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Apr 1, 2019

Real Time Economics | China’s Manufacturers Rebound, Europe’s Factories Sink

The Wall Street Journal.
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Real Time Economics
U.S. manufacturing data follows China and Europe this morning. We'll also look at the jobs market, interest rates, budget deficits and the spring home-buying season. Good morning. Jeff Sparshott here to take you through the day's economic news. Send us your questions, comments and suggestions by replying to this email.

Going Up...

An official gauge of China’s manufacturing activity rose to a six-month high in March. Factories showed a pickup almost across the board, from new orders to production, according to the official purchasing managers index. And a separate, private gauge of factory activity out Monday rebounded to expansionary territory in March for the first time in four months, underscoring the turnaround. 
The WSJ's Nathaniel Taplin cautions: China’s economy may have improved modestly last month, but the jump in the index probably exaggerates the uptick. The shifting dates of the weeklong Lunar New Year holiday, new loan quotas for banks and other seasonal factors make first-quarter data difficult to read. 

...Going Down

While China's factory sector rebounded, Europe's did not. IHS Markit's manufacturing index for the eurozone in March fell to its lowest level in nearly six years. But wait, it gets worse: the most forward-looking indicator—new orders—posted its biggest monthly decline since late 2012, suggesting a fairly bleak outlook.
One almost-bright spot: The U.K. manufacturing index rose to a 13-month high. But it appears that's because companies are stockpiling goods ahead of a potentially disruptive Brexit. Rising inventories are usually followed by falling production. 

And the Winner Is…China

Investors clearly seem more interested in the China data. Asian equities soared on Monday and, despite the grim eurozone manufacturing reports, so did Europe with German and French bourses up more than 1% early Monday. The message: China’s performance matters a lot more for the global economy and appetite for risk than Europe’s, for now at least.

What to Watch Today

U.S. retail sales for February are expected to rise 0.2% from the prior month. (8:30 a.m. ET)
The Institute for Supply Management's manufacturing index for March is expected to tick up to 54.4 from 54.2 a month earlier. (10 a.m. ET)
U.S. construction spending for February is expected to sink 0.3% from the prior month. (10 a.m. ET)
U.K. Parliament will vote on alternatives to Prime Minister Theresa May's Brexit agreement. Lawmakers rejected her plan for the third time last week.
The Reserve Bank of Australia releases a policy statement at 11:30 p.m. ET.

Top Stories

Bricklayers vs. Mortar Boards

The U.S. employment report for March is out Friday. February’s data was a bit of a dud, especially for construction and other blue-collar fields. But the broader trend is decidedly brighter: The Conference Board's latest Global Labor Market Outlook is forecasting a historically tight labor market this year—especially for blue-collar jobs. One big reason: "The US labor force has become more educated, which has reduced the supply of available blue-collar and low-pay services workers."
College degrees: Over the past decade, the U.S. labor force has added more than 13 million people with at least a four-year college degree. It has 4.4 million fewer with no college at all.

Now hiring: Meanwhile, the unemployment rate has fallen farthest and fastest for construction, production and transportation—traditionally blue-collar occupations.

Rising tide: And wage gains have been strongest for those with the least education. High-school dropouts certainly don't make more, on average, than college grads but the gap is ever-so-slowly narrowing—at least in today’s labor market.

The Right Stuff

Neel Kashkari, one of the Federal Reserve’s most consistent opponents of interest-rate increases, says it isn’t the time for the central bank to cut borrowing costs. For now, the Minneapolis Fed president believes the U.S. central bank is in the right place. “Some of the risks have shifted to the downside, so pausing to get more information, to see if this really is an economic slowdown or if it’s just a blip, I think that’s the right move,” Mr. Kashkari told the WSJ's Michael Derby.
Until recently, his opposition to rate rises was shared only with St. Louis Fed President James Bullard. But now their position is common among their colleagues.

Trump: Cut Rates!

President Trump and his team want the Federal Reserve to cut interest rates. National Economic Council Director Lawrence Kudlow said the central bank should lower its benchmark rate by half a percentage point, Kate Davidson and Nick Timiraos report. “I don’t want any threats to the recovery,” Mr. Kudlow said.
The call for a rate cut by a White House official is unprecedented in recent history, and appears at odds with the administration’s insistence that the U.S. economy is on course for another year of robust growth.

The Price Isn't Right

One reason the Fed doesn't need to raise rates: There's no sign of inflation pressure. The central bank's preferred inflation gauge in January was up just 1.37% from a year earlier, the smallest gain since September 2016. Stripping out volatile food and energy components, so-called core prices rose 1.79% from a year earlier, an 11-month low. The Fed has a 2% inflation target.

In Theory

Democrats have an array of ambitious and expensive policy proposals, from the Green New Deal to Medicare for All. How will the government pay for it? The answer, increasingly, comes from Stephanie Kelton, a professor at Stony Brook University who has become the public face of an unorthodox strain of economics called modern monetary theory, Kate Davidson writes.
The Theory: Ms. Kelton argues the government doesn’t need to worry so much about how much it borrows to pay for spending programs. Unlike a household or business, it can never run out of money. The government can always print more. The constraint, according to MMT, is whether the borrowing and spending spurs inflation and disrupts economic activity.

In Practice

Japan has $10 trillion in government debt and an economy half that size. Some people think the best policy is to borrow more. The case for more aggressive deficit spending in the world’s third-largest economy rests on some confounding facts. Japan is issuing 10-year government bonds at a negative interest rate, meaning it gets paid by its lenders. Thanks in part to a long period of low rates, only about 5% of central and local government revenue is going to interest payments. And inflation is very low, Megumi Fujikawa and Kosaku Narioka report.

Spring Thaw

The spring home-buying season is shaping up as the best in years. A number of economic factors that slowed sales in 2018 have eased or even reversed in recent weeks: Mortgage rates have been falling, home inventory is rising and the pace of home-price growth is slowing. These more favorable conditions are already bringing price cuts and fewer bidding wars. About 40% of the year’s sales take place from March through June, making these months pivotal for the housing market each year, Laura Kusisto reports.

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