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The Federal Reserve spoke volumes while saying hardly anything on Thursday. The takeaway: expect another rate increase next month.
Good morning. Jeff Sparshott here to take you through the day’s economic news. We’ll also look at the looming political struggle to pay for American infrastructure, how Iran is filling some of the void after China stopped buying U.S. soybeans, another low for jobless claims, and how Brexit is a bit like legalizing prostitution.
STEADY AS SHE GOES
The Federal Reserve held interest rates steady and highlighted the economy’s strength after its two-day policy meeting. It offered nothing to dispel market expectations that it would deliver its fourth rate rise of the year in December, Nick Timiraos reports.
Broad strength in the economy and labor market—powered in recent quarters by solid consumer spending—has been more than enough to offset any concerns about economic soft spots or financial market volatility. The latest stock market selloffs received no mention in the Fed’s statement, unlike earlier downdrafts in 2015 and 2016. The only significant change nodded to a recent pullback in business investment from its rapid pace earlier this year.
SURPRISE!
The Fed has been able to stay on course in large part because inflation has been bang-on target for five straight months: The closely watched personal consumption expenditure price index excluding food and energy is sitting right at 2%. That might not be locked in. “We think a mix of tariff effects and idiosyncratic factors have opened the door to possible upside surprises to core [consumer prices] & PCE over the next few months,” Morgan Stanley’s Jeremy Nalewaik and Ellen Zentner write in a research note.
The cause? Trump administration tariffs, a rebound in used-car prices and an annual hike in Medicare reimbursement rates. The result? A bump in inflation that will likely be seen as temporary, though “we do expect core CPI inflation to move up in 2019 as labor market slack exerts more upward pressure on inflation and as tariff rates on Chinese imports increase,” the economists write.
Comments or suggestions? 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 U.S. producer-price index for October, out at 8:30 a.m. ET, is expected to rise 0.3% from a month earlier. Excluding food and energy, the inflation gauge is expected to climb 0.2%.
The University of Michigan’s consumer sentiment index for November is expected to slip to 97.0 from 98.6 in October.
The New York Fed’s John Williams and the Philadelphia Fed’s Patrick Harker speak at the New York Fed at 8:30 a.m. ET, and Fed vice chairman for supervision Randal Quarles speaks on stress testing and financial regulation at 9:05 a.m. ET.
TOP STORIES
GRIDLOCK: PLANES, TRAINS AND AUTOMOBILES
Democrats will take the House majority determined to reverse tax cuts for high-income households, a goal that’s a non-starter for Republicans and will color debates on fiscal issues over the next two years, Richard Rubin writes. Take infrastructure. Both sides have signaled they want a spending program to build roads, bridges and other projects that help the economy hum, but disagree on how to fund it. Last year, Senate Democrats proposed a $1 trillion infrastructure plan, financed largely by rolling back cuts in the corporate tax rate and the top individual tax rate, an idea Republicans are sure to reject.
The partisan collision on taxes for the wealthy could also affect discussions on health care, education, more tax cuts for middle-income households and future budget agreements on defense and discretionary spending.
SPEAKING OF TAXES
The tax cut passed late last year was supposed to spur a wave of spending by consumers and companies that would boost demand, rekindle productivity and set the economy on a higher growth trajectory. So far consumers have held up their part of the bargain. But businesses? Not so much, Justin Lahart writes.
The reduction in the corporate tax rate to 21% from 35% is providing a big boost to companies’ profits but not lately to capital spending. Business investment grew at just an 0.8% annual rate in the third quarter, down from the second quarter’s 8.7% and the slowest pace since the fourth quarter of 2016. Instead of investing to boost output and increase efficiency, companies have used their tax windfall to return money to shareholders.
THE FRENEMY OF MY FRENEMY
China isn’t buying many American soybeans anymore. But at least there’s Iran. As rising trade tensions have pummeled Sino-U.S. agricultural trade, a curious pattern has emerged. China, in previous years by far the largest customer for American soybeans, bought just $24 million worth in September, down from $1.1 billion in September 2017. Meanwhile Iran, which in the first half of 2018 bought no U.S. soybeans at all, is taking advantage of deep discounts on American beans to stock up: It bought $140 million worth in August, becoming the top foreign customer for the month, Nathaniel Taplin writes.
China still buys plenty of oil from Iran, which now seems to be using some of those dollar earnings to stock up on U.S. soy. The little ironies of world trade keep going round and round.
BADDER THAN OLD KING KONG
Here’s yet another sign of a strong labor market: The number of jobless claims made by U.S. workers for longer than a week fell to the lowest level since July 1973. (It’s also a sign that fewer workers even bother to apply for benefits, in part because it’s harder to get them and in part because it’s gotten easier to find a new job.)
U.K. ECONOMY HEATS UP…
The U.K.’s economy expanded in the third quarter at its fastest pace in almost two years. In the third quarter, the British economy expanded at an annualized rate of 2.5%, the fastest clip since the last three months of 2016, Jason Douglas and Paul Hannon report.
…BUT IT’S ALREADY COOLED DOWN
There’s a way to measure the economic gains or losses from Basque terrorism, German reunification, legalizing prostitution and the right to bear arms. Researchers are applying the synthetic-control method to Brexit. The result in a virtual Britain? The economy at the start of 2018 was around 2% smaller than it would have been had the 2016 Brexit referendum gone the other way, Jason Douglas reports.
QUOTE OF THE DAY
“I hadn’t quite understood the full extent of this, but if you look at the U.K. and look at how we trade in goods, we are particularly reliant on the Dover-Calais crossing.”-Brexit Secretary Dominic Raab, speaking at an event on Brexit and the tech industry
WHAT ELSE WE’RE READING
There really is such a thing as fake news. “We collect data on the content and types of posts shared by Facebook groups that promote the discussion of anti-vaccine beliefs. We find that a handful of authors account for a disproportionately large number of posts and that the posts focus on promoting articles from fake news sites and other online social media. Our results suggest that anti-vaccine groups on Facebook serve as an alternative channel of information for users—both as an “echo” chamber (when users “like” anti-vaccine posts by other users) and as a means of disseminating false stories (when users share a post with others in their social network),” Lesley Chiou and Catherine Tucker write in a National Bureau of Economic research working paper.
Here’s a bit more on Facebook: “The social platform had a significant effect in persuading undecided voters to support Trump and in persuading Republican supporters to turn out on election day, but had no effect on Clinton’s side,” Federica Liberini, Michela Redoano, Antonio Russo, Ángel Cuevas Rumin and Ruben Cuevas Rumin write at the Center for Economic Policy Research. “Overall, our results show that social media effectively empowered politicians to influence key groups of voters in electoral races. It provides further evidence that recent political outcomes, such as Brexit and the election of President Trump, might be largely due to the effective use of data analytics.”
from Real Time Economics https://ift.tt/2zIjQrh
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