This Week In The Economy: US-China Trade Cliff Averted, Previewing The Autumn Debt Ceiling Fight, UK Business Not Prepared For Hard Brexit
Welcome to a regular snapshot-review of U.S. and international economic news that aims to 1) provide a window into the challenges and decisions facing businesses today, 2) determine the direction of economic policy — such as the speed at which central banks decide to raise interest rates, and 3) assess what the impact will be for consumers.
Coming This Autumn — The Debt Ceiling Battle
If you thought the partial government shutdown was bad, there are many fervently praying now that Congress acts quickly to raise the debt ceiling once the limit is reimposed on March 2. The debt limit is the maximum amount the federal government can borrow to cover its existing obligations. The amount is set by law and has been increased by lawmakers over the years to finance the government’s operations. The 2018 Bipartisan Budget Act suspended the debt limit through March 1, 2019.
The Congressional Budget Office warned unless the limit is raised, the U.S. Treasury — after exhausting extraordinary measures to pay the government’s bills — will likely run out of cash close to the end of this fiscal year or at the start of FY2020.
The U.S. government has never defaulted on its debt, with the trillion-dollar market for U.S. government securities a keg cog in the global financial market. Anything that raises doubts about the full faith and creditworthiness of the U.S government would negatively impact everything including; borrowing costs, the value of the dollar, jobs, pensions, and likely plunge the economy into recession.
However, news reports indicate the cash buffer the Treasury has on hand means U.S. lawmakers are likely to take their time before acting. Given the slate of legislative priorities for the now Democratic-controlled House, this issues is likely to be put on the back-burner until the second half of the year.
U.S. Delays Tariff Increase on $200 Billion In Chinese Imports, Reports of Final Deal Soon
The United States this week decided to suspend a scheduled 25% increase in tariffs on $200 billion worth of Chinese goods, citing the progress made so far in negotiations between the two countries.
And while both sides are said to be close to a final deal that could be signed in early March, U.S. Trade Representative Robert Lighthizer cautioned against expectations of a deal being wrapped up soon. In testimony before the House Ways and Means Committee this week, Lighthizer made it clear there’s still a long way to go — with the process for holding China accountable in any final agreement one of the major sticking points:
“If we can complete this effort — and again I say “if” — and can reach a satisfactory solution to the all-important outstanding issue of enforceability as well as some other concerns, we might be able to have an agreement that helps us turn the corner in our economic relationship with China. Let me be clear: much still needs to be done both before an agreement is reached and, more importantly, after it is reached, if one is reached.” — Robert Lighthizer
The delay in additional tariffs will come as welcome relief for businesses in both countries. China’s Purchasing Managers Index — a key economic indicator—declined to 49.2 in February, and remains firmly mired below 50, which means a further contraction in manufacturing activity in the face of weak global demand.
The impact of the slowdown in China is being borne mostly by small- and medium-sized businesses, for whom the PMI was 45.3 and 46.9, respectively, while the PMI for large enterprises came in at 51.1. And for a country who’s ruling party prioritizes keeping its citizens happy and maintaining social stability, the employed person index was 47.5, a decline from last month, meaning Chinese manufacturers again laid off more workers.
In the United States, trade data for December (the partial government shutdown disrupted the release schedule) showed exports of goods were $135.7 billion, $4.0 billion less compared to November. As a result, the U.S. trade deficit widened by $9 billion to $79.5 billion in December, a negative for overall economic growth.
This soft end to 2018 was supported by other data released this week, with new orders for manufactured goods rebounding by a mere 0.1% in December, following two consecutive monthly decreases. Shipments of manufactured goods, having declined for three consecutive months, fell again by 0.2%. Unfilled orders, also down three consecutive months, dipped by a further 0.1%. Inventory levels, a sign of how much factories are stocking up in relation to the expected demand, stay flat after falling the prior two months.
Pace of U.S. Economic Growth Slows In Fourth Quarter, Fed Chairman Testifies on Capitol Hill
The U.S. economy grew by 2.6% in the final quarter of 2018, ending the year on a soft note as the initial boost from the 2017 tax cuts continues to wear off — this after pushing GDP growth above 4% in the second quarter. According to the Bureau of Economic Analysis, the deceleration in Q4 real GDP growth reflected “decelerations” in inventory investment by the private sector, spending by consumers, and federal government spending as well as a downturn in state and local government spending.
Economic growth was strong for the year as a whole, up 2.9% compared to a 2.2% increase in 2017. In his semiannual testimony before Congress this week, Federal Reserve Chairman Jay Powell noted the recent soft data but said while the partial government shutdown created significant hardship for federal employees and many others, “the negative effects on the economy are expected to be fairly modest and to largely unwind over the next several months.”
At the same time, however, Powell highlighted several dark clouds on the horizon; including Brexit, financial conditions that are now less supportive of growth, the slowing pace of activity in major economies like China and the Euro Area, and the ongoing trade negotiations between China and the United States.
Reiterating the Fed’s switch to a more “patient approach” at its January monetary policy meeting, Powell stressed that the central bank’s decisions will going to be guided by economic data as conditions and the outlook evolve.
The Euro Area’s Inflation, Double-Digit Youth Unemployment Problem
There is universal agreement that the eurozone economy is having a bit of a wobble at the moment, impacted by weak conditions in the broader global economy and trade tensions fueled by the U.S. So while the bloc reported a 7.8% unemployment rate for January (the lowest on record since October 2008), the picture is less rosy when it comes to youth unemployment.
In January, the youth unemployment rate was 16.5% in the euro area, and while it came in at 6% in economic powerhouse Germany, it soared to as high as 39.1% in Greece, 33% in Italy, and 32.6% in Spain.
The European Central Bank’s mandate, however, is to maintain price stability, and does not cover employment. However, its officials have regularly argued that keeping inflation close to its 2% target would in turn spur economic growth and job creation. If that’s the case, then they have a lot of work ahead of them based on data released this week.
Eurozone annual inflation is expected to be 1.5% in February, not much of an increase over 1.4% in January. It is projected to have risen by just 1% last month excluding prices for energy, food, alcohol and tobacco. The ECB’s Governing Council vowed at its January meeting to keep key interest rates at their current very low levels at least through the summer of 2019, or “for as long as necessary” until inflation returns to levels that are below, but in the region of, 2% over the medium term. One can’t help but wonder if they might also decide to reverse course and revive their bond-buying program which ended in December 2018.
Brexit Uncertainty Causing UK Manufacturers To Cut Jobs
In an absolute surprise to nobody, data released this week showed the continued negative impact of the drawn-out Brexit ordeal on UK businesses. According to the IHS Markit/CIPS UK Manufacturing PMI, the uncertainty has impacted “business optimism and employment, with confidence at a series-record low and the rate of job losses hitting a six-year high.”
UK manufacturers’ expectations regarding future output fell to its lowest level in the series history in February, the report said, while factories cut back on employment for the second consecutive month, with the rate of job losses the steepest since February 2013.
Meanwhile a UK government report this week warned about the lack of preparedness on the part of businesses in the event of a ‘hard Brexit’:
“Despite communications from the Government, there is little evidence that businesses are preparing in earnest for a no deal scenario, and evidence indicates that readiness of small and medium-sized enterprises in particular is low.” — UK Government
As an example, it cited the low number of applications for an Economic Operator Registration and Identification (EORI) number, which businesses need to complete the necessary customs forms for imported goods — 40,000 registrations as of February vs. an estimated 240,000 EU-only trading businesses. “The lack of preparation for EU controls — of which this is an example — greatly increases the probability of disruption,” the government warned.
Japan’s Manufacturing Output Plunges To Start The Year
The pace of activity in Japan’s sizable industrial sector slowed considerably to start the year, adding to growing concerns about the outlook for global economic growth this year.
According to the Ministry of Economy, Trade and Industry, industrial production plunged 3.7% in January, with the government noting that factory output “is pausing.” Shipments of industrial goods, a key measure of demand, fell 4%, with many highlighting weak exports to China as a key reason. There was a drop-off in the production of motor vehicles, electrical machinery, information and communication electronics equipment, and factory equipment, which drove the overall decline.
