Real Time Economics: The Global Trade Slump

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The global economy is looking shaky as trade slows and factories pull back. Good morning. Jeff Sparshott here to take you through the day’s top economic news, including U.S.-China trade talks, looming auto tariffs, China’s new soybean supplier, and the Fed’s patience. Send us your questions, comments or suggestions by replying to this email.

GLOBAL TRADE IS IN A FUNK

South Korean trade figures out Thursday show exports and imports fell by the most since mid-2016; exports to China dropped 13.6%. Korea’s weakness today means global weakness tomorrow thanks to its position at the center of many international supply chains. Japan, meanwhile, recorded a 31.7% fall in exports to China in January.

U.S.-China trade tensions aren’t the only reason for the global trade slump—the current weakness began well before the U.S. first imposed tariffs last May. The true leading cause of the slowdown is China’s fading growth. So while any deal between Washington and Beijing would be good for their exporters and investors, it likely won’t reverse the broader global trade malaise, Mike Bird reports.

WHAT TO WATCH TODAY

The European Central Bank releases minutes from its Jan. 23-24 meeting at 7:30 a.m. ET.

The Atlanta Fed’s Raphael Bostic speaks on the economy and monetary policy at 7:50 a.m. ET.

U.S. durable goods orders for December are expected to rise 1.5% from a month earlier. (8:30 a.m. ET)

U.S. jobless claims are expected to fall to 227,000 from 239,000 a week earlier. (8:30 a.m. ET)

The Philadelphia Fed’s manufacturing survey for February is expected to fall to 14 from 17 a month earlier. (8:30 a.m. ET)

IHS Markit’s U.S. manufacturing purchasing managers index for February is expected to tick down to 54.2 from 54.9. (9:45 a.m. ET)

U.S. existing-home sales for January are expected to rise to an annual rate of 5.02 million from 4.99 million a month earlier. (10 a.m. ET)

The Conference Board’s leading economic index for January is expected to rise 0.1%. (10 a.m. ET)

U.S.-China trade talks at the principal level resume in Washington, D.C.

Bank of Canada Governor Stephen Poloz speaks at 12:50 a.m. ET.

Japan’s consumer-price index for January is out at 6:30 p.m. ET.

TOP STORIES

FALLING EXPORTS SIGNAL FALLING DEMAND

Japan and eurozone manufacturing sectors are pulling back. IHS Markit’s preliminary purchasing managers indexes for February showed factory activity in Japan at a 32-month low and the eurozone at a 68-month low. Both measures fell below 50, the threshold signaling activity is expanding or contracting. While growth in the service sector more than offset manufacturing’s decline in the eurozone, the overall picture is iffy at best.

Japan: “Unless service sector activity can offset manufacturing weakness, the chance of Japan entering a recession in 2019 looks set to rise.” —Joe Hayes, economist at IHS Markit

Eurozone: “The eurozone economy remained close to stagnation in February…. The survey data suggest that GDP may struggle to rise by much more than 0.1% in the first quarter.” —Chris Williamson, chief business economist at IHS Markit

CAVE MEN

Chinese leader Xi Jinping and President Trump share a common problem: growing concerns on the home front that they are going to cave in to the other side. “There is a growing call for a harder-line approach [toward the U.S.] in the Chinese society,” said Mei Xinyu, an analyst at a think tank affiliated with China’s Commerce Ministry. Mr. Trump risks a backlash if he cuts a deal that won’t lead to fundamental changes by China—from Democratic presidential candidates, U.S. business groups, labor unions and conservative anti-free traders, Lingling Wei and Bob Davis report.

The two nations have incentives to end the fight. China’s economy is slowing, which could dent support for Communist Party leadership. In the U.S., failed trade talks could unsettle Wall Street—and Mr. Trump views the stock market as a key barometer of his presidency. The challenge of reaching a meaningful compromise, however, has been exacerbated by the pressure on each side to claim victory over the other.

DEFINE PROGRESS

This week, negotiators from the U.S. and China are holding the fourth round of discussions since mid-January to resolve the yearlong trade dispute. The two sides are trying to hash out a broad agreement in the form of a memorandum of understanding, U.S. and Chinese officials say. The result would likely be framed as the broad outline of a deal that Messrs. Trump and Xi would later finalize at a summit, a move that could allow both men to claim a win.

THE 800-POUND GORILLA

President Trump said the U.S. would impose auto tariffs on the European Union if a trade deal can’t be reached between the two sides: “If we don’t make a deal, we’ll do the tariffs.”

The Commerce Department this week concluded its probe into whether imported cars and parts pose a national-security threat; the results weren’t made public. If the tariffs are imposed, then prices of cars from Japan, Germany and South Korea would rise sharply. Europe has promised to retaliate.

MIDWEST PAIN IS RUSSIA’S GAIN

President Trump’s trade conflict with Beijing has nearly wiped out U.S. soy exports to China, the bean’s biggest market. Russian farmers are working to step into the void. Russian soybean exports to the country have risen more than 10-fold in four years to nearly 1 million tons, Thomas Grove and Anatoly Kurmanaev report. Chinese officials this week reaffirmed an earlier commitment to buy more American soybeans amid U.S.-China economic negotiations. But the outcome of those talks are uncertain.

PATIENCE IS A VIRTUE

Federal Reserve officials last month supported putting interest-rate increases on hold until they could better judge risks to U.S. economic growth. After last month’s meeting, Fed Chairman Jerome Powell declined to say whether the central bank maintained a bias for tighter or easier policy, which marked a notable turn from a clear preference for raising rates in December. Minutes from the January meeting show the debate over the ultimate path for interest rates centered on whether to eventually raise them or keep them steady—discussions of a rate cut didn’t surface, Nick Timiraos reports.

QUOTE OF THE DAY

He really seems to have it in for Germany in particular. —Austrian Chancellor Sebastian Kurz, after meeting with President Trump (via Bloomberg)

TWEET OF THE DAY

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WHAT ELSE WE’RE READING

U.S. import tariffs could cost Volkswagen billions of euros. VW Chief Executive Herbert Diess said the U.S. threat of a 25% tariff on European-produced cars is the biggest worry for the continent’s carmakers in 2019. “It’s becoming tense once again,” Mr Diess told the Financial Times. “You know it’s a pity because we can’t solve it from the car industry [alone]. It’s more of a tariffs negotiation between Europe and the United States.”

The economy hasn’t been kind to low-skilled workers. The consequences are severe. “We document slowing mortality gains and rising morbidity and disability program enrollment that are stronger for less-educated males and in states with lower levels of education. Declines in marriage are also concentrated among non-college educated men,” Courtney Coile and Mark Duggan write in a National Bureau of Economic Research working paper.

UP NEXT: FRIDAY

The eurozone consumer-price index for January is out at 5 a.m. ET.

It’s a big day for Federal Reserve speakers: Atlanta’s Raphael Bostic speaks in New York at 8:15 a.m. ET; Chicago Booth’s Monetary Policy Forum features New York’s John Williams and San Francisco’s Mary Daly at 10:15 a.m. ET, Vice Chairman Richard Clarida at 12 p.m. ET, Vice Chairman Randal Quarles, Philadelphia’s Patrick Harker and St. Louis’s James Bullard at 1:30 p.m. ET; and Mr. Williams speaks at his bank at 5:30 p.m. ET.

European Central Bank President Mario Draghi speaks in Bologna, Italy, at 10:30 a.m. ET.

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