Newsletter: Why Did Economists Get the Decade All Wrong?

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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.

Maxed Out

Boeing is considering either suspending or cutting back production of the 737 MAX amid growing uncertainty over the troubled plane’s return to service, according to people familiar with the matter. Boeing management increasingly sees pausing production as the most viable among difficult options, Andy Pasztor and Doug Cameron report.

Any MAX production changes could carry significant implications for the U.S. economy. Boeing’s inability to deliver the aircraft during the prolonged grounding has already affected the nation’s trade deficit. They could also spur job cuts and furloughs across the global aerospace industry, as well as further disruption to airlines hit by the grounding of a fleet of around 800 jets.

WHAT TO WATCH TODAY

The New York Fed’s Empire State manufacturing survey for December is expected to rise to 3.1 from 2.9 a month earlier. (8:30 a.m. ET)

IHS Markit’s preliminary U.S. manufacturing index for December is expected to hold steady at 52.6. (9:45 a.m. ET)

The National Association of Home Builders housing market index for December is expected to hold steady at 70. (10 a.m. ET)

The Bank of England releases a financial stability report at 12 p.m. ET.

TOP STORIES

Steel Glut

U.S. Steel, caught between the need to overhaul its existing plants and invest in new mills, is breaking down. Many of the company’s largest plants are unreliable, inefficient and, in some cases, dangerous for workers and the surrounding community. Tariffs on foreign-made steel imposed by President Trump have curbed imports and for a short time drove up U.S. prices. But several of the company’s domestic rivals stepped up with major investments in new production capacity that will add several million tons of additional steel to the U.S. market over the next three years. With steel prices already weakening again, the industry’s building spree is raising questions about whether the U.S. is facing a glut that could drag down prices and profits, Bob Tita and Kris Maher report.

Peak Oil

America’s hottest oil-drilling regions are seeing their economies soften as shale producers slash spending, leading to emptier hotels, choosier employers and less overtime for workers. Fracking has made the U.S. the world’s top oil producer, buoyed the national economy and helped the country become a net exporter of crude and petroleum products for the first time in decades. But the rapid production growth of recent years is waning as shale companies focus on profits over expansion. That shift is taking an economic toll. National nonresidential fixed investment—which tracks spending on software, research and development, equipment and structures—fell in the second and third quarters, due in large part to declines in oil and gas spending. Spending is expected to decline further next year, Rebecca Elliott reports.

Two Roads Diverged

China’s economic activity got a lift as the year winds down. Value-added industrial output for November rose 6.2% from a year earlier, retail sales climbed 8% from a year earlier and fixed-asset investment held steady at 5.2% growth for the January-November period. While many economists remain cautious about the sustainability of any improvement in China’s economy, the better-than-expected data released on Monday morning—together with a limited trade deal announced by Beijing and Washington—could alleviate concerns about an even sharper slowdown for the world’s second-largest economy, Grace Zhu, Liyan Qi and Bingyan Wang report.

The eurozone’s manufacturing recession is deepening. IHS Markit’s preliminary manufacturing index for December fell to a two-month low. Activity in the region’s service sector picked up, offsetting some of the factory weakness but the outlook remains grim. “The economy has been stuck in crawler gear for fourth straight months, with the [purchasing managers index] indicative of GDP growing at a quarterly rate of just 0.1%. There are scant signs of any imminent improvement,” said IHS Markit economist Chris Williamson.

Profit and Loss

Are U.S. companies making more money than ever before, or are they mired in one of their longest profit slumps since World War II? Widely used measures have diverged in recent years, leaving many investors worrying that something is amiss. Pretax domestic profits as measured by the Bureau of Economic Analysis are down 13% in five years, the biggest drop outside a recession since World War II. Earnings by S&P 500 companies tell the opposite story. Reported earnings per share were at a record in the 12 months to June, up 31% in five years. What gives? Much of the gap appears to be due to tax dodging by multinationals, the troubles of smaller businesses and that the big-company index includes more successful companies than the wider economy, James Mackintosh writes.

America First

President Trump’s trade vision is coming into focus. Last week, the president drew concessions from Mexico and China while stripping the World Trade Organization of its power to restrain the tactics he used to secure them. Combined, the efforts show an approach toward U.S. trading partners and multinationals that is focused more on pressuring companies to produce domestically and sell American-made goods abroad than on helping them expand their global manufacturing footprint, Jacob M. Schlesinger writes.

When Good Economists Go Bad

Economists got the postrecession decade all wrong. Growth, interest rates and unemployment repeatedly came in lower than expected. Why? The WSJ’s Greg Ip offers three theories:

• Debt hangover: Households, banks, businesses and sometimes governments became fixated on paying down debts, so they avoid borrowing and investing.
• Secular stagnation: The population is growing slowly. Businesses have less need to invest when there are fewer new workers and customers, and when aging households buy fewer big-ticket products.
• Elongated cycle: The so-called natural rate of unemployment, the lowest the U.S. can sustain without running out of workers or pushing up inflation, is much lower than previously thought. So the recovery has had more ground to cover than many realized, and as a result the economy has spent much of the past decade operating well below capacity.

 

So which is it? It might take the next decade to answer what really happened in the last.

Ho Ho Ho Uh-Oh

Shoppers are heading into the U.S. holiday season with restrained cheer. Lackluster retail sales in November signaled consumer spending, which accounts for two thirds of the U.S. economy, could be softening as the fourth quarter progressed.

TWEET OF THE DAY

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WHAT ELSE WE’RE READING

Coal-mining jobs come with a cost. “Our results suggest that the higher rates of injury in underground coal mining (in particular) lead to greater amounts of opioid consumption and mortality. An implication is that the decline in coal mining in the United States may have a positive spillover in the form of reduced mortality from opioid use,” Gilbert Metcalf and Qitong Wang write in a National Bureau of Economic Research working paper.

 

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