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In today’s issue, investors brace for more market turbulence, the debate on spending and deficits at a time of strong economic growth, why one type of spending that economists and politicians tend to like, infrastructure, faces a skeptical Congress, tight labor markets are pushing businesses and local lawmakers to consider new child care initiatives, Wisconsin runs short on workers, and Switzerland and Denmark inflation numbers suggest little price pressure in the global economy.
INVESTORS READY FOR MORE MARKET TURBULENCE
Investors are bracing for another wild ride.
The Dow Jones Industrial Average last week fell more than 5%, extending a two-week selloff. Investors withdrew $22.9 billion from U.S. stock mutual funds and exchange-traded funds, the highest total on record.
Greg Ip writes that, so far, the drop looks to have more in common with selloffs in 1987 or 1998 than the 2007 crash. Some market players were clobbered but linkages to the real economy appear few.
But eventually, market moves don’t just reflect the economy, they can also drive it. Past turmoil has inflicted damaging losses on market participants that required intervention by the Federal Reserve. Postcrisis reforms have strengthened the financial system but volatility may expose weak links.
THE TRUMPONOMICS EXPERIMENT
President Donald Trump‘s fiscal policy is a rather unprecedented gamble on rising deficits and more spending at a point of robust economic expansion.
A White House budget document, due out at 11:30 a.m. E.T. today, has largely been overtaken by events. We already know about the $1.5 trillion tax cut and a $300 billion spending package approved by Congress. Economists at J.P. Morgan expect that to boost the deficit to 5.4% of GDP next year, up from 2.4% in 2015.
We don’t know the macroeconomic effects. The White House hopes its policies encourage people to work more and businesses to invest more, raising productivity and providing long-lasting benefits to the economy, Nick Timiraos writes.
But such fiscal largess also risks putting added upward pressure on inflation and interest rates, potentially undercutting growth while hurting stock and real-estate values. And if the economy starts to overheat, Fed officials may decide they need to raise short-term interest rates faster than expected, tamping down inflation but also holding back growth.
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WHAT TO WATCH TODAY
The White House budget will be released online at 11:30 a.m. E.T.
Otherwise, Monday is fairly quiet. Here are a few highlights for the rest of the week:
The Cleveland Fed’s Loretta Mester speaks Tuesday. “Given that she votes on the [Federal Open Market Committee] this year, it will be particularly important to see if her hawkish leanings have wavered in light of the market volatility,” economists at Deutsche Bank said.
Wednesday brings U.S. retail sales and consumer prices. The figures are key measures of consumer spending and inflation, one of which has been reassuringly strong and the other bafflingly weak. Remember, signs of stronger U.S. wage growth sparked inflation concerns. That got investors thinking the Fed might have to raise interest rates faster than expected, feeding into the broad market selloff and volatility.
On the global front, U.K. inflation, and Japan and eurozone GDP are due out during the week.
TOP STORIES
PLANES, TRAINS AND AUTOMOBILES
One item to watch in today’s White House budget: a proposal to spend $200 billion over 10 years on infrastructure.
Most of that is in the form of new, competitive grants designed to encourage states and cities to raise their own money for improving rails, airports, highways and water systems, Rebecca Ballhaus and Ted Mann report. The proposal also would expand federal loan programs for such projects.
That would be another sizable dollop of fiscal stimulus. But the source of any funding is unclear. Congress reached a two-year spending agreement last week that will probably push deficits past $1 trillion by next year, reducing the chances of an infrastructure package.
WORKFORCE DEVELOPMENT
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.
A freewheeling debate set to start today in the Senate may well affect how that share changes. In an opening salvo, some of the Senate’s most conservative members are offering a package that would ultimately reduce total legal immigration to the U.S. by about a third, Laura Meckler and Siobhan Hughes report.
TIGHT LABOR MARKET FORCES DEBATE ON CHILD CARE
Historically low unemployment is forcing a rethink on child care policy.
Businesses increasingly see it as an issue vital to their operations and communities, and policy makers from New Hampshire to Michigan to Colorado have identified it as key to freeing up workers to fill stubborn vacancies and building a talent pipeline, Jennifer Levitz reports.
Nearly one in three families spend 20% or more of their household income on child care, prompting some parents to leave the workforce entirely.
PLENTY OF BEER AND CHEESE, NOT ENOUGH WORKERS
Wisconsin has an abundance of job openings, but not enough workers to fill them. The shortage comes as Taiwan’s Foxconn Technology Group is building a 20 million square-foot facility that will make liquid-crystal-display screens and employ as many as 13,000 workers in the state, Shayndi Raice reports.
Like the rest of the Midwest, Wisconsin is contending with slow population growth, spurred by an aging population, fewer immigrants and low natural birth rates. The labor force—the number of working-age people—grew just 1.4% from 2010 to 2016.
Elected officials and businesses are hoping to woo residents from nearby states by pitching a low cost of living, short commute times and what they say is a high quality of life. The state economic development corporation recently announced a $1 million ad campaign and Republican Gov. Scott Walker has proposed a broader effort across Midwestern cities that would cost an additional $6.8 million.
DOUBLE 0.7S
There’s been a lot of focus on rising U.S. inflation as a source of recent market volatility.
But let’s not forget smaller, but still very relevant, countries like Switzerland and Denmark. They are highly export dependent and thus sensitive to developments in the global economy. Each reported identical annual inflation rates of 0.7% in January, far below the level that most large central banks consider optimal. This doesn’t mean that inflation will stay super low in the U.S. and eurozone. But if countries like Switzerland were to start seeing significantly higher inflation, it would probably be a bellwether for the global economy. And that’s not happening yet. - Brian Blackstone
TWEET OF THE DAY
[wsj-responsive-sandbox id = "0" ]WHAT ELSE WE’RE READING
U.S. worker wages have grown only slowly through most of the latest expansion. Economists place much of the blame on slack in the labor market but there’s an alternate, or perhaps complimentary, theory: Declining business dynamism. “The decline in dynamism encompasses the various ways in which workers and entrepreneurs have become less likely to explore new patterns of economic activity: starting new, fast-growing businesses; switching jobs; and moving across the country. As these activities diminish, both productivity growth and worker bargaining power suffer, limiting workers’ opportunities and damaging wage growth,” the Hamilton Project’s Jay Shambaugh, Ryan Nunn and Patrick Liu write.
If Poland trades with Brazil, should either country care about the value of the U.S. dollar? Probably. “[T]he value of a country’s currency relative to the dollar is a primary driver of a country’s import prices and quantities regardless of where the good originates from, and the prevalence of dollar invoicing is an important predictor of the sensitivity of price and quantities to the dollar exchange rate,” the International Monetary Fund’s Emine Boz, Harvard University’s Gita Gopinath and Princeton University’s Mikkel Plagborg-Moller write. The findings have important implications for the conduct of monetary and exchange rate policies.
UP NEXT
The National Federation of Independent Businesses small business survey is due out at 6 a.m. ET on Tuesday. Economists expect a reading of 106.0 for January, up from 104.9 and a reflection of a broadly positive outlook.
Also Tuesday, U.K. consumer price inflation for January is expected to slow to 2.9% year over year from 3% the previous month.
from Real Time Economics http://ift.tt/2ChZiFG
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