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The U.S. economy is flashing some warning signals—starting with the interest-sensitive housing and auto industries.
Good morning. Jeff Sparshott here to take you through key developments in the global economy. We’ll look at President Trump’s plan to hit China with more tariffs, GM’s layoffs, trouble in the housing market, uncharted territory for the Fed, and Morgan Stanley’s odds for a recession. Let us know what you think by replying to this email.
WHAT GOES UP…
President Trump said he expects to ratchet up tariffs on China. Just days before a summit with China’s leader, Mr. Trump called it “highly unlikely” that he would accept Beijing’s request to hold off on boosting tariff levels on $200 billion of Chinese goods to 25%. Chinese officials have said their priority is to convince the U.S. to suspend the planned Jan. 1 increase from 10%, Bob Davis reports.
Mr. Trump is clearly maintaining pressure on China. His tariffs now cover almost half of Chinese imports. The president said he would start in on the rest if the sides don’t strike an agreement. “If we don’t make a deal, then I’m going to put the $267 billion additional on” at a tariff rate of either 10% or 25%, Mr. Trump said.
…MUST COME DOWN
It may not be the best time for heightened trade tensions. General Motors Co.’s plan to cut up to 14,800 North American jobs is a fresh sign the U.S. economy may be slowing after strong growth in the middle of the year. Few economists see a recession, but the large layoff announcement comes as other economic indicators flash yellow, Eric Morath writes.
Warning lights: The housing sector has slowed in the face of higher interest rates, the domestic energy sector faces a big drop in oil prices that could damp hiring and investment, and the global economy has lost momentum. Financial markets are concerned: Stock prices have declined and yields on risky corporate debt have risen.
WHAT TO WATCH TODAY
Fed Vice Chairman Richard Clarida speaks on data dependence and monetary policy at 8:30 a.m. ET.
The S&P/Case-Shiller home-price index for September is out at 9 a.m. ET.
The Conference Board’s consumer confidence index for November, out at 10 a.m. ET, is expected to fall to 135.8 from 137.9 a month earlier.
The Chicago Fed’s Charles Evans, Atlanta’s Raphael Bostic and Kansas City’s Esther George speak at the Clearing House’s annual conference at 2:30 p.m. ET.
TOP STORIES
WHY GM IS CUTTING BACK
General Motors plans to cut up to 14,800 jobs in the U.S. and Canada and end production at several North American factories, marking the auto maker’s first significant downsizing since its bankruptcy last decade, Mike Colias reports. The immediate cause: weak sedan sales.
Longer term: The moves would reduce GM’s annual costs by $4.5 billion by the end of 2020, freeing up money to invest in electric and self-driving vehicles. GM Chief Executive Mary Barra said she wants to act now to help GM sustain profits through an expected downturn in the U.S. car market and keep investing in burgeoning technologies: “The industry is changing very rapidly. We think it’s appropriate to get in front of it while the business and the economy are strong.”
MORE TO COME?
Sales of sedans and other passenger cars have been sliding industrywide for several years as low gasoline prices have prompted more consumers to opt for roomier sport-utility vehicles and trucks. GM plans to drop several passenger-car models from its U.S. lineup, Fiat Chrysler already phased out most small-car and sedan lines for the U.S., and Ford Motor Co. intends to follow suit, ending production of several car models within the next few years.
PERSPECTIVE
GM’s job cuts are going to sting. It’s potentially devastating news for people who are let go and the communities that rely on the automaker for jobs. But in the aggregate, 15,000 jobs isn’t a huge deal. Across the U.S., there were 5.7 million separations—layoffs, quits, retirements and the like—in September alone. In a strong job market, hires are outpacing separations. Over the most recent 12-month span, the net employment gain was 2.5 million. Of course, such sweeping data doesn’t capture key details, like salaries, benefits, productivity, the goods or services produced, and localized pain or gain.
BIG TROUBLE IN BIG D
Dallas’s once vibrant housing market is sputtering. That’s a bad sign. The city’s economy has been booming. But home prices have grown much faster than wages, and buyers have been straining to afford homes. Those price challenges have been masked in part by access to cheap credit, but that era is coming to an end as mortgage rates rise. In Dallas, that means homes are taking longer to sell, bidding wars are rarer and price cuts are more common as buyers absorb the impact of higher rates, Laura Kusisto writes.
If the Dallas market is troubled, don’t expect the other parts of the country to lead a recovery. Already, U.S. existing-home sales have declined on an annual basis for eight straight months, the longest slump in more than four years. The slowdown has been driven by places that had earlier seen some of the strongest price growth during this recovery, including Seattle, Denver, New York City, Boston and the Bay Area.
TAKING AWAY THE PUNCH BOWL, PART 1
A big reason mortgage rates are going up: the Federal Reserve. But after two years of removing economic stimulus in regular, quarterly intervals, central bank officials are now moving into a more unpredictable phase of policy-making.
They will be deciding whether and when to raise interest rates more on the basis of the latest signs of economic vigor—such as in inflation, unemployment and growth—and less on forecasts of how the economy is expected to perform in the months and years to come, Nick Timiraos reports. That could mean increased uncertainty for markets about the likely path of interest rates more than a few months or even weeks ahead.
TAKING AWAY THE PUNCH BOWL, PART 2
The Fed isn’t the only central bank that that’s ending crisis-era policies. European Central Bank President Mario Draghi on Monday confirmed that the ECB would likely start winding down its €2.6 trillion bond-buying program after next month. The move comes at an awkward time—just as the currency union posts its slowest growth rate in about four years, and as borrowing costs jump in Italy, the bloc’s number-three economy, which is clashing with the European Union over its budget.
MORGAN STANLEY SAYS…
In 2019, the probability of recession remains low at 15%, but naturally rises in 2H around the growth correction. By the second half of 2020, the economy shows clear signs that it has entered the last stage of the expansion—the stall/overheating phase of the business cycle—where we see the probability of recession rising to 30%.
QUOTE OF THE DAY
I spoke with Mary Barra, the head of General Motors last night. I said: I heard you’re closing your plant. It’s not going to be closed for long, I hope, Mary, because if it is you’ve got a problem.—President Trump, in an interview with the WSJ
TWEET OF THE DAY
[wsj-responsive-sandbox id = "0" ]WHAT ELSE WE’RE READING
President Trump’s protectionist policies are a natural reaction to trade-related job losses and rising inequality. “We show that the long-run consequences of a shock depend on whether or not less skilled workers are eventually able to catch up to the overall economy. If convergence is possible, the result will be protectionist overshooting: the short run tariff spike will gradually unwind, as workers increase education and support for freer trade rises. Alternatively, if less-skilled workers fall even further behind after the shock, the result will be protectionist escalation: a pendulous transition to permanently higher tariffs,” Dartmouth’s Emily Blanchard and University of Bielefeld’s Gerald Willmann write.
Workers are not that well adapted to doing different kinds of work. “This paper shows that the growth rate of a displaced worker’s pre-displacement occupation significantly impacts that worker’s duration of joblessness and earnings losses. A one standard deviation decrease in the worker’s occupation growth rate (which is approximately four percentage points) is associated with a 16.1% increase in the duration of joblessness and a 9.2% decrease in weekly earnings,” UC Santa Barbara’s Sarah Bana writes in a job market paper.
UP NEXT: WEDNESDAY
U.S. trade in goods for October is out at 8:30 a.m. ET.
U.S. gross domestic product for the third quarter is out at 8:30 a.m. ET. The revised figures are expected to be unchanged from the advance reading of 3.5% growth.
U.S. new-home sales for October, out at 10 a.m. ET, are expected to rise 4% to an annual pace of 575,000.
The Richmond Fed manufacturing survey for November is out at 10 a.m. ET.
Fed Chairman Jerome Powell speaks at the Economic Club of New York at 12 p.m. ET.
from Real Time Economics https://ift.tt/2r9eEJs
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