Real Time Economics: The U.S. and China Are Fighting About More Than Just Trade

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Good morning. This week brings key manufacturing, consumer spending and inflation data, remarks from Fed Chairman Jerome Powell, and a meeting between President Trump and his Chinese counterpart, Xi Jinping. Jeff Sparshott here to help you get ready for another busy week of economic news. Send us your questions, comments and suggestions by replying to this email.

It’s Not Just a Trade Fight

The Trump administration is examining whether to require next-generation 5G cellular equipment used in the U.S. be designed and manufactured outside China. The move could reshape global manufacturing and further fan tensions between the countries, Stu Woo and Dustin Volz report.

• Washington has already essentially banned telecom equipment from Chinese companies. The new proposals could force Finland’s Nokia and Sweden’s Ericsson, to move major operations out of China to service the U.S., which is the biggest market in the $250 billion-a-year global industry.
• Pressure to disentangle global manufacturing and supply chains is part of a larger rivalry between the U.S. and China that is encompassing technology, trade and influence to shape the global economic and political order.

 

WHAT TO WATCH TODAY

The Dallas Fed’s manufacturing survey for June is expected to climb to  minus 1 from minus 5.3 a month earlier. Investors are paying a little more attention than usual to the Fed’s regional manufacturing surveys: Recent New York and Philadelphia reports were disappointing. More bad news may suggest the closely watched national ISM manufacturing index will slip into contractionary territory. (10:30 a.m. ET)

The Bank of Japan releases minutes from its April 24-25 meeting at 7:50 p.m. ET.

TOP STORIES

Yield Sign

The collapse in bond yields since this spring has been stark, swift and global. The drop says investors expect a recession may be looming, and that central banks will have to step in with lower rates to try to forestall it, Patricia Kowsmann, Avantika Chilkoti and Sam Goldfarb report.

• Ten-year bond yields last week fell to record lows in Germany and France, and below 2% in the U.S. for the first time since 2016.
• The causes: The Chinese economy has been slowing, inflation expectations in developed countries plummeting, tariff threats are throwing sand in the gears of global trade, and investors worry the global economy—hampered by aging demographics and weak productivity—just can’t break out of a decade of tepid expansion.
• Reasons to celebrate? The S&P 500 on Thursday notched its first record close since April, reflecting expectations that Federal Reserve rate cuts later in 2019 will hold off a downturn. Borrowers—home buyers seeking mortgages, corporations issuing bonds—are rushing to lock in the low rates.

Europe’s Job Machine Falters

A steady rise in employment has been one of the eurozone’s big successes. But there are signs the region’s job market may be cooling as manufacturers cut back on hiring. That could place the eurozone’s already faltering recovery in peril, since it would lose the support of consumers at home just as it has lost buyers abroad, Paul Hannon reports.

• The eurozone has gained 3.6 million jobs since the beginning of the financial crisis and the unemployment rate fell to 7.6% in May. But the labor market may be stalling: Purchasing managers at eurozone manufacturers reported cutting their payrolls in May and adding to them only slightly in June.
• If unemployment were to settle at current levels, that wouldn’t just leave a large slice of southern Europe’s youth without work—it would greatly reduce their prospects of ever finding any.

Not Hiring: Regulators

The Trump administration has found a way to deregulate: don’t hire people to enforce the rules. Environmental Protection Agency staffing has fallen to Reagan-era levels and inspections in the last fiscal year were down to 10,600 from nearly 21,300 at the height of President Obama’s second term. The Occupational Safety and Health Administration has the fewest inspectors in decades, and intensive enforcement has trailed off. Consumer Financial Protection Bureau enforcement is down by 80% from its 2015 peak, Alex Leary reports.

Down on the Farm

A strong labor market and tightened border security are raising costs for New York farmers. Empire State producers are increasingly relying on H-2A visas, which lets them import workers but add expenses. Farmers pay for transportation, food and legal aid to bring foreign workers into the country, guarantee at least 75% of their pay, and provide housing. H-2A workers in New York earn $13.25 per hour, Acacia Coronado reports. Dennis Brawdy, partner with Amos Zittel and Sons in Erie County said his farm’s annual cost rose about $160,000, not including housing, now that it relies on the visa program.

TWEET OF THE DAY

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WHAT ELSE WE’RE READING

One unintended casualty of the U.S.-China trade fight: trees. “China imports more than 60% of the world’s soy; imports account for nearly 90% of its supply. Shifting soybean purchases from the U.S. to other countries such as Brazil…raises a different threat: rampant deforestation. While U.S. farmland was logged out long ago, Brazilian farmers have a relatively poor environmental record. Between 2001 and 2006, soybean fields expanded by 1 million hectares in the Amazon Basin. Nearly 30% of that area was formerly virgin forest,” Adam Minter writes at Bloomberg Opinion.

One happy side-effect of an aging population: The Fed may be more successful at influencing the economy than in the past. Older households “tend to be wealthier than younger households, so a given decline in the interest rate generates a larger capital gain for the old,” Kimberly Berg, Chadwick Curtis, Steven Lugauer and Nelson Mark write in a National Bureau of Economic Research paper. Younger households are less sensitive because they fund spending through labor income less so than asset values.

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