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Apr 8, 2019

Real Time Economics: | Will the Economy Get Another Fiscal Boost?

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Real Time Economics
Government spending is a big unknown for U.S. economic growth, the White House is sticking by its picks for the Fed, and more Brexit drama is on the way. 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.

The Great Unknown

One of the big unknowns for U.S. economic growth: federal spending. Lawmakers agreed to cap spending in 2011 as part of a bruising fight over raising the debt limit. Since, they've struck three separate deals—the latest boosted funding nearly $300 billion above the caps. But if Congress doesn’t reach another deal by October, the spending limits known as the sequester would kick back in, reducing discretionary spending by $125 billion, or 10%, from 2019 levels, Kate Davidson reports.
Federal spending has had an important impact on growth in this expansion. In quarters when discretionary spending was contracting, mostly between 2011 and 2014, the economy grew at a 2% rate. When it was expanding, including during the past two years, the economy advanced at a 2.5% rate. The Congressional Budget Office estimates year-over-year economic growth would slow to 1.7% in 2020 if the automatic spending cuts kick in, down from a projected 2.3% in 2019 and 3% in 2018.

What to Watch Today

U.S. factory orders for February are expected to fall by 0.5% from the prior month. (10 a.m. ET)

Top Stories

Don't Give Up the Fight

The Trump administration isn't giving up on Herman Cain without a fight. The former restaurant executive and onetime GOP presidential candidate warned of renewed scrutiny of sexual-harassment allegations against him. The White House has his back, Dave Michaels and Paul Kiernan report. “We’ve seen a lot of charges here. They don’t necessarily pan out,” Mr. Kudlow said on CNN, suggesting the sexual-harassment allegations wouldn’t necessarily disqualify Mr. Cain

Reshaping the Fed

President Trump had a chance to remake the Fed soon after he took office. Instead, he shuffled the deck with economists and technocrats, replacing Chairwoman Janet Yellen with Jerome Powell, Vice Chairman Stanley Fischer with Richard Clarida, de facto regulatory guru Daniel Tarullo with Randal Quarles and filling the long-vacant community banker's spot with Kansas bank commissioner Michelle Bowman. It seems like Mr. Trump has some regrets. Mr. Cain and former campaign adviser Stephen Moore, his latest picks, are decidedly more partisan. Both have echoed the president’s complaints about the central bank and its interest-rate policies. 
There are two vacant seats on the Fed's seven-person board of governors. “President Trump has every right to put people on the Federal Reserve Board with a different point of view. He wants people on the Fed who share his philosophy,” Mr. Kudlow said.

Loud and Clear

Just in case you doubted his dissatisfaction, Mr. Trump on Friday repeated his call for the Fed to cut interest rates and said it should restart buying assets to stimulate growth. “In terms of quantitative tightening it should absolutely now be quantitative easing,” he said.

What to Watch: Stocks

This week's test for the stock market: corporate profits. With earnings season kicking off in earnest, investors say they plan to scrutinize corporate executives’ comments to gauge whether declining profits are a momentary blip or further evidence of a late-cycle economic slowdown. Walgreens Boots Alliance last week became the latest big company to cut its full-year profit forecast, joining corporate powers such as Apple, FedEx and 3M, Michael Wursthorn reports.
So far, investors appear to be looking past the expected profit crunch thanks to a more accommodative Fed. The central bank earlier this year decided to put interest-rate increases on hold, helping to stoke investors’ demand for riskier assets. The S&P 500 is up more than 15% since January—its best start to a year since 1998.

What to Watch: Bonds

Wall Street firms are lowering their forecasts for U.S. government bond yields, the latest sign of investors’ mounting worries about slowing economic growth. HSBC now predicts the yield on the benchmark 10-year Treasury note will end the year at 2.1%, down from an earlier forecast of 2.5%. UBS lowered its forecast to 2.8% from 3.2%, Goldman Sachs to 2.8% from 3% and JPMorgan Chase to 2.75% from 2.9%, Daniel Kruger reports. Tepid reports on the economy “have left investors relatively skeptical about the notion that growth will rebound later this year,” JPMorgan analysts wrote.  The 10-year Treasury serves as a benchmark for other loans, including mortgages. Theoretically, lower yields should support growth.

To Leave or Not to Leave

Britain’s two main political parties are pushing to reach a new Brexit deal this week. The ruling Conservative Party and the principal opposition Labour Party are resuming talks ahead of a European Union summit that will consider again postponing the country’s departure from the bloc, Stephen Fidler reports. “The choice that lies ahead of us is either leaving the European Union with a deal, or not leaving at all,” Prime Minister Theresa May said.
European diplomats are set to meet in Brussels late Wednesday to discuss another extension. Brexit was originally scheduled for March 29. It has already been pushed pack once, to April 12.

Trade Winds

German trade slowed along with the rest of the world in February. The Federal Statistical Office said that total exports of goods dropped 1.3% in February from the month before; imports of goods fell by 1.6%. The latest data underscore the pressures facing Europe’s largest economy amid international trade tensions and a slowdown in China, Tom Fairless reports.

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