Wednesday, November 14, 2018

Real Time Economics: Signs of Trouble for the Global Economy

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Suddenly, the global economy isn’t looking so great. German and Japanese GDP shrank in the third quarter, momentum in China is vanishing, oil prices are tanking, the U.S. and China are still sparring over trade, and the big U.S. fiscal stimulus is set to fade as deficits grow.

Good morning. Jeff Sparshott here to take you through the day’s top economic news. It’s not all glum: Germany and Japan were hit by temporary factors, cheaper oil could help consumers, and Amazon is set to add 50,000 jobs and sop up spare office space along the East Coast. Let us know what you think by replying to this email.

BREAKING BAD

The global economy took a bad turn last quarter with gross domestic product in Japan and Germany—the world’s third- and fourth-biggest economies—contracting. Japan’s economy slid 1.2% annualized, while Germany’s fell 0.8%. Third-quarter growth in the eurozone was a scant 0.7%, the lowest since early 2013. During the same period, China advanced 6.5%, the weakest pace for world’s second-largest economy since the financial crisis, while the U.S. grew at a solid 3.5% rate.

Glimmers of hope. Japan’s contraction was blamed on a typhoon and an earthquake, so growth should return if trade frictions don’t worsen. In Germany’s case, economists said that the weak result was largely caused by temporary factors, notably a new emissions-testing protocol that caused bottlenecks for passenger-car production. Still, with the world’s two biggest economies fighting over trade and the third and fourth contracting, the global economy doesn’t look set for vigorous growth.

WHAT TO WATCH TODAY

The U.S. consumer-price index for October is expected to rise 0.3% from the prior month. That would put the year-over-year reading at 2.5%. Excluding food and energy, prices are expected to rise 0.2% from the prior month and 2.2% from a year earlier.

Fed vice chairman for supervision Randal Quarles delivers testimony on Capitol Hill at 10 a.m. ET, and Chairman Jerome Powell speaks on the global economy at a Dallas Fed event at 6 p.m. ET.

TOP STORIES

INCONSPICUOUS CONSUMPTION

China bet its economic future on consumers. That wager isn’t paying off. Outlays on automobiles, staple foods and other consumer products grew at the slowest pace in five months in October, while property sales were the slackest in a half-year, according to official data. Separately, the central bank said the amount of new bank loans fell last month.

All told, the softer consumer spending and the reduced loans suggest that demand may be weakening, adding further drag to an economy that was already slowing. Beijing has been trying to nurture consumption as its new growth driver, steering the economy away from reliance on investment. Instead, China’s economy has been on a downward glide path for months, partly due to the bite of a government crackdown on risky financing and fears about a trade fight with the U.S., Liyan Qi, Lin Zhu and Dominique Fong report.

FUEL TO THE FIRE

A commission of security and economic experts convened by Congress warned China’s technology-manufacturing strength threatens U.S. national security. The U.S.-China Economic and Security Review Commission found Chinese dominance of networking-equipment manufacturing imperils U.S. fifth-generation wireless infrastructure, Kate O’Keeffe reports. It also cautioned China’s position as the world’s largest manufacturer of internet-connected household devices creates “numerous points of vulnerability for intelligence collection, cyberattacks, industrial control, or censorship.”

The report bolsters one of the Trump administration’s main complaints about China and certainly won’t do anything to discourage tougher trade measures.

OIL TANKS

U.S. oil prices sank deeper into a bear market Tuesday, posting their steepest fall in over three years and a record 12 consecutive days of declines. Fears of oversupply and weakening demand are gripping the market.

Oil’s rapid decline is now fueling worries about weakness in the broader economy. Investors are questioning whether crude’s plunge could spill over into other markets. The last time oil prices posted such a steep one-day slide, three years ago, crude was in the midst of a rout that eventually dragged down equity prices, Dan Molinski, Amrith Ramkumar and Stephanie Yang report.

THIS WON’T HELP

The International Energy Agency’s monthly oil market report Wednesday said the U.S., Russia and Saudi Arabia are churning out crude at record levels, causing global supply to significantly outstrip demand. Since May, global oil output has climbed by 1.8 million barrels a day, more than enough to offset reductions from Iran due to U.S. sanctions and supply outages in Venezuela.

U.S. RED INK

The federal government started the new fiscal year the same way it ended the last one: with a widening budget deficit.

A strong economy typically leads to narrower deficits: Rising household income and corporate profits help boost tax collections, while spending on safety-net programs tends to decline. That’s not what’s happening. “The trends are clear—outlays are rising steadily and receipts have plateaued for now. While there might still be hope for a growth-led increase in receipts, there are no signs of that in the data yet,” Contingent Macro Advisors said in a note to clients. Falling corporate tax revenue has been a major culprit. At least so far, Republican tax cuts aren’t paying for themselves.

THE SWAMP SWALLOWS AMAZON

Among the many advantages Virginia’s Crystal City offers Amazon is proximity to the federal government across the Potomac River. The federal Leviathan has long been a corporate magnet, as a customer (the Pentagon is a major client of Amazon Web Services) and arbiter in countless regulatory and legislative decisions. As government expanded under President Obama, the Washington region led the country in new office space. Much remains vacant, but maybe not for long: Hopes that government interference would end under a Republican administration and Congress have been dashed by President Trump’s trade war and regular threats against corporate adversaries such as Amazon and its owner, Jeff Bezos.—Greg Ip

QUOTE OF THE DAY

My heart is broken today.—Dallas Mayor Mike Rawlings, upon learning his city had been passed over by Amazon

TWEET OF THE DAY

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WHAT ELSE WE’RE READING

Why does one gasoline station hold its price steady when its across-the-street competitor knocks off a few pennies? Because it’s chasing a different customer. “We contribute to the explanation of cycling heterogeneity by showing that a station’s choice of a pricing strategy is related to the type of consumer targeted: non-cycling stations aim to attract inelastic consumers, while cycling stations target price-sensitive, search-intensive consumers,” the University of Illinois at Urbana-Champaign’s Julia Gonzalez and Carlos Hurtado write in a job market paper.

The interplay of government bonds and fragile banks can create a “diabolic loop.” What happens? Lower bond prices weaken bank solvency and, in turn, affect government guarantees, according to a European Central Bank paper. “The impact of these feedbacks is to make sovereign-banking crises much more severe than they otherwise would have been.” The diabolic loop has been “rocking a number of European economies since 2010,” the paper adds.

UP NEXT: THURSDAY

U.S. retail sales for October, out at 8:30 a.m. ET, are expected to rise 0.5% from the prior month.

U.S. import prices for October, out at 8:30 a.m. ET, are expected to rise 0.2% from the prior month.

U.S. jobless claims, out at 8:30 a.m. ET, are expected to remain low.

The New York Fed Empire State manufacturing survey for November, out at 8:30 a.m. ET, is expected to fall to 20 from 21.1 a month earlier.

The Philadelphia Fed manufacturing survey for November, out at 8:30 a.m. ET, is expected to fall to 20 from 22.2.

It’s another day chock full of Fed talk. Fed vice chairman for supervision Randal Quarles testifies before the Senate Banking Committee at 10 a.m. ET, Chairman Jerome Powell reviews post-Hurricane Harvey recovery efforts in Houston at 11:30 a.m. ET, Atlanta’s Raphael Bostic speaks at a banking conference in Madrid at 1 p.m. ET, and the Minneapolis’ Neel Kashkari participates in a moderated Q&A with the Minnesota AgriGrowth Council at 3 p.m. ET.



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