Date: July 16, 2018
Fed’s Powell Says the U.S. Economy in ‘Good Place’ But Trade Is a Risk
Federal Reserve Chairman Jerome Powell gave an upbeat assessment of the U.S. economy but warned a sustained period of high tariffs on a wide variety of imports could be harmful to growth. “I sleep pretty well on the economy right now,” Powell said Thursday in an interview on American Public Media’s “Marketplace” program, noting that it’s in a “good place” with unemployment at its lowest level in years and inflation close to the central bank’s 2 percent target. He cautioned, however, that trade disputes could end up being a negative for the economy if they result in a protracted period of widespread higher tariffs. President Donald Trump has already imposed import duties on a wide range of products, from steel and aluminum to washing machines and farm equipment. Other countries have retaliated with tariffs of their own on U.S. exports. “We are hearing a rising level of concern about the effects of changes in trade policy” on the economy, Powell said. But he added that it was hard to forecast how the trade tensions will play out, noting that the Trump administration has portrayed its efforts as an attempt to get other countries to lower their barriers to imports, not raise them. If that happened, it would be good for the economy. “I think this process that is going on now is a new one,” he said. “It’s very difficult to predict how it turns out and we’ll just have to see.” Powell said he could imagine situations that could be “very challenging” for the Fed with inflation rising and the economy weakening at the same time from the tariff battles, though he declined to criticize the president’s actions, saying that the independent central bank needed “to stick to our lane.” Aside from his comments to the radio program, the fact that a Fed chief just five months on the job agreed to an interview at all was itself news and further evidence of his effort to broaden his audience. His predecessors rarely granted exclusive interviews to news organizations.
The U.S. economy will be pushed toward domestic investment and away from domestic consumption.
Many Americans still think of the U.S. economy as increasingly dominated by knowledge and technology workers. In fact, when it comes to jobs growth in this decade, blue-collar industries have outpaced service industries, and the trend is accelerating. Tariffs may amplify this trend — making the U.S. economy more like China’s economic model. Throughout the economic expansion in the 1980s and 1990s, and again during the 2000s, there was one labor market trend you could count on: services job growth outpacing job growth in goods-producing sectors like manufacturing and construction. But for the past seven years, that has no longer been the case. The June payrolls report showed that goods-producing jobs are taking share as a percentage of total employment at the fastest rate in over three decades. The growth this decade can be understood as three different waves. The first period in 2011 and 2012 was when the housing market had hit bottom, with the construction sector no longer shedding jobs, while the energy sector boomed, with jobs and investment supported by oil prices over $100 a barrel. The second period in 2014 represented a Goldilocks environment for goods-producing jobs, as the energy, manufacturing and construction sectors all contributed modestly to job growth. And now, following the bust and recovery of the energy sector, we have all three industries going strong — with energy jobs growing again, construction ramping up to meet the rising demands of millennial household formation, and factories booming. With labor force growth constrained by demographics, and the low unemployment rate meaning there are a dwindling number of unemployed workers to hire, the acceleration in goods-producing jobs growth has increasingly constrained job growth in the services sector.
BOE Gets Vital Economic Health check Before August Meeting
Bank of England policy makers are getting a crucial glimpse of the health of the U.K. economy before their crunch August meeting. A deluge of numbers on wages, inflation, retail sales and public borrowing are coming over the next five days. While a similar run of reports prompted the bank to back away from an interest-rate increase in May, this time appears different, with recent indicators looking more positive. A Bloomberg survey Monday showed 71 percent of economists expect a rate hike on Aug. 2, up from 55 percent last month, while investors are currently pricing in about an 80 percent chance of such a move. Bets on a hike have gathered momentum since the BOE’s June meeting, when Chief Economist Andy Haldane unexpectedly threw his support behind an immediate increase. They were further boosted when Governor Mark Carney said earlier this month that recent data had been encouraging, supporting the view that the economy will require higher interest rate. “This month’s GDP supported the idea that the economy is recovering — not rebounding, but recovering — and that seems to be enough for a couple of MPC members,” Fabrice Montagne, chief U.K. economist at Barclays Plc. “And that’s enough to have a hike.” Pricing for August is now at similar levels to that seen ahead of the bank’s May decision, before softer numbers and an intervention by Carney damped expectations. Officials ultimately voted to maintain rates at 0.5 percent. The backdrop has improved since, with a GDP report confirming the bank’s view that the economy is gaining momentum after its snow-damaged first quarter, and evidence that better weather and the World Cup had boosted consumer spending.
China’s Cooling Economy Spells Trouble Ahead for Global Growth
Confirmation that China’s economy is slowing amid an escalating trade war is a worrying omen for global growth. Data released since Friday has affirmed what’s been expected for some time: That an ongoing campaign to curtail credit is putting the brakes on the world’s second-largest economy. Given that China generates as much as a third of global growth, that’s adding to signs that the best world expansion in years is plateauing. The International Monetary Fund, which has repeatedly warned that the trade spat between the U.S. and China will reverberate globally, is scheduled to release fresh growth forecasts later Monday. The Chinese economy grew at an expected 6.7 percent in the second quarter, its slowest pace since 2016, while key readings on investment growth and industrial output slowed in June. Retail sales held up. While the numbers point to a modest slowdown in China, the U.S.-led trade war has only just begun. U.S. President Donald Trump this month implemented tariffs on an initial $34 billion of imports from China, which retaliated in kind. Trump is expected to deliver levies on another $16 billion worth of goods and has threatened to expand the hit-list by $200 billion. China has threatened to retaliate again. That means headwinds not just for China’s economy, but for the world’s too. “If the U.S. and China do not resume talks in the next two months or so, the conflict will escalate further, with major economic implications for themselves and the global economy,” Louis Kuijs, head of Asia Economics at Oxford Economics in Hong Kong, wrote in a note after the data’s release. The global tensions were clear to see at a summit between leaders of the European Union and China in Beijing. E.U. President Donald Tusk warned that trade wars can lead to “hot conflicts” while summit host, China’s Premier Li Keqiang, said nobody will win from the dispute. It’s the spillover effect that most worries economists, given China’s central role in a regional and global supply chain that feeds America’s economy with goods and services.