Real Time Economics: A U.S.-China Trade Deal Won’t Do Much for the Global Economy

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SERVICES WITH A SMILE

Big swathes of the U.S. economy are diverging. The Institute for Supply Management’s manufacturing survey fell to its lowest level in more than two years in February. ISM’s service-sector survey last month rebounded near to recent highs. Both are still well into expansion territory, and the split may reflect stronger growth at home than abroad rather than any underlying defects in the U.S. economy. “The renewed divergence between the ISM manufacturing and nonmanufacturing indexes suggest that solid domestic demand in the U.S. is outweighing softer global economic conditions. The U.S. economy is on solid footing,” said Berenberg’s Mickey Levy and Roiana Reid.

NO BIG DEAL

A U.S.-China trade deal probably wouldn’t give the global economy much of a boost. “Even if they land an agreement, it’s likely to be limited, and will not bring to the world a lot of certainty,” Organization for Economic Cooperation Chief Economist Laurence Boone said.

Uncertainty is one factor weighing on businesses and consumers. The OECD in its quarterly report cut its economic forecasts for this year. It expects the U.S. to register 2.6% and China 6.2% growth in 2019, both slowdowns from 2018’s pace. The research body reserved its most severe downgrades for Europe: For the eurozone as a whole, it expects growth of just 1% in 2019, Paul Hannon reports.

WHAT TO WATCH TODAY

The ADP jobs report for February is expected to post a net gain of 185,000. (8:15 a.m. ET)

The U.S. trade deficit for December is expected to widen to $57.3 billion. (8:30 a.m. ET)

The Bank of Canada releases a policy statement at 10 a.m. ET.

The New York Fed’s John Williams speaks on the economic outlook at 12:10 p.m. ET.

The Federal Reserve releases its beige book at 2:00 p.m. ET.

TOP STORIES

RED INK

Do deficits matter? It’s a raging debate across the field of economics right now. Americans get to live the experiment. The U.S. government ran a $310 billion deficit from October through January, up a whopping 77% from the same four-month stretch a year earlier. Federal outlays are climbing—driven by higher spending on the military, veterans’ affairs and interest on the debt—while tax receipts are falling following the Republican tax overhaul. As a share of the overall economy, the budget deficit in the past year has climbed to the highest level since 2013, Kate Davidson reports.

CONSUMERS PAY FOR TARIFFS

American consumers have been saddled with $69 billion in added costs because of tariffs the U.S. imposed last year, according to a study released by a quartet of economists working on a National Science Foundation grant.

The study disputes President Trump’s oft-repeated claim that the cost of tariffs are born by foreign countries. But the administration has also justified the levies as a long-term strategy to bring trading partners to the table. The U.S. had winners, too, starting with the federal government, which collected an estimated $39 billion from the new tariffs. And U.S. manufacturers and producers, such as steel mills and washing-machine makers, boosted income by $23 billion because tariffs on foreign competition let them charge more for their products, Josh Zumbrun reports.

A LITTLE TRADE SKIRMISH

The Trump administration is planning to scrap India’s and Turkey’s participation in a privileged trading program that allows developing economies to avoid some U.S. tariffs. India is being kicked out of the Generalized System of Preferences, or GSP, for a “wide array of trade barriers that create serious negative effects on United States commerce,” U.S. trade officials said. Turkey’s dismissal  “follows a finding that it is sufficiently economically developed,” William Mauldin reports.

AN INDUSTRIAL POLICY BY ANY OTHER NAME

Beijing dropped its “Made in China 2025” slogan, though the government-led industrial program appears to have changed more in name than substance. The Trump administration has criticized Made in China as a subsidy-stuffed plan to make China a global technology leader at the expense of the U.S. The policy had been a highlight of Premier Li Keqiang’s State-of-the-Nation-like address for three years running. On Tuesday, he ticked off a list of emerging industries to nurture—next-generation information technology, high-end equipment, biomedicine and new-energy automobiles—that were also in “Made in China 2025” and with a similar goal: “Buy China,” Lingling Wei reports.

The remarks are likely to feed the suspicions of some in the Trump administration that Beijing isn’t going to give into demands to change its government-led economic model, leaving the U.S. with a bad deal.

TRY BUYING A PACK OF GUM WITH THAT

Switzerland’s central bank issued new series of one-thousand-franc (worth about $995) notes despite worries that they make life easier for criminals. Switzerland is increasingly isolated in its affection for high-denomination notes amid concerns that such bills, which can be easily transported and stashed away, can be used to hide money from tax authorities or facilitate illegal activity. The European Central Bank stopped issuing new €500 ($567) notes in early 2019. The Swiss are standing firm, Brian Blackstone reports. “We have no indications at present that high denomination bank notes, or in particular the thousand franc bill, is more risk prone to use for criminal purposes,” said Fritz Zurbrügg, vice chairman at the Swiss National Bank.

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TWEET OF THE DAY

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WHAT ELSE WE’RE READING

There are jobs out there. They’re not always good jobs. Scott “Mezzapeso earned $22 an hour with good benefits at Magna, a GM supplier that made seats for the Chevy Cruze, but he was laid off last summer as the auto giant scaled back Cruze production and suppliers did the same. Now he makes $11 an hour working part time at Bruno Bros. Pizza, the only job he has found after months of sending out his résumé,” Heather Long writes in the Washington Post.

Global warming could decrease America’s GDP by more than 5% by 2100. “The impact on some individual counties could be much larger. In particularly poor regions—such as counties around the fifth percentile of the national income distribution—the lost output accounted for 10% of GDP, and in the most affected county it reached 28%. In contrast, counties at the 95th percentile of income are expected to face losses of just 0.7% of GDP,” The Economist writes.

UP NEXT: THURSDAY

The European Central Bank releases a policy statement at 7:45 a.m. ET. ECB President Mario Draghi holds a press conference at 8:30 a.m. ET.

U.S. jobless claims are expected to fall to 221,000 from 225,000 a week earlier. (8:30 a.m. ET)

U.S. labor productivity for the fourth quarter is expected to advance 1.6% from the prior quarter. (8:30 a.m. ET)

Fed governor Lael Brainard speaks on the economic and monetary policy outlook at 12:15 p.m. ET.

U.S. consumer credit for January is out at 3 p.m. ET.

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