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Good morning. Today we look at U.S.-China trade tensions, lessons from the last housing bust, a slow trickle for repatriated profits, and the limited economic fallout from hurricanes and other natural disasters.
TRADE FIGHT HEATS UP
The Trump administration plans to unveil fresh tariffs on $200 billion in Chinese products as soon as this week. Beijing is debating new ways to retaliate. The threats from both sides of the Pacific risk upending negotiations aimed at staving off a new round of tit-for-tat penalties. Already, China has threatened to pull out of preliminary trade talks, Jacob M. Schlesinger, Lingling Wei and Bob Davis report.
With the expected new round of U.S. tariffs, combined with earlier rounds, the Trump administration will have levied duties on roughly half of the more than $500 billion in Chinese goods that enter the U.S. each year.
TWO TRACKS
The Trump administration’s two-track approach to China—new import taxes looming on $200 billion in goods, twinned with a willingness to hold new high-level talks—shows divisions inside the Trump team. The next stage of Mr. Trump’s unfolding China strategy also reflects the president’s personal desire to show Beijing that he is willing to step up the pressure, that he feels he has the upper hand in the conflict, and that if tariffs and diplomacy conflict, he will choose tariffs.
How should the White House proceed—with talks, tariffs or both? Write to Jeffrey Sparshott at realtimeeconomics@wsj.com, tweet to @WSJecon and visit wsj.com/economy for the latest news. (Responses may be quoted in this newsletter.)
WHAT TO WATCH TODAY
The New York Fed Empire State manufacturing survey for September, out at 8:30 a.m. ET, is expected to slip to 22.0 from 25.6 a month earlier.
President Trump participates in the inaugural meeting of the National Council for the American Worker, an initiative to educate and train U.S. students and workers.
TOP STORIES
THE UPPER HAND
Why might President Trump think he has the upper hand with China? Infrastructure investment in is nose-diving and the Shanghai Composite Index just closed at its lowest since November 2014. But there’s a risk that American trade negotiators, watching the forest, are missing some important—and still rather healthy—trees. Infrastructure and small-scale private industry are suffering from the shadow banking crackdown championed by President Xi Jinping. But two other important drivers of the economy—state-owned firms and real estate—are doing well. As long as real estate holds up, a sharp slowdown remains unlikely, Nathaniel Taplin writes.
UNDERAPPRECIATED LESSONS FROM THE HOUSING BUST
Before we look ahead to this week’s housing data, the let’s look back 10 years into the financial crisis. One lingering frustration: piecemeal efforts to provide homeowners with more relief. With hindsight, policy makers could have taken a bolder approach to mortgage relief. But many critiques falsely assume policy makers had a magic wand to write down debts. They didn’t.
1.) Pro-cyclical mortgage credit policies made the crisis much worse than is appreciated. The government rescued Fannie Mae and Freddie Mac to maintain mortgage credit, but the firms—and critically, the private mortgage-insurance companies that enable low-down-payment lending—made loans harder to get when demand was weakest.
2.) The mortgage-servicing infrastructure—the business of collecting mortgage payments from borrowers on behalf of investors in mortgage bonds—failed horrifically. Even a more generous debt-relief program than the Obama administration’s unpopular mortgage-modification programs would have faced similar headaches of relying on the same overwhelmed servicers.
3.) Policy makers grew distracted from the first two problems because a Band-Aid—a temporary first-time home-buyer tax credit—goosed sales in 2009 and early 2010. When it expired, sales slumped. But by then, policy makers had ceded precious time and political capital, making it that much harder to redouble efforts. – Nick Timiraos
SHOW ME THE MONEY
“Over $4 [trillion], but close to $5 trillion, will be brought back into our country. This is money that would never, ever be seen again by the workers and the people of our country.” – President Trump in August
U.S. companies have moved cautiously in repatriating profits stockpiled overseas in response to last year’s tax-law rewrite. The Wall Street Journal reviewed securities filings from 108 publicly traded companies accounting for the vast majority of an estimated $2.7 trillion in profits parked abroad. They said they have repatriated about $143 billion so far this year. In all, while repatriations have soared past pre-2018 levels, independent analysts don’t expect anywhere near the $4 trillion Mr. Trump has touted, Richard Rubin and Theo Francis report.
REALLY, SHOW ME THE MONEY
Before Congress rewrote the international tax rules, companies often told investors where their cash was. Why? Because the difference between foreign and domestic could be a 35% tax bill. By listing offshore money, companies showed what was really available for domestic uses such as dividends. Now, after the tax changes, the location of cash matters less, and many companies have gone silent. That information gap makes it harder to figure out how much U.S. companies have reduced their stockpiled foreign profits. – Richard Rubin
FLORENCE VS. THE ECONOMY
Hurricanes upend lives and destroy wealth, but leave little lasting imprint on the broader economy. Hurricane Harvey last year flooded the nation’s fourth-largest city by population, Houston, destroying $125 billion worth of property, according to estimates by Moody’s Analytics Inc. But lost economic output was just $8.5 billion, a barely perceptible sliver of more than $19 trillion of national economic output. For the U.S. economy as a whole, output grew at a healthy 2.8% rate in the quarter when Harvey hit Texas.
To be sure, economic growth is not a proxy for well-being. Also, some local economies can be devastated by a storm and bear long-lasting scars. In New Orleans, shocked in 2005 by Hurricane Katrina, employment and economic output still haven’t returned to pre-Katrina levels.
QUOTE OF THE DAY
Let me be clear, compared with today’s smooth single market, all the likely Brexit scenarios will have costs for the economy and to a lesser extent as well for the EU. The larger the impediments to trade in the new relationship, the costlier it will be. – International Monetary Fund Managing Director Christine Lagarde, speaking in London
TWEET OF THE DAY
[wsj-responsive-sandbox id = "0" ]WHAT ELSE WE’RE READING
ALICE in Euroland. In a European Central Bank paper, economists unveiled the Area-wide Leading Inflation CyclE, or ALICE. The aim is to spot turning points in inflation. It’s a wide-ranging mix of nine indicators including oil prices, building permits and the inflation-linked swap rate. There’s a separate gauge for core inflation called, you guessed it, “core ALICE.” The findings: “The headline and core ALICE identify major cyclical movements in inflation in an ex post analysis well, especially for the period since 1999,” the authors wrote. “They performed in particular well in terms of forecasting the direction of inflation developments two or three quarters ahead.” Looks like we’ll be seeing more of ALICE in Europe.
Who said a foolish consistency is the hobgoblin of little minds?* “We find that after committing to a first belief, individuals are reluctant to incorporate new information. This reluctance causes lower belief accuracy and also generates higher belief divergence among subjects. Our findings are in line with the notion that people want to behave consistently,” Armin Falk and Florian Zimmermann write in the Royal Economic Society’s Economic Journal.
*Ralph Waldo Emerson
UP NEXT: TUESDAY
The European Central Bank’s Mario Draghi speaks in Paris at 3:15 a.m. ET.
The National Association of Home Builders housing market index for September, out at 10 a.m. ET, is expected to tick down to 66 from 67 a month earlier.
from Real Time Economics https://ift.tt/2MFgYQL
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