jeff Sparshott here to take you through the day's economic news, including the Fed's about-face, surging student debt among America's seniors, and trouble figuring tax bills. Send us your questions, comments or suggestions by replying to this email.
After a banner year, many small businesses are becoming more cautious about their investment and hiring plans. Some are responding to early signs of slowing sales, while others fear that tariffs, unstable financial markets, the aftereffects of the government shutdown and other headwinds could damp economic growth in 2019, Ruth Simon reports.
Economic confidence among small firms in January reached its lowest level since President Trump’s election. Just 14% expect the economy to improve this year, while 36% expect it to get worse. “We could be at a turning point,” said Richard Curtin, a University of Michigan economist who analyzed the data. “Recessions are not made of one firm collapsing, but of many firms cutting back in marginal ways.”
What to Watch Today
U.S. factory orders for November are expected to rise 0.1% from the prior month. (10 a.m. ET)
The Cleveland Fed's Loretta Mester speaks about the economic outlook and monetary policy at 7:30 p.m. ET.
The U.S. and China are moving closer to settling their fight over tariffs, but data on the state of global trade is worsening. The J.P. Morgan Global Manufacturing Purchasing Managers’ Index dropped to 50.7 in January. A reading above 50 indicates growth, but the index is signaling its weakest expansion in 2½ years. The new exports portion of the index was even worse, dropping to its lowest level since May 2016. The index has been a reliable predictor of real global trade volumes published weeks or months after the fact, Mike Bird reports. The weak data could have a knock-on effect for stocks and bonds world-wide, particularly in trade-sensitive Asian markets.
The Federal Reserve reversed course last week when it put interest rates on hold, prompted by rising risks to U.S. growth rather than any signs the economy’s health is faltering now. The new stance is a U-turn from six weeks earlier when it raised rates and penciled in two increases in 2019. What happened? 1.) When the U.S. economy heated up, inflation didn't take off. Now, inflation risks have diminished—and with it, the need for additional, pre-emptive rate rises. 2.) Growth in Europe and China turned worse. 3.) The Fed’s moves to raise rates had started to bite.
Fed officials are calculating the combined effects of tighter financial conditions and a slowdown in foreign economies could keep a lid on domestic inflation, even if U.S. economic growth remains solid this year, Nick Timiraos writes.
U Can't Touch This
Dallas Federal Reserve Bank President Robert Kaplan said he believes the U.S. central bank will hold off on rate increases until at least the summer, Michael S. Derby reports. “It’s very important for the Fed to get out of the way” and let uncertainties around the economy resolve themselves, Mr. Kaplan said Friday.
One generation of Americans owed $86 billion in student loan debt at last count. Its members are all 60 years old or more. Many of these seniors took out loans to help pay for their children’s college tuition or to go back to school and boost their own employment prospects. On average, student loan borrowers in their 60s owed $33,800 in 2017, up 44% from 2010, AnnaMaria Andriotis reports. Total student loan debt rose 161% for people aged 60 and older from 2010 to 2017. Now, some are having funds garnished from their Social Security checks.
Mind the GAAP
Some companies got a little ahead of themselves talking up tax cuts. Casino chain Las Vegas Sands has already taken a $727 million hit to its fourth-quarter profit, after a corporate tax regulation made the 2017 tax overhaul less favorable than the company expected. IBM said the same provision reduced its profit by $1.9 billion. As more companies report year-end results in coming weeks, investors can expect more dents in more bottom lines—plus, presumably, at least a few pleasant surprises, Theo Francis and Richard Rubin report.
The problem? Accounting rules that ask companies to outpace the new law. Generally accepted accounting principles (GAAP) require companies to book the costs and benefits of new legislation immediately. But rule writers at the U.S. Treasury and Internal Revenue Service typically take months, and sometimes years, to draft and finalize regulations. The details can make a big difference in a company’s analysis of the law.
Quote of the Day
The economy is so good right now. You saw the jobs report just came out. Three hundred and four thousand added jobs, which is a shocker.
Someone had to ask: Did Fed Chairman Jerome Powell cave to President Trump?
"Powell repeatedly denied it, asserting that the Fed makes policy based
on its best professional judgment and doesn’t consider politics. Still,
appearances being what they are, there is now a convenient convergence
between the president and the Fed," the Washington Post's Robert J. Samuelson writes.
The U.S. private-debt market has more than doubled in under a decade.
"However, the scale of the inflows is stirring concerns. Economic
growth is slowing, and while the Federal Reserve may be sounding a more
cautious note after December’s market ructions, most economists still
reckon the central bank will raise interest rates further in 2019. The
combination of a weaker economy and higher rates will test the corporate
debt market, and some suspect that cracks will show first in private
debt.," the Financial Times's Robin Wigglesworth reports.
Up Next: Tuesday
Eurozone retail sales for December are out at 5 a.m. ET.
Markit's purchasing managers index for services for January is out at 9:45 a.m. ET.
The Institute for Supply Management's nonmanufacturing index for January is expected to slip to 56.7 from 57.6. (10 a.m. ET)