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Oil prices jumped after attacks in Saudi Arabia knocked out about 5% of the globe’s crude output, auto workers are on strike, China’s economy is showing more signs of cooling, and don’t blame direct government lending for the student debt boom. It looks like another busy week for the economy. Let’s get started.
Oil Prices Soar
Crude prices surged following an attack on Saudi Arabia’s oil infrastructure. The strikes knocked out 5.7 million barrels a day of production, or roughly 5% of the globe’s output. A sustained spike in fuel prices could mark the latest threat to a world economy already under significant pressure from the U.S.-China trade war, Amrith Ramkumar and Joseph Wallace report.
- President Trump said he was authorizing the release of crude from the Strategic Petroleum Reserve to keep markets well supplied if needed. Such releases have been rare historically and only used as a last resort.
- The U.S. economy is very different than it was in the 1970s, when surging oil prices tipped it into recession. The U.S. is now the world’s largest crude producer and among the top exporters of oil and gas. A significant boost in prices would be a shot in the arm for shale producers.
- High oil prices would do the most damage in countries that rely on energy imports, such as China and Japan, the world’s second- and third-largest economies. China has already been under strain from the trade war with the U.S. and a broad global growth slowdown. Higher prices could cause it to slow further, which would reduce Chinese demand for U.S. exports.
WHAT TO WATCH
The New York Fed’s Empire State manufacturing survey for September is expected to fall to 3.0 from 4.8 a month earlier. (8:30 a.m. ET)
China’s new-home prices for August are out at 9:30 p.m. ET.
TOP STORIES
Who’s Gonna Drive You Home
Factory workers at General Motors went on a nationwide strike early Monday morning in the United Auto Workers’ largest work stoppage in more than a decade. UAW leaders instructed nearly 46,000 blue-collar workers at 31 GM plants to either walk off the job or stay home. One of the biggest sticking points is the company’s decision in November to close four U.S. factories, a move the UAW’s leadership vowed to fight at the bargaining table, Nora Naughton and Mike Colias report.
China Cools
Economic activity in China cooled further in August, with industrial output and retail sales data suggesting sluggish demand and low confidence among businesses and consumers. China’s leaders have already responded to signs of weaker growth with extra support for local-government bond issuance and by releasing more funds for banks to lend to businesses. Many economists expect the central bank to lower key market rates this month, not only to bring down borrowing costs but also to send a strong message that Beijing is willing to support its economy, Liyan Qi, Grace Zhu and Lin Zhu report.
What Caused the Student Debt Boom?
Republicans lawmakers at a hearling last week blamed the student debt boom on a 2010 law, championed by then-President Obama, under which most student loans were made by the federal government, rather than private banks with a federal guarantee against default. Republicans say the shift to so-called direct lending removed underwriting standards and thus led to the boom in student debt. In reality, the 2010 law didn’t change underwriting standards at all. There were few standards in the first place. Whether issued by Treasury or private banks, student loans have been long treated as an entitlement. Participating banks had no authority to turn down applicants as long as the applicants met the eligibility requirements. The real causes:
- Rising tuition. Since the start of 2005, it’s up 166%, compared to 52% for overall consumer prices.
- A surge in college enrollment: It peaked at about 21 million in 2011, up 20% from 2005. More students meant more student loans.
- The recession: When unemployment is high, the opportunity cost of college drops (because well-paying jobs are scarcer). On top of that, the recession wiped out wealth, forcing more families to rely on student debt.
- Between 2005 and 2008, Congress raised the cap on how much college and graduate students could borrow.
- The Obama administration promoted plans that tie borrowers’ payments to their incomes. Many of those borrowers are seeing their balances rise since their monthly payments don’t cover interest.
—Josh Mitchell
It’s All I Can Do
President Trump has disavowed support for a strong dollar, and officials have considered whether to use currency intervention as a weapon in their trade war. Could it work? The White House has levers. The 1934 Gold Reserve Act gives it broad powers to sell dollars and buy foreign currencies; the Treasury Department maintains a fund of about $95 billion for such operations. But that would be tiny in a $5-trillion-dollar-a-day foreign exchange market. It would be more effective if the Federal Reserve and other finance ministries and central banks participate. With growth in other countries lagging behind the U.S. economy, however, it is hard to imagine international allies agreeing to help bolster U.S. economic growth at their expense. Large-scale intervention would also put the Fed in an awkward position, with some officials possibly reluctant to support what would in effect be further monetary easing, Kate Davidson writes.
Let the Good Times Roll
U.S. consumers are doing a good job holding up the economy. The latest evidence: robust retail sales in August. And households appear pretty upbeat too. The University of Michigan’s preliminary index of consumer sentiment rose to 92.0 this month, from the end-of-August reading of 89.8, suggesting consumers are shrugging off tariff concerns. But are they trying to tell us anything else? Tucked into the UofM survey was a big spike in expectations for lower interest rates—to the highest level since 2009. That often precedes a recession.
Quirky, right? But that’s not the only consumer survey flashing a bit of a warning. The Conference Board’s present situation and expectations subindexes have opened their widest gap since 2001. Consumers think things are really good now but aren’t so optimistic about the future. Don’t sweat it? “Consumer confidence has been moving sideways for quite some time and while we see little likelihood of further upward momentum there is no reason why this couldn’t go on for a while. As long as consumers’ wages and job situation remains strong, the gap could become even bigger,” says the Conference Board’s Lynn Franco.
—Likhitha Butchireddygari and Jeff Sparshott
WHAT ELSE WE’RE READING
When coal mines shut down, women go to work. “Few places have seen a more dramatic change than Letcher County, in hilly Eastern Kentucky, where for generations the archetypal worker was a brawny, coal-dusted man in reflective overalls. Just 10 years ago, nearly three-fifths of the work force was male. Now the majority is female. … ‘Women now, they got a little taste of freedom,’ ” says Ciara Bowling, a nurse in the county. (New York Times)
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