Newsletter: Is the Worst Over for Manufacturers?

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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.

Self Service

U.S. dominance of the global services economy is weakening, Paul Kiernan reports.

• From 2003 to 2015, the U.S. trade surplus in services such as medical care, higher education, royalties and payments processing nearly sextupled to $263.3 billion. Growth has since stalled and the services surplus is on pace for its steepest annual decline since 2003.
• Some of the softness likely reflects cyclical factors. But other forces—some political, others more tectonic—are also weighing on exports while prompting American consumers and firms to buy more foreign services.
• While trade surpluses or deficits aren’t intrinsically good or bad, they reflect a country’s comparative advantages in the global economy. The U.S.’s prowess in academia, tech, finance and consulting creates millions of jobs, often high-skilled, and effectively helps pay for imports of merchandise such as smartphones, cars and wine.

WHAT TO WATCH TODAY

European Central Bank President Christine Lagarde testifies at European Parliament at 9 a.m. ET.

IHS Markit’s U.S. manufacturing index for November is out at 9:45 a.m. ET.

The Institute for Supply Management’s manufacturing index for November is expected to rise to 49.4 from 48.3 a month earlier. (10 a.m. ET)

U.S. construction spending for October is expected to climb 0.5% from the prior month. (10 a.m. ET)

The Reserve Bank of Australia releases a policy statement at 10:30 p.m. ET.

TOP STORIES

China Bounces Back

After months of slowdown, China’s economy showed signs of stabilizing. The private Caixin manufacturing purchasing managers index in November climbed deeper into expansionary territory and the country’s official manufacturing PMI rose into expansionary territory for the first time since April, Liyan Qi reports. The Caixin index showed domestic and overseas demand rising, and factory employment growing for just the second time this year.

Trade dynamic: The improving data suggests Beijing doesn’t need to rush toward a trade deal with the U.S., though one might help. “If trade negotiations between China and the U.S. can progress in the next phase and business confidence can be repaired effectively, manufacturing production and investment is likely to see a solid improvement,” said CEBM Group’s Zhengsheng Zhong.

Better but Still Bad

Eurozone factory activity contracted for the 10th time this year, though there were some encouraging signals in the latest IHS Markit index: The contraction was at the slowest pace since August, and measures of exports, employment, order books and purchasing all came off of recent lows. “Perhaps most promising is a marked upturn in business sentiment, particularly in Germany, with optimism about production in the year ahead hitting a five-month high in November,” said IHS Markit economist Chris Williamson. That doesn’t mean the sector is poised for growth, but suggests the worst could be over.

ICYMI

The U.S. economy looks to be on stable ground. Last week, the Commerce Department in separate reports said household spending picked up in October and orders for long-lasting factory goods rose—both positive signs for growth. The department also said the U.S. economy expanded at a slightly better pace than initially estimated in the third quarter, despite a continuing slump in business investment, Harriet Torry reports.

The U.S. factory sector gets another gut check this morning. The Institute for Supply Management’s manufacturing index for November, out at 10 a.m. ET, is expected to show activity contracting for the fourth straight month, albeit at a slower pace than October.

When the Chips Are Down

American tech companies are getting the go-ahead to resume business with Chinese smartphone giant Huawei, but it may be too late: It is now building smartphones without U.S. chips. Huawei’s latest phone—which competes with Apple’s iPhone 11—contained no U.S. parts, according to an analysis by UBS and Fomalhaut Techno Solutions, a Japanese technology lab that took the device apart to inspect its insides. In May, the Trump administration banned U.S. shipments to Huawei. Meanwhile, Huawei has made significant strides in shedding its dependence on parts from U.S. companies, Asa Fitch and Dan Strumpf report.

Drill Baby … Nah

President Trump campaigned on a promise to boost domestic energy production, and in January 2018 his Interior Department proposed allowing oil rigs along nearly all of America’s coastline. That was a nonstarter in West Coast and Northern Atlantic states that lean Democratic. The unexpected twist: Republican leaders up and down the Southeastern seaboard have pledged to put the beauty of the coastal waters above the U.S. thirst for oil. The administration’s drilling plan now is sidelined, Timothy Puko and Andrew Duehren report.

Meanwhile, in Russia

An 1,800-mile pipeline is set to begin delivering Russian natural gas to China today. The $55 billion channel is a feat of energy infrastructure—and political engineering. Russia’s most significant energy project since the collapse of the Soviet Union, the Power of Siberia pipeline is a physical bond strengthening a new era of cooperation between two world powers. Beijing and Moscow, after years of rivalry and mutual suspicion, are expanding an economic and strategic partnership influencing global politics, trade and energy markets, Georgi Kantchev reports.

Nobody Goes There Anymore, It’s Too Crowded

Target, Walmart and other retailers are staffing stores differently in an effort to meet new competitive challenges, attract workers and control payroll costs amid the tightest labor market in decades. Foot traffic to U.S. stores fell about 6.2% on Black Friday, as more people ordered online or went to stores on Thanksgiving Day. How to adapt? Some chains use their stores to handle deliveries or convince shoppers to pick up orders rather than wait for an Amazon.com package. Target also retrained the bulk of its 300,000 year-round U.S. workers over the past year, hoping to mold each into an expert for a specific area of the store such as toys or online fulfillment to offer better customer service and use labor spending more efficiently, Sarah Nassauer reports.

Let it Grow

A rush of farmers seeking to grow hemp is creating a glut, damping prices and leaving some farmers struggling to unload their product. Hemp—which is the same plant species as marijuana, but with a minimal amount of the psychoactive compound in pot—became legal because of a provision of the 2018 federal farm bill. It is mostly grown for cannabidiol, or CBD, which is used to treat seizures, pain, anxiety and other conditions. The projected growth of the CBD market has enticed farmers: Acres of cultivated hemp in the U.S. surged to more than 285,000 this year from 78,000 in 2018. The increased cultivation has contributed to a decline in prices. Wholesale prices for biomass, or harvested plant matter, used for CBD production fell between 42% and 53%, depending on the volume sold, Arian Campo-Flores and Cameron McWhirter report.

WHAT ELSE WE’RE READING

Europe is trying to build a better battery. “Governments, universities, EU institutions and scores of businesses, including the leading carmakers, have joined forces in a new industrial policy drive that could become a blueprint for many other technologies and sectors. Fearing European industry could be crushed by U.S. technological supremacy, Washington’s growing protectionism and Chinese state capitalism, German, French and EU leaders have embraced a reinvigorated industrial policy as a tool to assert the continent’s technological independence and ensure its economic survival,” Ben Hall and Richard Milne report in the Financial Times.

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