Newsletter: The U.S. Economy Looks Fine. What Happens if that Changes?

This is the web version of the WSJ’s newsletter on the economy. You can sign up for daily delivery here.

Policy makers don’t have a ton of options if the economy sours, the Labor Department revised away half-a-million jobs and federal debt is exploding. 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.

Can We Fix It?

After debating for days whether the U.S. is going into an economic downturn, Washington policy makers and Wall Street investors have barreled into an even more difficult problem: There are few good options to deal with one if it happens, Rebecca Ballhaus and Nick Timiraos write.

• With short-term interest rates already low, the Federal Reserve has little room to cut borrowing costs to spur spending and investment. Meantime, federal debt is exploding, which could hamstring efforts to boost growth with tax cuts or spending increases.
• Further complicating matters, Democrats and Republicans strongly disagree about how best to rev up the economy. Democrats favor higher spending while the GOP wants lower taxes.
• President Trump, meanwhile, abruptly backed away from pursuing new tax cuts. Mr. Trump is in the awkward position of calling for economic stimulus at the same time he says the economy is strong.

WHAT TO WATCH 

U.S. jobless claims are expected to fall to 217,000 from 220,000 a week earlier. (8:30 a.m. ET)

IHS Markit’s preliminary U.S. manufacturing index for August is expected to tick down to 50.3 from 50.4 at the end of July. The services index is expected to slip to 52.6 from 53.0. (9:45 a.m. ET)

The Conference Board’s leading economic index is expected to advance 0.3% from a month earlier. (10 a.m. ET)

Eurozone consumer confidence for August is out at 10 a.m. ET.

The Kansas City Fed’s manufacturing survey for August is out at 11 a.m. ET.

The Minneapolis Fed’s Neel Kashkari speaks about “Too Big to Fail” financial institutions at 2:30 p.m. ET.

The Kansas City Fed releases the full agenda for the central bank’s annual symposium in Jackson Hole, Wyo., at 6 p.m. ET.

Japan’s consumer-price index for July is out at 7:30 p.m. ET.

TOP STORIES

The Big Downgrade

The U.S. economy wasn’t as strong as we thought. Government agencies in recent weeks have substantially lowered their estimates of job gains, output growth and corporate profits as part of their regularly scheduled updates based on fuller data, Josh Mitchell and Paul Kiernan report.

• Employers added about two million jobs in the year through March, down 501,000 from a prior estimate, the Labor Department said. That brought down the average monthly gain over that period to about 168,000 from 210,000—still solid but not as robust as once thought.
• The Commerce Department late last month said gross domestic product grew 2.5% in the fourth quarter of 2018 compared with a year earlier. That was down from the earlier estimate of 3%. A key measure of corporate profits also was revised lower.
• On the flip side, personal income—which comes from pay, dividends, interest and other sources—rose more and households saved more in 2018 and the first quarter of this year than earlier estimated.
• Together, the new figures recast the picture of the expansion’s health as it approached its 10-year anniversary in June.

I’m Old Enough to Remember When Deficits Mattered

Federal deficits and debt are projected to grow much more than expected after the White House and Congress’s latest budget deal. The Congressional Budget Office forecast government debt as a share of the economy will rise from 79% this year to 95% in 2029, the highest level since just after World War II, Kate Davidson reports.

And You May Ask Yourself, Am I Right? Am I Wrong?

The Federal Reserve struggled to provide a single explanation for why it cut interest rates last month. That’s because its officials supported the move for different reasons, Nick Timiraos writes.

• Fed officials saw risks to the economy differently: Some worried most about low inflation, others about a world-wide manufacturing downturn and a chill in business investment, and still others focused on slowing global growth and trade tensions.
• At the same time, several didn’t see a strong case to cut rates at all given healthy consumer spending and labor market conditions. Two Fed bank presidents dissented.
• Fed Chairman Jerome Powell’s challenge in the weeks ahead, including with his speech Friday at the Kansas City Fed’s annual conference in Jackson Hole, Wyo., is to articulate clearly why the central bank is likely to continue reducing rates absent obvious signs of economic deterioration in the U.S.
• With this speech, Mr. Powell can start building a consensus among his colleagues for the next move, which could come at the Fed’s Sept. 17-18 meeting.

On the Bright Side

Not all U.S. economic news was gloomy yesterday. Existing-home sales in July rose 0.6% from a year earlier, the first year-over-year uptick in 17 months and possible a sign that lower mortgage rates are finally starting to drive sales after a weak spring selling season, Will Parker and Harriet Torry report.

And Heard on the Street’s Justin Lahart says strong earnings from some of America’s biggest retailers suggest U.S. consumers are doing just fine. The companies also are expressing a lot of optimism: Target raised its earnings forecast for 2019, as did Walmart. Home Depot said escalating tariffs with China might rattle consumer confidence, but also that real-time data don’t show this yet.

All Shook Up

Economic activity was mixed in several major economies in August, findings that will do little to ease concerns that a long global expansion could be coming to an end. Preliminary purchasing managers surveys for Australia, Japan and the 19-nation eurozone painted a picture of a global economy struggling to regain momentum after stumbling earlier this year amid growing tensions over trade. Output in Australia shrank for the first time in five months, while the eurozone grew at a muted pace as the service sector offset a manufacturing slump. One bright spot was Japan, where activity expanded at the fastest pace in eight months, Jason Douglas reports.

Corrections & Amplifications: A chart in yesterday’s newsletter showed inaccurate figures for men and women with a college degree. Here is a corrected version.

WHAT ELSE WE’RE READING

The Federal Reserve should do more than just cut interest rates next month. “At a minimum, we should commit to not raising rates again until core inflation returns to our 2% target on a sustained basis. Since cutting rates to near zero in 2008, the Fed has consistently overestimated the speed of inflation’s return to that target and repeatedly signalled that rates would go up quickly. … Although the Fed didn’t realise it at the time, by sending a message suggesting rate increases, this forward guidance was contractionary rather than stimulative. Announcing a commitment not to raise rates until inflation returns to target would prevent us from making that mistake again,” Minneapolis Fed President Neel Kashkari writes in the Financial Times.

Sign Up for Our Calendar

Real Time Economics has launched a downloadable Google calendar with concise previews, forecasts and analysis of major U.S. data releases.

• To add to your Google Calendar on desktop, click here.  
• To add to your Google calendar app on mobile, click here.
• If you prefer to view the calendar using a web browser, with the option of adding select Real Time Economics entries to your calendar, click here.
• And here’s our how-to.

 

Let us know what you think. This is a pilot project, so we’d appreciate your feedback.

from Real Time Economics https://ift.tt/30qPzcH