Real Time Economics: Are U.S. Factories in Trouble?

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U.S. factory activity is looking weaker, the American oil boom is moderating and the Fed is under a lot of pressure to get its next rate call right. 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.

Friday Night Lights Out

The Dallas Fed’s manufacturing index fell to the lowest level in three years in June. Trade tensions are clouding the outlook for factories, with 41% of Texas manufacturers saying U.S. and foreign tariffs have had a negative impact on business. The weak Dallas report follows soft New York and Philadelphia Fed surveys, suggesting a potentially poor reading for the closely watched Institute for Supply Management manufacturing index (out July 1). U.S. activity could well drop to the lowest level since mid-2016, confirming a big slowdown for the factory sector and underscoring broader troubles in the world economy. 

High Frequency Economics‘s Jim O’Sullivan says the June ISM index is tracking at 50.8, down from 53.2 in May and 57.3, on average, in 2018. Suttle Economics‘s Phil Suttle says there’s a good chance that June ISM index dips to 50, or possibly below. Readings below 50 signal contraction in the sector. 

WHAT TO WATCH TODAY

The S&P/Case-Shiller 20-city home-price index for April is expected to rise 2.6% from a year earlier. (9 a.m. ET)

The Conference Board’s consumer confidence index for June is expected to slip to 131 from 134.1 a month earlier. (10 a.m. ET)

U.S. new-home sales for May are expected to rise to an annual pace of 683,000 from 673,000 a month earlier. (10 a.m. ET)

The Richmond Fed’s manufacturing survey for June is expected to fall to 3 from 5 a month earlier. (10 a.m. ET)

The Congressional Budget Office releases its 2019 Long-Term Budget Outlook at 10:00 a.m. ET.

Fed Chairman Jerome Powell headlines central bank speakers with remarks on the economic outlook and monetary policy at 1 p.m. ET. The New York Fed’s John Williams speaks in New York at 8:45 a.m. ET, the Atlanta Fed’s Raphael Bostic speaks on housing 12:00 p.m. ET, the Richmond Fed’s Thomas Barkin speaks in Ottawa at 3:30 p.m. ET, and the St. Louis Fed’s James Bullard gives opening remarks at a lecture in St. Louis at 6:30 p.m. ET.

TOP STORIES

Long Term: The U.S. Oil Boom is Moderating

Shale drillers transformed the U.S. into the world’s largest oil producer, churning out roughly 12 million barrels a day. But after years of losing money, they are coming under intense pressure from investors and Wall Street financiers to boost returns, Rebecca Elliott and Bradley Olson report.

• How they respond will shape America’s heady pursuit of “energy independence” and its status as a geopolitical oil player.
• Dialing back: Companies long valued on growth prospects are seeing new capital dry up as many find it more expensive than anticipated to meet lofty production goals. Executives are slashing overhead and dialing back drilling plans.
• As the frenzy slows, the pace of U.S. production growth is set to moderate this year. Many older wells are falling short of expectations, and some operators acknowledge that they have fewer future drilling locations than they once predicted.

Short Term: U.S. Oil Exports Are Hopping

U.S. crude exports are surging. Strife along the Strait of Hormuz has given oil buyers second thoughts about the Persian Gulf, lifted crude prices, sent tanker rates surging and opened a window for U.S. producers to sell more barrels abroad. That’s helping narrow the gap between Brent crude, the global oil benchmark, and West Texas Intermediate, the U.S. benchmark. The $6.96 difference between the two prices is the slimmest it has been since April, Ryan Dezember reports.

One, Two, Three, Four, Pressure!

The Federal Reserve is under plenty of pressure—from investors and the White House—to cut interest rates. 

• President Trump said the Federal Reserve “doesn’t know what it is doing” after the bank opted not to cut last week. “Think of what it could have been if the Fed had gotten it right,” Mr. Trump tweeted. “Now they stick, like a stubborn child, when we need rates cuts, & easing, to make up for what countries are doing against us. Blew it!”
• Are they listening? Dallas Fed President Robert Kaplan said it is too soon to say whether the Fed will need to reduce interest rates in coming months. “The question is whether trade and global growth uncertainties are likely to persist in a manner that leads to a material deterioration in the outlook for U.S. economic growth,” Mr. Kaplan said.
• Low on ammo: Rates are already low. The current target range is 2.25% to 2.5%. Contrast that with the 5.25% the Fed targeted before it started cutting ahead of the last recession, or its 6.5% target a few months before the 2001 recession began. To revive the economy after a recession, the Fed typically has had to cut rates by about 5 percentage points. Now it would only get about halfway there before hitting zero and having to launch another round of bond-buying and other unconventional policies.
• The Fed last week held its benchmark rate steady, though nearly half of officials indicated they thought lower rates would be needed by year’s end.

What Else We’re Following

President Trump is pushing for greater price disclosure in health care. He signed an executive order that could make thousands of hospitals expose more pricing information and require doctors, health clinics and others to tell patients about out-of-pocket costs upfront.

FedEx is suing the Commerce Department over restrictions on Huawei. The shipping giant said the latest restrictions, which essentially force FedEx to police millions of packages to ensure prohibited items aren’t being exported to Huawei, are legally and logistically impossible.

Carrefour is the latest Western company to bail out of China. The grocery retailer is unloading most of its operations in the country as it struggles to keep up with nimble delivery providers. The move marks the latest retreat by a Western company in China in the face of stiff competition from homegrown rivals.

TWEET OF THE DAY

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WHAT ELSE WE’RE READING

U.S. billionaires and their heirs want to pay a little bit more in taxes. “We are writing to call on all candidates for President, whether they are Republicans or Democrats, to support a moderate wealth tax on the fortunes of the richest 1/10 of the richest 1% of Americans—on us. The next dollar of new tax revenue should come from the most financially fortunate, not from middle-income and lower-income Americans,” Abigail Disney, George Soros, Liesel Pritzker Simmons and 16 others write on the website Medium. 

The U.S. economic expansion will be the longest on record as of July, the unemployment is at a 50-year low and wages are rising. “Despite these positive macroeconomic outcomes, the benefits from this decade-long expansion have not been shared as widely as they could. Average life expectancy is falling, income and wealth polarization have increased, poverty has fallen but remains higher than in other advanced economies, and social mobility has steadily eroded,” the International Monetary Fundsaid in a summary of U.S. economic conditions.

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from Real Time Economics https://on.wsj.com/2N9BaiV