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In today’s issue, more signs inflation is slowly gathering pace, the U.S. Senate debates immigration, companies rethink job requirements to find employees, Republicans have become anti-spending, not anti-deficit, and what Nestle can tell us about the global economy.
INFLATION NATION
More inflation is on the way. Inflation data, anyway.
U.S. core consumer prices rose at the fastest monthly pace in more than a decade in January, one sign inflation is picking up as the economy expands and labor market tightens. Today, we get the producer price index, a measure of inflation pressures faced by companies. Headline PPI is expected to rise 0.4% from the prior month and core, which excludes food and energy, is expected to climb 0.2%. That would put year over year gains at about 2.5% and 2.3%, well above figures from 2014 to 2016 but not out of whack with Federal Reserve objectives.
PPI typically slips under the radar but it’s worth watching as markets remain alert to signs the economy is overheating. Why? In part, because it feeds into the Fed’s preferred inflation gauge, the price index for personal consumption expenditures. That’s where the central bank targets 2%. So far, it looks like PCE is only inching closer, with some forecasters expecting a roughly 1.5% year over year gain for core prices in January (the actual numbers are due out March 1). If inflation advances at a manageable pace, Fed officials are less likely to have to deviate wildly from plans to raise rates three, or perhaps four, times this year.
FED MAY WELCOME RISING PRICES
The consumer-price report raised expectations the Fed will lift its benchmark interest rate at its next policy meeting on March 20-21.
Indeed, new signs of firming inflation should bolster the central bank’s resolve to gradually raise interest rates this year, David Harrison writes. In December Fed officials penciled in three quarter-percentage-point increases in their benchmark short-term rate in 2018. Some have said they might favor four moves, depending on how the economy performs.
“[Wednesday's] inflation reading should probably cement in place the Fed’s intent to hike rates at the March … meeting,” said J.P. Morgan economist Michael Feroli. “We now also think the odds are moving up that they also revise their guidance at that meeting from looking for three hikes this year to four.”
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WHAT TO WATCH TODAY
The eurozone’s exports of goods to the rest of the world rose for a second straight month in December, a sign that the euro’s appreciation against other major currencies has yet to crimp economic growth. Adjusted for seasonal patterns, eurozone exports rose by 1.7% in the final month of 2017 from November, while imports were up by just 0.9%, Paul Hannon reports.
The U.S. producer price index is out at 8:30 a.m. E.T. Economists expect headline prices to advance 0.4% and core prices to climb 0.2% from the prior month.
U.S. jobless claims, out at 8:30 a.m., are forecast to rise to 230,000 from 221,000, remaining at a historically low level.
The New York Fed’s Empire State manufacturing survey for February, out at 8:30 a.m., is expected to register at 17.3, down slightly from 17.7 a month earlier.
The Philadelphia Fed’s manufacturing survey for February, out at 8:30 a.m., is forecast to slide to 20.4 from 22.2.
The Federal Reserve’s January industrial production index, out at 9:15 a.m., is expected to rise 0.3%. U.S. factories have been humming along in recent months, but the headline number also includes utilities and mining, which can be volatile from month to month.
The National Association of Home Builders housing market index for February, out at 10 a.m., is expected to hold steady at 72, reflecting optimism among builders amid strong demand for housing.
TOP STORIES
IMMIGRATION DEBATE HEATS UP
Immigration has taken center stage as a national security and political issue. It’s also an economic issue. About 17% of the U.S. labor force is foreign born. That’s a big chunk of workers at a time when the unemployment rate is holding at its at lowest level since December 2000.
President Donald Trump is effectively demanding that the Senate significantly cut legal immigration as part of any new legislation, Siobhan Hughes, Natalie Andrews and Kristina Peterson report. That’s threatened to derail a Senate compromise package including more funds for border security and protections for hundreds of thousands of young, undocumented immigrants. It doesn’t include an end to so-called chain migration, an aspect of Mr. Trump’s proposal that would reduce legal immigration to the U.S. by about a third.
COMPANIES GET CREATIVE
Did we mention the unemployment rate was the lowest since 2000?
That’s pushing companies to break old habits as they look for workers—eliminating sometimes unnecessary requirements such as a bachelor’s degree and extensive experience, ramping up apprenticeship programs and tapping labor pools outside a company’s immediate field, including prisons, Lauren Weber and Rachel Feintzeig write.
“We straddle between altruism and desperation,” Jon Kinning, co-owner of Denver’s RK Mechanical Inc.
There were 5.8 million open jobs in December, and scant prospects for filling many of them at a time when only 4.1% of Americans in the labor force are out of work.
DEFICIT HAWK OR SPENDING HAWK?
“I will always be a deficit hawk,” President Donald Trump’s budget director, Mick Mulvaney, declared Monday. Come again?
Mr. Mulvaney and his fellow Republicans are, rather, spending hawks, motivated less by an abhorrence of debt than of big government, Greg Ip says. But the biggest programs, Social Security, Medicare and other entitlements, are off limits, defense spending is going up and taxes down.
That leaves domestic discretionary spending. In fiscal 2019, it will be less than in 2012, without adjusting for inflation. At less than 3% of GDP, it would be near the lowest in at least 50 years. The federal government’s civilian workforce today is the smallest as a share of total employment since World War II.
With taxes and most federal spending off the table, room to meaningfully cut the deficit is small.
NESTLE AND THE GLOBAL ECONOMY
A global company like Swiss-based Nestle with a vast portfolio of products from coffee and bottled water to frozen pizza and nutrition can be a good bellwether for the world economy. And its disappointing 2017 revenue figures contained some interesting insights on spending, confidence and inflation.
Nestle struggled last year in the U.S., its largest market. Executives in part blamed a delayed reaction from consumers before healthy economic growth translated into improved confidence and spending.
The company also has had trouble raising prices due to the low-inflation environment worldwide and deflationary pressures in places like Europe. But it sees some signs that inflation is starting to rise in 2018 and beyond, led by the U.S., which should help the packaged goods sector. - Brian Blackstone
SOUTH AFRICA’S ZUMA STEPS DOWN
South African President Jacob Zuma bowed to intense pressure and resigned, ending a nine-year tenure that dragged the party of Nelson Mandela into a series of political and financial crises that inflicted severe harm on Africa’s most-developed economy.
An economic populist, Mr. Zuma often pledged to complete a “radical economic transformation” that would aid the impoverished black underclass left behind during the years of breakneck economic growth under his predecessor, Gabriele Steinhauser and Joe Parkinson write. But South Africa’s economy stagnated under his tenure, with the unemployment rate rising to 26.7%.
TWEET OF THE DAY
[wsj-responsive-sandbox id = "0" ]WHAT ELSE WE’RE READING
Americans are more optimistic than Europeans about social mobility. No surprise for a country that prides itself on real-life Horatio Alger success stories, right? But expectations are often unrealistic. “We show that, paradoxically, optimism is particularly high in U.S. states where actual mobility is particularly low,” Harvard University’s Alberto Alesina, Stefanie Stantcheva and Edoardo Teso write in the latest American Economic Review. Here’s the kicker: Even when presented with information on low economic mobility, right-leaning respondents tend to reject redistribution through programs like public education and health spending, “possibly because they see the government as a ‘problem’ and not as the ‘solution.’ ”
U.S. lenders seem pretty comfortable with the housing market. So-called jumbo mortgages have become more readily available in recent years, with the fraction of lenders willing to offer such credit roughly doubling for borrowers with intermediate credit scores, Andreas Fuster, James Vickery and Akhtar Shah write at the New York Fed’s economics blog. “Our analysis suggests that banks’ appetite for mortgage credit risk has been increasing over time. Our findings match other evidence that residential mortgage lending standards have eased in recent quarters…while remaining substantially tighter than during the housing boom.”
UP NEXT
U.S. import prices for January are out at 8:30 a.m. E.T. on Friday. Economists expect a 0.7% rise from the prior month.
U.S. housing starts for January, out at 8:30 a.m., are expected to rise to an annual pace of 1.24 million, up from December’s 1.19 million.
University of Michigan consumer sentiment for February, out at 10 a.m., is expected to remain solid at 95.0, down only slightly from January’s 95.7.
from Real Time Economics http://ift.tt/2EK3gfg
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