Real Time Economics: U.S. and China Hit a Wall

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Good morning. Jeff Sparshott here to take you through key developments in the global economy. Today we take deep dives into the U.S.-China trade fight and what worker pay is telling us about the labor market. Send us your questions, comments and suggestions by replying to this email.

U.S.-China: The Good, the Bad and the Ugly

• The good: The U.S. and China are still talking. China invited U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin to Beijing to continue trade negotiations.
• The bad: The two nations haven’t found a formula for successful negotiations, and the U.S. officials haven’t even firmed up plans to travel yet.
• Bridging the trade rift may ultimately depend on the personal chemistry between President Trump and President Xi—and their willingness to push matters forward after months of negotiations that have been full of positive intentions but thwarted by miscalculations and accusations. The American and Chinese presidents expect to meet again at the next G-20 in Japan at the end of June, Lingling Wei, Vivian Salama, Michael C. Bender and Bob Davis report.
• The ugly: “You can be nice to someone, but sometimes you need to say ‘stop screwing me,’ ” said one person involved in the discussions on the U.S. side.

 

WHAT TO WATCH TODAY

The Boston Fed’s Eric Rosengren gives welcoming remarks at 9:05 a.m. ET and Vice Chairman Richard Clarida speaks on the central bank’s strategy review at a “Fed Listens” event at 9:10 a.m. ET.

TOP STORIES

China Holds Its Fire

China held back from immediate retaliation for higher U.S. tariffs. Unlike in past rounds, Beijing is taking time to weigh its options amid uncertainty over how the Chinese economy would weather a full-bore trade conflict, Chao Deng reports.

• China has more limited tariff options, since it imports fewer products from the U.S. than the other way around, and the Chinese leadership is also constrained by an economy that is in a shaky recovery from a sharp slowdown.
• Raising existing tariffs or imposing new ones could hit products China’s economy needs, like semiconductors, pork, oil and passenger jets.
• A wider-scale trade conflict could also force Beijing to further ease credit and boost government spending to shore up growth, doubling down on the stimulus used last year at a time some analysts say it should be ratcheting back such measures.

 

Closer Look at China’s Economy

China’s economy stumbled last year, and it wasn’t all because of the trade fight with the U.S. Beijing launched a campaign two years ago to crack down on lightly regulated lending sources known as shadow-banking firms. Private firms that relied on these lenders found themselves short of cash, and a slew of defaults on bonds and notes issued by the private firms roiled markets and dented confidence, Liyan Qi writes.

• When economic growth faltered recently, Beijing ramped up spending and relaxed restrictions on shadow banking.
• The amount of stimulus injected into the economy in the first three months this year was stunning to some analysts. Macquarie Group’s Larry Hu says policy makers pumped 2 trillion yuan to 3 trillion yuan ($293 billion to $439.5 billion) of extra spending and credit into the economy.
• The efforts seemed to pay off: The economy expanded 6.4% in the first quarter from a year earlier.
• The big question: Does Beijing now pump in even more and risk exacerbating long-term problems, such as the economy’s heavy reliance on debt?

Wage Freeze

Price increases, driven by gasoline, have edged up in recent months and that makes solid wage growth feel less good for workers. Average hourly earnings rose 3.2% in April from a year earlier—near the best rate since the expansion began. But when factoring in inflation, the gain was a less spectacular 1.2%.

• The challenge may not be that inflation has returned to a rate consistent with a healthy economy, but rather that wages aren’t growing as fast as one would expect with a 3.6% unemployment rate.
• That could be because the potential labor pool is bigger than previously thought. In the past five years, 3.2 million prime-age workers joined the labor force, partly reversing a decline that started during the last recession.
• “As long as non-participants continue to re-join the labor market, wage growth won’t be substantially higher than where it currently is,” said Marianne Wanamaker, a labor economist at the University of Tennessee. “Only when that really starts to hit a limit will we get to wage growth numbers that we typically see towards the end of an economic expansion.”
• The bottom line: Companies say they’re having a hard time finding workers, but aggregate wage growth suggests there are still some out there.

—Eric Morath

Your’re Killing Me Smalls

It could also be that companies are constrained by their own finances as they compete for workers. Job growth at the smallest businesses has fallen to the lowest levels in nearly eight years, Ruth Simon reports.

• Larger companies tend to pay more than small firms, and they are handing out bigger raises. Businesses with 500 to 999 employees boosted wages in the first quarter by an average of 5.3% from a year earlier, according to a Moody’s Analytics analysis. That compared with a 4.1% average pay increase at companies with fewer than 50 employees.

Case Study: Wage Wars

Haworth Inc. has raised pay at its office-furniture factory to $12.50 an hour from about nine bucks five years ago. It can’t continue at that pace. “This wage war isn’t winnable,” Ann Harten, Haworth’s human-resources chief, tells the WSJ’s John Stoll. It’s simple arithmetic: Haworth’s revenue grows at about a 5% annual clip, trailing the approximately 8% in entry-level increases it has been dishing out.

• How can companies respond without going broke? Haworth has an idea: Treat blue-collar workers more like their white-collar counterparts. Starting May 19, about 300 factory employees in Holland, Mich., start working a new schedule that allows a three-day weekend every other week, a golden benefit for people living near Lake Michigan during the summer.

 

Low Rider

Not every company expects to make its workers happier. Uber in its IPO filing said that it wants to reduce driver incentives as it seeks to curb financial losses—and that, as a result, “we expect driver dissatisfaction will generally increase.” In their struggle to attract and keep drivers, Uber and Lyft have paid billions of dollars combined in incentive payments. That’s helped contribute to a combined $5.4 billion in losses over the 12 months through March, Eliot Brown reports.

What Else We’re Reading

Spain introduced fully paid paternity leave in 2007. “Economists Lídia Farré of the University of Barcelona and Libertad González of University of Pompeu Fabra estimate that two years on, parents who had been eligible for the newly introduced program were 7% to 15% less likely to have another kid than parents who just missed the eligibility cutoff. … Farré and González think that spending more time with their children—or the prospect of having to do so—may have made men more acutely aware of the effort and costs associated with childrearing,” Corinne Purtill and Dan Kopf write at Quartz.

Don’t expect long-time U.S. ally Australia to join the Trump administration’s trade fight with China. “In effect, the combination of population and geography made an Australian shift into the Chinese economic orbit inevitable once China began opening its economy in the 1980s. … What is sensible for Australia’s economy and geopolitics means that what was once a special relationship with the United States is no longer quite so special,” Neil Irwin writes in the New York Times.

TWEET OF THE DAY

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