Real Time Economics: U.S.-China Summit On Tap, Trump Threatens GM

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It’s looking more and more like U.S. tariffs on China are going to go up on Jan. 1.

Good morning. Jeff Sparshott here to take you through key developments in the global economy. We’ll look the upcoming Trump-Xi summit and broader trade tensions, General Motors and the U.S. auto industry, a small slip in consumer confidence, and how surveys are outperforming hard data. Let us know what you think by replying to this email.

NO BIG DEAL

A top White House adviser on Tuesday voiced skepticism over this coming weekend’s meeting between President Trump and Chinese President Xi Jinping, suggesting the two leaders may not be able to resolve their escalating trade fight. “I don’t know if the Chinese take him seriously. They ought to,” National Economic Council Director Larry Kudlow said.

The two leaders will meet Saturday night at the Group of 20 summit in Buenos Aires. China wants a truce on tariffs. But Mr. Kudlow’s comments are the second signal in two days that the meeting may end in failure. Monday, Mr. Trump said it was “highly unlikely” that he would suspend an increase in tariffs on $200 billion in Chinese goods to 25%, now scheduled for Jan. 1, Alex Leary and Bob Davis report.

SUMMIT ODDS

The Trump-Xi meeting could end up roiling markets. Trade tensions and tariffs are already biting, particularly in Asia. Softening economic data, in both developed and emerging markets, has added another wild card for unsettled investors, Mike Bird reports.

The problem now: it’s hard to forecast an outcome. The Trump administration has proven more difficult to predict than recent predecessors. Credit Suisse China placed a 25% probability on no agreement whatsoever and continued threats of new tariffs. Their central case is for a partial ceasefire of 6-12 months in which no new tariffs would be imposed, except potentially those that have already been announced. 

WHAT TO WATCH TODAY

U.S. trade in goods for October is out at 8:30 a.m. ET. In September, the U.S. posted record imports and a record trade deficit with China.

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.

The Fed releases a semiannual report on U.S. financial stability at 10 a.m. ET.

Fed Chairman Jerome Powell speaks at the Economic Club of New York at 12 p.m. ET.

TOP STORIES

READY, FIRE, AIM

President Trump threatened to cut electric-vehicle and other subsidies that have benefited General Motors a day after the automaker released plans to close several U.S. factories. The president’s comments hit at GM’s strong position in the electric-car market in the U.S., where the auto giant has benefited from tax incentives meant to spur sales of battery-powered vehicles, Rebecca Ballhaus and Mike Colias report.

The White House provided no additional details. It wasn’t clear what power the president would have to change existing electric-car subsidies or whether he intended to put pressure on Congress to change existing tax law. GM has lobbied federal lawmakers to extend the $7,500 income-tax credit that has made the electric vehicles more affordable for buyers.

COMMAND CAPITALISM

President Trump wants GM to stop building cars in China, its biggest market. That’s probably not going to happen. In today’s globalized car industry, auto makers need their factories to be close to their customers if they’re to turn a profit, a calculation that is being reinforced by the tit-for-tat tariffs China and the U.S. have imposed on each other’s exports, Trefor Moss writes.

“Even if this tariff was zero, GM still wouldn’t build its China volumes in the U.S.,” said Sanford C. Bernstein’s Robin Zhu. “The supply chain would be too long, and logistics costs would make the cars structurally unprofitable.”

OUT OF FOCUSES

One underappreciated but profound benefit of globalization is at risk: bountiful variety. Take sedans. Just two years ago, Americans could choose from 90 different models, from large to subcompact. By next year, that will shrivel to just 62. It’s partly strategic choice by auto makers to invest high-margin trucks and SUVs and electric and autonomous cars. But at the margin, a shift in the direction of globalization is also at work.  Falling trade barriers enabled multinational companies to integrate their supply chains and rationalize operations across borders, to minimize costs and maximize product offerings, Greg Ip writes.

That Mr. Trump’s trade tactics sometimes hurt consumers doesn’t make them wrong: it may be a necessary price if Mr. Trump is to coax foreign countries into concessions that lower the barriers to American companies, workers and exporters. But in the end consumers have to have more to choose from than before; otherwise, they’ll be losers.

COLLATERAL DAMAGE

Europe has been off the radar lately when it comes to trade. And while assets prices in Europe don’t seem to be at risk from an escalation of the U.S.-China conflict, that could change if a broader trade war erupts and all countries impose tariffs on each other. Such a scenario “could lead to a significant decompression of risk premia and strongly declining equity prices in the euro area,” the European Central Bank said in a report. If a global trade war erupted, U.S. equities would fall 10% and corporate bonds spreads would increase up 100 basis points in the first year, the ECB estimated. “In the euro area, equity prices would fall by 15% and corporate bond spreads would increase by 150bps in the first year,” the report said. —Brian Blackstone

A LITTLE BIT SOFTER NOW

A measure of confidence among American households fell in November from an 18-year high. It’s not a major concern: The overall level is still historically robust and consumer spending is expected to remain strong. But it highlights a potentially emerging trend: very-elevated soft data from surveys falling back toward where the hard production data have been, says Suttle Economics’s Phil Suttle.

Note a big drop in the National Association of Home Builders index. The gauge of builder sentiment had been advancing well ahead of hard housing starts data until this month.

The Institute of Supply Management’s manufacturing index, based on a survey of purchasing managers, has also been elevated compared with manufacturing output as tracked by the Federal Reserve.

Consumer sentiment is outpacing spending.

It’s a bit of a mystery why soft data has been outperforming hard data data, especially with something like the ISM’s index, which measures actual activity.

GOOD & PLENTY

We’ve been reporting some glum news lately—a faltering housing market, GM’s job cuts, rising trade tensions, market ructions. So here’s something a bit brighter: the labor market still looks rock solid. The share of Americans telling the Conference Board that jobs are plentiful rose to the highest level since 2001.

QUOTE OF THE DAY

Remaining in the European Union would be a better outcome for the economy, but not by much. —U.K. Chancellor Philip Hammond, speaking about the country’s Brexit deal

TWEET OF THE DAY

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WHAT ELSE WE’RE READING

Do you believe in miracles? Yes! At least when it comes to Germany’s labor market. “We trace the German labor market miracle back to the reform of the German unemployment insurance system that happened during the Hartz reforms in Germany in the mid-2000s,” according to a Center for Economic Policy Research paper. A key part of the Hartz reforms was a cut to the country’s generous long-term unemployment benefits, which made the labor market more flexible. “Absent the reform, unemployment rates would be 50% higher today.”

Maybe people are working longer because it pays, not because they have to. “We find that the implicit tax on work after age 65 has dropped by about 15 percentage points for a typical worker as a result of Social Security reforms; incorporating the change in private pensions, the decline is larger. We provide suggestive evidence that the evolution of retirement incentives has affected retirement behavior,” Wellesley College’s Courtney Coile writes in a National Bureau of Economic Research working paper.

UP NEXT: THURSDAY

German employment numbers for November are out at 3:55 a.m. ET.

German consumer prices for November are out at 8 a.m. ET.

U.S. jobless claims, out at 8:30 a.m. ET, hit a nearly five-decade low in September but have been inching up since. Economists expect 220,000 for the latest week, down slightly from the previous reading of 224,000.

U.S. personal income and consumer spending for October, out at 8:30 a.m. ET, are both expected to increase 0.4% from the prior month.

The personal consumption expenditure price index excluding food and energy for October, out at 8:30 a.m. ET, is expected to increase 1.9% from a year earlier, showing scant sign of inflation pressure.

U.S. pending home sales, out at 10 a.m. ET, are expected to rise 0.3% from a month earlier.

Minutes from the Federal Reserve’s last policy meeting are out at 2 p.m. ET.

The Boston Fed hosts an economic development conference. Boston Fed President Eric Rosengren kicks things off at 2:05 p.m. ET. Cleveland’s Loretta Mester, Chicago’s Charles Evans, Philadelphia’s Patrick Harker, Minneapolis’s Neel Kashkari and Dallas’s Robert Kaplan are all set to participate in the event.

China manufacturing data is out at 8 p.m. ET.

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