This Week In The Economy: More Brexit Talks, UK Unemployment At Record Low, US-China Talks Resume
Welcome to a regular snapshot-review of U.S. (and sometimes international) economic data 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.
Good morning from London, where the sun appears to be winning the battle against grey skies, and your TWITE host is typing away in the garden while nursing a strong cup of tea. Life goals and all that …
UK: Brexit Negotiations Resume Next Week, Falling Unemployment, The Tyranny of the Retail Price Index
On this side of the pond, he may no longer be a cabinet member but Boris Johnson remains remains very much in the news — and a constant thorn in PM Theresa May’s side — with reports his allies are urging a repeat of the former Foreign Secretary’s infamous pro-Brexit bus tour to whip up opposition against May’s plan for leaving the EU.
Unveiled in early July, the so-called ‘Chequers Agreement’ (named for the prime minister’s country residence where the plan was drafted by May and her cabinet) laid out the UK’s proposed arrangement for its relationship with the EU after the March 2019 Brexit deadline.
Viewed as a soft deal, as opposed to the hard break from Europe being advocated by many in the pro-Leave camp, the proposal led to the resignation of Johnson and Brexit Secretary David Davis. Negotiations with the European Commission are set to resume next week, with UK’s new Brexit chief Dominic Raab meeting with the EU’s lead negotiator Michel Barnier on August 21st.
Also next week, the UK government will begin publishing a series of papers — covering more than 80 topics — advising individuals and businesses on how to prepare for the country’s exit from the EU if no deal is in place. Ranging from topics such as travel, farming requirements to driving licenses, the reports will be released in spurts through September.
In economic news, data released earlier this week by the Office of National Statistics showed 32.39 million people employed in the UK between April and June, 42,000 more than the first three months of 2018 and 313,000 compared to the same period a year earlier. The unemployment rate fell to 4%, the lowest level reported since February 1975.
This, coupled with the rising inflation, has boosted the odds of the Bank of England hiking interest rates again when its Monetary Policy Committee meets on September 13th. UK consumer prices rose 2.5% in July compared to a year ago, faster than the 2.4% increase in June.
In other news, the UK government this week announced rail fares are set to increase by 3.2% in January 2019, sparking an outcry from commuters who already spend more on train travel than any other European country. One of the main reasons for passengers’ outrage is the continued reliance on the Retail Price Index (RPI) to set ticket prices, a measure consistently higher than the Consumer Price Index (CPI) and widely discredited by the ONS:
“ Overall, RPI is a very poor measure of general inflation, at times greatly overestimating and at other times underestimating changes in prices and how these changes are experienced. Our position on the RPI is clear: we do not think it is a good measure of inflation and discourage its use.”
Around the Horn
US’ Tiff With NATO Ally Turkey Over Jailed Pastor Continues, US-China Talks To Resume Later This Month
Turkey this week announced tariffs on about $533 million worth of U.S. exports, including cars, tobacco, cosmetics and coal, as well as vowing to boycott U.S. electronic goods such as the iPhone. In response, U.S. Treasury Secretary Steve Mnuchin has warned the U.S. will impose more punitive sanctions if pastor Andrew Brunson is not released.
As for China, senior White House economic adviser Larry Kudlow confirmed this week trade negotiations will resume later this month. A low-level Chinese delegation will travel to Washington D.C. to meet with U.S. counterparts as both sides seek to end the impasse amid escalating tensions and tit-for-tat retaliations.
Speaking of tariffs, a New York Federal Reserve survey of regional businesses indicates the actions by the Trump Administration against its trading partners are raising both input costs and selling prices for local businesses.
The impact is especially acute for manufacturing firms, roughly two-thirds of whom said higher import duties have already pushed up their overall input costs, and more than 70 percent expect changes in trade policy will push up input costs in 2018 and 2019.
U.S. Congressional Budget Office Predicts Slower Economic Growth, Higher Interest Rates Over Next Few Years
The CBO twice a year releases an economic outlook to help inform its forecasts for the federal government’s budget. This week the non-partisan body forecast U.S. economic growth slowing to 2.4% in 2019 from an expected 3.1% expansion rate this year. It does expect the unemployment rate to continue its downward trend next year, but cautioned that interest rates will rise “over the next few years as the Federal Reserve raises the federal funds rate to reduce excess demand and the associated inflationary pressures.”
US. Residential Construction Rebounds In July
The U.S. housing market got some good news this week, as the Census Bureau reported an increase in the pace at which home builders began construction of new privately-owned homes. The rate of housing starts improved by 0.9% to 1.168 million in July compared to 1.158 million in June. However, that number is still 1.4% below July 2017’s rate of 1.185 million. Housing starts are a key indicator of the economy’s overall health, especially as it relates to the future supply of homes.
The construction of new single-family housing started at a rate of 862,000 in July, above June’s pace of 854,000.
Small Businesses Struggling To Find Qualified Workers
The National Federal of Independent Business, an advocacy group, released its monthly survey this weak underlining that while small business optimism continues to be buoyed by strong sales and profits, finding qualified workers to fill vacancies continues to be a challenge.
There was an increase in employers reporting job openings they couldn’t fill, the NFIB said, adding:
“Fifty two percent (88 percent of those hiring or trying to hire) reported few or no qualified applicants for the positions they were trying to fill. Twenty-three percent of owners cited the difficulty of finding qualified workers as their single most important business problem (up two points), one point below the 45-year record high.”
The ongoing skills mismatch in the U.S. jobs market is a problem that will not go away any time soon, and highlights how many unemployed Americans are not benefiting from the current economic boom. The scarcity of qualified workers in certain industries will also cause wages to spike in those sectors, having knock-on effects on overall inflation and future interest rate policy.