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The U.S. economy has been taking some hits and growth is suddenly looking a bit weaker. Good morning. Jeff Sparshott here to take you through key developments in the global economy. Send us your questions, comments and suggestions by replying to this email.
FARE THREE WELL
Americans’ spending on services slowed sharply in the fourth quarter, a development that will likely force downward revisions to official estimates of fourth-quarter gross domestic product. The Bureau of Economic Analysis on Feb. 28 said U.S. GDP grew 2.6% annualized in the fourth quarter. But that was based on incomplete source data—such as spending on services—so the agency follows up with multiple revisions. The next is March 28.
The upshot: Following the services data, JP Morgan lowered its 4Q estimate to 1.8%, Macroeconomic Advisers to 2% and Oxford Economics to 1.9%. Another possible consequence: full-year 2018 GDP growth could fall below 3%, a data point the Trump administration cites as evidence its policies have lifted the U.S. economy. The BEA initially tabulated 4Q-to-4Q GDP at 3.1%, while private forecasters now have it just below that mark, Paul Kiernan reports.
WHAT TO WATCH TODAY
Canada’s consumer-price index for February is out at 8:30 a.m. ET.
IHS Markit’s flash U.S. manufacturing index for March is expected to hold at 53.0. (9:45 a.m. ET)
U.S. existing-home sales for February are expected to rise to an annual pace of 5.10 million from 4.94 million a month earlier. (10 a.m. ET)
The Baker-Hughes rig count is out at 1 p.m. ET.
The U.S. federal budget deficit for February is expected to widen to $227 billion from $215 billion during the same month a year earlier. (2 p.m. ET)
The Atlanta Fed’s Raphael Bostic speaks on the economy and monetary policy at 9:30 p.m. ET.
TOP STORIES
BOEING AND THE AMERICAN ECONOMY
Indonesia’s flagship airline wants to cancel an order for 49 Boeing 737 MAX jets, saying passengers have lost confidence in the aircraft following two deadly crashes. The U.S. economy could feel the effects if that becomes a global trend. JP Morgan estimates the 737 MAX accounts for one-quarter of domestic U.S. aircraft production. If safety issues “are not resolved in a timely manner and production of the 737 MAX needs to be halted for a spell, it would take about…0.6%-point off the quarterly annualized growth rate of GDP in the quarter in which production is stopped,” bank economists Michael Feroli and Daniel Silver say. For context, JP Morgan is forecasting first-quarter GDP at 1.8%—a big Boeing hit would knock it down to 1.2%.
Numbers to watch: inventories, durable goods shipments and international trade. If Boeing keeps producing but temporarily can’t deliver the aircraft, inventories will shoot up, likely balancing out hits to GDP from trade and shipments. Longer term, order cancelations would push down shipments and exports, which would be a drag on the economy.
WHERE’S MY TAX REFUND?
U.S. tax refunds are lagging last year’s pace. Through the week ending March 15, the IRS dished out $177.19 billion to individuals, about 3% shy of 2018’s $182.77 billion. If the gap persists, that may be enough to put a tiny dent in first-quarter consumer spending. A potentially bigger concern? “The market volatility, government shutdown, and concerns about trade tensions could result in a higher percentage of refunds this year going toward savings rather than spending,” economists at Morgan Stanley said in a research note.
DOWNWARD FACING FED
Jerome Powell’s response to an economic curveball: flexibility. The Federal Reserve chairman abruptly changed course in just three months, both with interest rates and the Fed’s asset portfolio. In doing so, Mr. Powell is showing he cares more about crafting what he thinks is the right policy than winning an argument with either markets or economists, Nick Timiraos writes.
Risk management: Mr. Powell’s approach tries to balance the risk of policy being too loose—which could fuel unwanted inflation or asset bubbles—with the risk that the central bank could tighten policy too much and prematurely end the expansion. He appears eager to accept the risk that the economy stabilizes and the Fed is forced to raise rates again.
NOT LOOKING OUT FOR THE LITTLE GUY
The Fed and European Central Bank hog the headlines. But abrupt changes in the policies of the world’s largest central banks have rippled through smaller economies, leaving them with the prospect of low and even negative interest rates for years to come. The latest: The Swiss National Bank said it would keep its policy rate at minus 0.75% and reduced its inflation forecast to 0.3% this year and 0.6% in 2020, Brian Blackstone writes.
Danger zone: There’s a risk that easy-money policies could fuel destabilizing bubbles in real estate and other asset markets. They may also leave banks with little ammunition to respond to the next economic downturn.
EUROPE STUCK IN THE SLOW LANE
IHS Markit’s eurozone composite Purchasing Managers Index—a measure of activity in the manufacturing and services sectors—slipped in March, suggesting more weak economic growth in the first quarter. While services propped up overall numbers, the outlook for factories is bleak: the region’s manufacturing PMI fell to the lowest level in 71 months.
“The big picture is that the euro-zone economy remains very much in the slow lane, with the German manufacturing recession and wider downturn in Italy dragging the region down,” says Capital Economics’s Andrew Kenningham.
BREXIT MARCH: APRIL, MAY
European leaders allowed Prime Minister Theresa May to postpone the Brexit deadline beyond next week. They also warned the U.K. could still crash out of the trade bloc. EU leaders decided that if the British Parliament approves a Brexit withdrawal agreement next week, the bloc would extend the Brexit deadline until May 22, giving the U.K. and the EU time to approve the necessary legislation to allow the agreement to be implemented. If Mrs. May’s Brexit deal isn’t approved, the U.K. would have until April 12 to indicate how it wants to take the Brexit process forward, Laurence Norman and Max Colchester report.
“We didn’t loosen anything. By April 12, we have to know what’s going on, otherwise there is no deal,” said Luxembourg Prime Minister Xavier Bettel.
TWEET OF THE DAY
[wsj-responsive-sandbox id = "0" ]WHAT ELSE WE’RE READING
Washington, D.C., in 2008 banned the sale of single beers in parts of the city in an effort to cut down on crime and public drunkenness. What happened? “The most common way for affected retailers to continue to fill that demand after moratoriums in the District was by offering two-packs of alcoholic beverages, rather than singles,” D.C.’s Alcoholic Beverage Regulation Administration writes in a report. More broadly, there’s no clear evidence the bans “have effectively relieved the societal ills of binge drinking, alcohol-related violence and public intoxication.” (h/t @maustermuhle)
Chicago Booth’s IGM forum polled economists about Modern Monetary Theory—the idea that a country that is able to borrow in its own currency need not worry about government deficits and debt. None really liked it: 88% of those who answered either disagreed or strongly disagreed with the question: “Countries that borrow in their own currency should not worry about government deficits because they can always create money to finance their debt.”
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