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Apr 11, 2019

Real Time Economics |The Middle Class Is Shrinking

The Wall Street Journal.
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Real Time Economics
A new study links economic stagnation and political instability, the U.S. Treasury secretary sees a breakthrough in trade talks and the Fed doesn't expect to change its benchmark interest rate this year. Good morning. Jeff Sparshott here to take you through key developments in the global economy. Send us your questions, comments and suggestions by replying to this email.

Falling Behind...

The middle class is shrinking and its economic power diminishing in the U.S. and other rich countries. A report by the Organization for Economic Cooperation and Development said the loss of middle-class economic power has been driven by “dismal” income growth and rapidly rising costs for many of the goods and services that are key to middle-class lifestyles, especially housing, Paul Hannon reports.
The threat: Middle-income households are carrying more debt and feeling less secure in their status, and younger generations are less likely to join the group at all. “Political instability is an important channel through which a squeezed middle class may upset economic investment and growth,” the OECD warned.

...And Staying Home

In the U.S., young women are living at home at the highest rate on record and men aren't far behind. American University economist Gray Kimbrough sliced up Census and American Community Survey data on 25-year-olds living with a parent.  The chart below shows a steady decline after World War II, a gentle resurgence after 1970 and a sharp rise following the 2001 recession. Mr. Kimbrough's theory on the cause: "housing costs combined with cratering economic growth and significantly deteriorated labor market conditions for young adults." 

What to Watch Today

U.S. jobless claims are expected to rise to 210,000 from a near half-century low of 202,000 a week earlier. (8:30 a.m. ET)
The U.S. producer-price index for March is expected to rise 0.3% from a month earlier. (8:30 a.m. ET)
International Monetary Fund Managing Director Christine Lagarde kicks IMF/World Bank spring meetings into high gear with a press conference at 9:30 a.m. ET.
The WSJ’s survey of economists is out at 10 a.m. ET.
Fed Vice Chairman Richard Clarida speaks on the economic outlook and monetary policy at 9:30 a.m. ET, the New York Fed’s John Williams speaks at an Association for Neighborhood and Housing Development conference at 9:35 a.m. ET, the St. Louis Fed’s James Bullard speaks on the economy and monetary policy at 9:40 a.m. ET, the Minneapolis Fed's Neel Kashkari holds a Q&A on Twitter at 2 p.m. ET, and governor Michelle Bowman speaks on community banking at 4:00 p.m. ET.

Top Stories

Two Steps Forward...

China sweetened an offer to open its cloud-computing sector to foreign companies. In face-to-face talks in Washington last week, Chinese negotiators revised an earlier offer on cloud-computing access, proposing to issue more licenses that businesses need to operate data centers and to lift the 50% equity cap that limits ownership for certain foreign cloud-service providers, Yoko Kubota and Lingling Wei report. U.S. negotiators rejected an earlier proposal as inadequate and both sides continue to haggle over the issues this week via videoconference. The fresh concessions are aimed at reaching a compromise as both sides work toward a trade deal.
Separately,  Treasury Secretary Steven Mnuchin said the U.S. and China have agreed on an enforcement mechanism for their potential trade deal, suggesting one of the key stumbling blocks had been cleared. “We’ve agreed that both sides will establish enforcement offices that will deal with the ongoing matters,” Mr. Mnuchin said on CNBC.

...Six Months Back

European Union leaders agreed to postpone Brexit until Oct. 31. The extension avoids an outcome leaders on both sides of the English Channel feared: the U.K. crashing out of the EU on Friday without a separation agreement. But it does little for businesses looking for clarity over Brexit, and offers no clear path toward getting a deal through Britain's House of Commons, Laurence Norman and Max Colchester report.
Next: The new date gives British Prime Minister Theresa May more time to try to get the U.K.’s Parliament to approve a Brexit deal. She returns to the U.K. Thursday to continue discussions with the Labour Party on a possible compromise.

Ready to Spring Into Action

European Central Bank President Mario Draghi signaled the bank could take fresh action to shore up the eurozone’s faltering economy if the outlook darkens. At a news conference, Mr. Draghi said Europe’s economic slowdown would continue this year, in part because of the uncertainty facing businesses as a result of U.S. threats to raise tariffs on automobiles and other imports from Europe. The ECB’s caution echoes that of the Federal Reserve, which stepped back from further interest-rate hikes in recent months, Tom Fairless and Paul Hannon report.

Standing Pat

We already knew Federal Reserve officials voted to hold rates steady at their March 19-20 meeting. Minutes from the gathering add key details: The Fed has set a high bar to raising rates again because of greater risks to the U.S. economy from a global growth slowdown, and after a muted inflation reading took officials by surprise. But the minutes also show officials didn’t see any need to cut their benchmark rate absent a broad deterioration in the economy, Nick Timiraos reports.
Key quote: “A majority of participants expected that the evolution of the economic outlook and risks to the outlook would likely warrant leaving the target range unchanged for the remainder of the year.”

Searching for Inflation

Low inflation readings have puzzled central bankers around the world—and are one reason the Fed is in a holding pattern. The latest data provide little urgency for higher rates.
  • U.S. consumer prices rose 1.9% from a year earlier in March, compared with a 1.5% annual gain in February. Volatile oil prices drove the latest increase. Excluding food and energy, so-called core prices rose 2% on the year, the slowest annual gain since early 2018. Overall, the numbers suggest inflation pressures remain tame, Sarah Chaney reports.
  • Germany’s inflation rate eased in March on the back of a slowdown in food prices. The annual inflation rate slipped to 1.4% from 1.7% in February, the Federal Statistical Office said Thursday.
  • China's consumer prices accelerated last month. March’s consumer-price index rose 2.3% from a year earlier, compared with a 1.5% gain in February. A hefty increase in pork prices and more expensive oil led the way, Grace Zhu reports.

Fiscal Firepower

The U.S. budget gap widened in the first half of the fiscal year as spending rose faster than revenue. The $691 billion deficit from October through March is 15% higher than during the same period a year earlier despite relatively strong economic growth. The Treasury estimated the full-year deficit will top $1 trillion in fiscal 2019, the first time breaching that level since 2012.

What Else We're Reading

President Trump, looking to discourage migrants, recently said "our country is full." Bloomberg Opinion's Noah Smith writes that, actually, "the population problem in the U.S. is highly location-specific. Instead of keeping immigrants out of the country, the government should focus on sending them to places where the population is stagnant or declining and the economy needs shoring up."
The 17th century Republic of Venice has a lesson for today’s world. "The picture that we reconstruct suggests that from around 1600 or 1650, the Italian domains of the Republic of Venice were characterised at the same time by economic stagnation, growth in economic inequality, and low (and worsening) rates of social-economic mobility. This picture corresponds quite closely to the situation being faced by Italy and by other parts of southern Europe since the onset of the Great Recession in 2008–which is definitely not a very encouraging scenario," Guido Alfani writes on the Economic History Society's blog.

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