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Good morning. Today we look at U.S. fiscal policy, why the Trump administration might not label China a currency manipulator, unintended consequences of U.S. sanctions, signs of life for European exporters, and the dynamics of supply and demand in higher education.
RED INK
The U.S. government ran its largest budget deficit in six years during the fiscal year that ended last month. It’s an unusual development in a fast-growing economy and a sign that tax cuts have so far restrained government revenues. The deficit is expected to hit $1 trillion this year.
Deficits usually shrink during economic booms because strong growth leads to increased tax revenue while spending on safety-net programs tends to tail off, Kate Davidson reports. In the last fiscal year, interest payments on the federal debt and military spending rose rapidly, while revenue failed to keep pace as the Republican tax cuts for both individuals and corporations kicked in.
BOOM AND BUST
“America’s booming economy will create increased government revenues,” Mick Mulvaney, President Donald Trump’s budget director, predicted Monday. So far, the budget figures he released show exactly the opposite: the economy is booming thanks to falling revenue. In the three months before the tax cut on Jan. 1st, federal revenues rose 4% from a year earlier and real GDP rose 2.5%. In the nine months after, revenues fell 1% and growth accelerated to 2.9%. The tax cut pushed the budget deficit up to 3.9% of GDP in fiscal 2018 from 3.4% in fiscal 2017. Adjusting for a shift in social security payments the deficit actually jumped to 4.1% of GDP from 3.2%.
This looks like conventional demand-side stimulus, not the supply-side lift Republicans claim the economy will get from the tax cut, shrinking the deficit. Unfortunately, when demand stimulus fades, so does the growth boost, leaving the elevated deficit. – Greg Ip
The U.S. budget deficit is heading back toward $1 trillion and no one in Washington seems to care. Should we be worried? 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
U.S. industrial production for September, out at 9:15 a.m. ET, is expected to rise 0.2% from the prior month.
The National Association of Home Builders housing market index for October, out at 10 a.m. ET, is expected to hold steady at 67.
The job openings and labor turnover survey for August is out at 10 a.m. ET.
The San Francisco Fed’s Mary Daly speaks at Wellesley College at 4:15 p.m. ET.
The U.S. Treasury’s semiannual currency report is due out this week. President Trump has repeatedly criticized China for manipulating the yuan to its advantage and America’s detriment, though the Treasury isn’t expected to fault the country this time around. Other nations could come under increased scrutiny, including Germany, India, Thailand and Taiwan.
TOP STORIES
DOLLAR VS. YUAN
China’s yuan has fallen more than 9% against the dollar since the U.S. Treasury’s last currency report in April. Why shouldn’t the U.S. label the country a manipulator, a designation that allows sanctions to kick in?
The WSJ’s James Mackintosh writes that it’s tempting to think that China must be actively pushing its currency down in an attempt to offset the effect of U.S. tariffs. But arguably the yuan should have weakened more. It is being pushed down by a slowing economy and easier monetary policy, at the same time that the dollar is being pushed up by the supercharged U.S. economy and higher interest rates. If anything, China has been preventing its currency from falling further.
NON-TARIFF BARRIERS
U.S. oil exports to China have slowed to a trickle, an abrupt reversal that is upending global crude trade flows and forcing American producers to find new buyers. China was the biggest buyer of U.S. crude oil in the first half of this year. But in August, U.S. crude exports to China, the world’s largest oil importer, fell to zero, Georgi Kantchev and Rebecca Elliott report. China hasn’t hit U.S. crude with tariffs but rising trade tensions appear to be the main cause.
U.S. producers have found new markets and overall oil exports haven’t fallen significantly. But the changes have scrambled the global oil trade, with Russia and Saudi Arabia moving in to replace U.S. oil in China. The situation is also hitting the profits of some shipowners, as the long and lucrative route from the U.S. to China dries up.
UNINTENDED CONSEQUENCES: SANCTIONS EDITION
U.S. sanctions have driven the price of oil and the ruble apart—leaving Russia with expensive crude and a cheaper currency, a combination that is helping its economy. The price of oil, Russia’s main export, has risen almost 14% since mid-August, largely because of coming U.S. sanctions against Iran. Meanwhile, the ruble has declined 15% since April, when Washington imposed sanctions on Russia for alleged meddling in U.S. elections and other aggressions. So, just as the price of dollar-denominated oil rises, those greenbacks are worth more when translated back into a weaker ruble, Avantika Chilkoti reports.
BACK IN BUSINESS
Eurozone exports of goods to the rest of the world rose sharply in August, indicating that economic growth likely continues at a modest pace. A surge in exports was behind the eurozone’s strong performance in 2017. But that growth engine has faltered this year, with the European Central Bank identifying weaker demand from Asia as a key factor, Paul Hannon reports. However, after a worrying decline in July, the European Union’s statistics agency on Tuesday reported a 2.1% rebound in goods exports during August. With imports flat, the seasonally adjusted trade surplus widened for the first time since March.
OLD SCHOOL
After increasing for decades, the real cost of attending both public and private college is flat and in some cases even declined this year. If that sounds counterintuitive, it’s because the sticker price for higher education continues to inch up even though fewer students actually pay it, according a report by the College Board, a New York nonprofit.
One big reason: Private colleges are increasing financial aid as they compete harder to attract students from a diminishing pool of high-school graduates. This demographic drop is expected to accelerate, as falling U.S. fertility rates lead to shrinking numbers of college-ready children, Douglas Belkin reports.
Sticker shock: The average net cost of a year at a four-year public college or university was $14,880 in 2018–19. Four-year private schools cost $27,290.
READERS RESPOND
On Monday, we asked if the U.S. is losing anything with the gradual demise of old-line retailers like Sears and Toys “R” Us.
There is a lot lost in the demise of “sticks and bricks” retail stores. The first is a straightforward economics answer—local employment is lost and is replaced by minimum wage packers at Amazon (now $15 per hour). The second is also economically straightforward and has already been much bemoaned—the loss of small store downtowns that knit community together. The third is behavioral—for most people and families, shopping is a social experience and much social interaction takes place in the course of shopping. Buying online (as with most internet interactions) isolates us. —Donald Wargo, Temple University
TWEET OF THE DAY
[wsj-responsive-sandbox id = "0" ]WHAT ELSE WE’RE READING
Those big GDP, jobs and other economic numbers the government releases don’t often reflect local realities. “In the years following the recession, top-tier places have thrived, seeing meteoric growth in jobs, businesses, and population. Meanwhile, the number of people living in America’s most distressed zip codes is shrinking as the nature of distress becomes more rural. But the gaps in well-being between prosperous areas and the rest have grown wider, and national rates of growth have become more distant from the experience of the median community,” the Economic Innovation Group writes in a new report.
When it comes to business access to credit, there is too much of a good thing. According to a paper published by the Bank of France, easier access to credit raises productivity growth initially. But it also reduces the exit rate of the least productive firms, leading to an inverse U shape between credit access and productivity. “The decline in productivity growth in most advanced countries since the 1970s may indeed be partly related to an overall easier access to credit due to financial liberalization over the period,” the authors wrote.
UP NEXT: WEDNESDAY
U.K. inflation figures for September are out at 4:30 a.m. ET.
U.S. housing starts for September, out at 8:30 a.m. ET, are expected to slip to an annual pace of 1.22 million. Building permits are expected to rise to 1.27 million.
Fed governor Lael Brainard speaks on fintech and financial inclusion at 12:10 p.m. ET.
Minutes from the Federal Reserve’s Sept. 25-26 meeting are out at 2 p.m. ET.
The Bank of Japan’s Haruhiko Kuroda speaks at a quarterly meeting of regional branch managers 8:30 p.m. ET.
from Real Time Economics https://ift.tt/2ExOSYy
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