This Week In The Economy: Ballooning U.S. Budget Deficit, Bank Of England Planning For The Worst, Turkey Central Bank Defies Erdogan

Welcome to a regular snapshot-review of U.S. and international economic news that aims to 1) determine the direction of economic policy — such as the speed at which central banks decide to raise interest rates, 2) provide a window into the challenges and decisions facing businesses today, and 3) assess what the impact will be for consumers.

The House Ways and Means Committee this week advanced a series of bills — commonly referred to as Tax Reform 2.0 — to make permanent certain provisions of the 2017 tax cuts for individuals, families, and small businesses; including incentives for savings accounts and innovation.

The package is expected to pass the Republican-controlled House of Representatives, but then stall in the Senate. Not only do the proposed tax cuts lack support among Democrats in Congress, but it also comes with a very expensive price tag that some conservatives are not happy about. An analysis by the Tax Policy Center showed making the tax cuts permanent would add $631 billion to the federal deficit over the next ten years, then pile on an additional $3.2 trillion in the ten years after that.

The state of the U.S. government’s finances, and the outlook for future revenue, has long been a cause for concern — more so now. The U.S. Treasury reported this week that the federal government recorded a $214 billion budget deficit in August alone. The deficit so far in Fiscal Year 2018 now stands at $898 billion, already $232 billion more than the deficit recorded for all of FY2017.

Trade Tensions Slowing Investment, Inflation Eases, Businesses Struggling To Fill Job Openings, U.S. Poverty Rate Falls Again

The Beige Book is a report published eight times a year by the Federal Reserve, and summarizes anecdotal information on current economic conditions in the central bank’s 12 districts. Usually released two weeks before the senior Fed officials meet to discuss and set interest rate policy, the report this week described a U.S. economy that has grown at a “moderate” pace through the end of August.

Consumer spending continued at a modest pace, with a separate report from the Census Bureau showing U.S. retail sales rose by just 0.1% month-over-month in August (compared to a 0.7% increase in July), less than expected and their smallest gain in six months. Consumers reduced purchases of clothing, autos and furniture last month.

The Fed said the manufacturing sector also experienced a moderate uptick in activity (industrial production rose 0.4% in August), and lending by banks was up nationwide. In the housing market, however, the Fed said home sales were “somewhat softer, on balance — in some cases due to reduced demand, in others due more to low inventories.” More importantly, the Fed report noted that while there is general optimism about the near-term outlook among businesses:

“Most Districts noted concern and uncertainty about trade tensions — particularly though not only among manufacturers. A number of Districts noted that such concerns had prompted some businesses to scale back or postpone capital investment.”

The report also described the jobs market in many areas of the country as “tight,” with most Districts reporting widespread shortages. This assessment is supported by two other reports released this week — the National Federation of Independent Business’ (NFIB) Small Business Optimism Index, and the Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey (JOLTS).

The JOLTS report showed the number of job openings was at 6.9 million on the last business day of July, compared to just 5.7 million hires. The NFIB’s report showed 62% of the small business owners surveyed are trying to hire, but then 89% of those owners reporting few or no qualified applications for their open positions.

On the inflation front, consumer and wholesale price inflation decelerated last month, with the Consumer Price Index excluding food and energy up 2.2% in August compared to a year ago, a slower rate than July. The Producer Price Index less food, energy, and trade services was up just 0.1% in August after rising by 0.3% in June and July.

As the chart below shows, one likely reason for the slow rate of inflation is higher value of the U.S. dollar, which has strengthened against major currencies as interest rate hikes by the Fed has attracted investors from other markets to the United States.

There is also no sign — yet — that the trade war between the United States’ and its trading partners is feeding through to the prices Americans pay for imported goods. Import prices declined 0.6% month-on-month in August, following a 0.1% increase the previous month. Prices for U.S. exports dipped by 0.1%, after decreasing 0.5% in July.

And finally, the Census Bureau released a study showing poverty rates declined in 20 states and the District of Columbia from 2016 to 2017. The 2017 American Community Survey (ACS) 1-year estimates show that for many states the declining poverty was the continuation of a longer trend. “In California, Florida, Georgia, Michigan and North Carolina, this was the fourth consecutive year of statistically significant declines in the poverty rate,” Census added.

Around The World

Bank of England Stays On Hold, Planning For The Worst Brexit Outcome— The BOE’s Monetary Policy Committee (MPC) this week voted unanimously to leave its key interest rate unchanged at 0.75%. This came on the back of news that the UK economy grew by 0.4% in Q2 of 2018 and by 0.6% for the three months to July. The UK unemployment rate fell to 4.0%, the lowest level since 1975.

Their attention remains very much on the BREXIT factor. The central bank warned that:

“The MPC continues to recognise that the economic outlook could be influenced significantly by the response of households, businesses and financial markets to developments related to the process of EU withdrawal. Since the Committee’s previous meeting, there have been indications, most prominently in financial markets, of greater uncertainty about future developments in the withdrawal process.”

In a speech at an event hosted by the Central Bank of Ireland, BOE Governor Mark Carney said the outlook for the UK will be heavily influenced by Brexit, but that the Bank of England is “well-prepared.”

“Our job, after all, is not to hope for the best but to plan for the worst. The MPC will respond to any persistent change in the outlook to bring inflation sustainably back to 2% target while doing what it can to support jobs and activity,” he said.

Turkey Central Bank Defies Erdogan, Raises Interest Rates — In an attempt to boost the value of its struggling currency, Turkey’s central bank this week hiked its main interest rate to 24% from 17.75% and vowed to raise rates further if necessary. The move is also viewed by many as an opportunity for the bank to assert its independence from political influence, with Turkish President Recep Erdogan publicly calling for low rates in order to spur faster economic growth.

Global Demand For Oil Expected To Decline, U.S. Production Surges — Oil cartle OPEC published its monthly oil market report this week in which the group predicted global demand for oil will grow at a slower rate in both 2018 and 2019. While demand from countries like China, India and the United States remain strong, OPEC noted “signs of weakening demand” in other regions, especially the Middle East and Latin America. Meanwhile the U.S. Energy Information Administration (EIA), the data arm of the Energy Dept., is predicting a jump in U.S. oil production that will mean a disparity in U.S. vs. global oil prices.

EIA estimates that U.S. crude oil production averaged 10.9 million barrels per day in August, up by 120,000 bpd from June, and sees U.S. crude oil output averaging 10.7 million bpd in 2018, up from 9.4 million bpd in 2017, and will average 11.5 million bpd in 2019. As a result, the cost of West Texas Intermediate (the U.S. benchmark oil price) is expected to average about $6 per barrel less compared to the price for Brent crude (the global benchmark oil price) in 2018 and in 2019.

Japan’s Economy Grows At Fastest Rate In Two Years — In a sign that the ultra-easy monetary policy being pursued by the Bank of Japan might be working, data released this week showed the world’s third largest economy expanded by 3% in the second quarter of 2018, the fastest rate since 2016. Increased business investment is responsible for the surge in economic activity, with capital expenditure up 3.1% in Q2 on the back of increased export demand and the massive construction effort ahead of the 2020 Olympic Games in Tokyo.