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In today’s issue, the U.S. and China’s warning shots on trade set up months of negotiations, the U.S. trade deficit is expected to widen, unemployment is poised to hit a 17-year low, lower- and middle-income families are abandoning prosperous cities, and Washington targets tech companies.
NOW THE HARD PART
Get ready for more market volatility. The Trump administration’s tariff tit-for-tat with Beijing sets up a high-stakes standoff between the world’s two largest economies.
Over the next half year or so, the combatants will seek to negotiate a new normal, Josh Zumbrun writes. While the actions threatened so far may stop short of a full-blown trade war, they have ignited a lobbying battle engulfing much of American industry, and a market shakeout as investors pull out of companies who trade in the goods targeted by Beijing and Washington for action.
For now, the tariffs are only a threat. But the clear signal from the White House: The U.S., while open to discussing solutions, isn’t prepared to back down anytime soon.
READY, AIM …
The Trump administration’s ratcheting up of pressure on China shows a shift in strategy from the surprise announcement on steel and aluminum tariffs. Instead of jumping the gun and attacking allies, President Trump is 1.) signaling room to either escalate or deescalate, and 2.) targeting a country both allies and adversaries agree is a bad actor.
How will it play out? Beijing is vulnerable economically, Greg Ip writes. China depends much more on exports to the U.S. and its role in the global supply chain could be at risk. The U.S., though, is vulnerable politically, with district-specific retaliation a tried and true weapon (Hello, Iowa!).
The upshot: The U.S. and China have strong incentives to negotiate a solution rather than let the tariffs go into effect.
Comments or suggestions for Real Time Economics? Write to Jeffrey Sparshott at realtimeeconomics@wsj.com, tweet to @WSJecon and visit wsj.com/economy for the latest.
WHAT TO WATCH TODAY
It’s not usually a market mover, but U.S. trade data for March, out at 8:30 a.m. ET, is expected to show a $57 billion deficit. The trade gap has been widening, adding to political pressure for tariffs and other barriers to foreign goods in the U.S.
U.S. jobless claims, out at 8:30 a.m. ET, are expected to remain at historically low levels. Economists expect 225,000, up slightly from the prior week’s 215,000.
The Atlanta Fed’s Raphael Bostic speaks on financial literacy at 1 p.m. ET on Thursday.
TOP STORIES
FRIDAY IS JOBS DAY!
With all the talk of tariffs and trade, it’s possible to lose sight of underlying economic developments. We’ll get a key reading on Friday with the Labor Department’s March jobs report.
Economists expect U.S. nonfarm payrolls increased by 178,000 and the unemployment rate ticked down to 4%. If unemployment hits consensus, it would be the first time the jobless rate was at or below 4% since December 2000.
Eric Morath highlights key themes: 1.) Unemployment rates at or below 4% are historically rare. If the rate falls, is such a low level sustainable? 2.) The rate hasn’t dipped below 4% yet partly because more people are joining the labor force. Can the labor-force participation rate top 63% for the first time since 2014? 3.) Bringing workers off the sidelines helps hold wages in check. But there has been some recent, modest upward pressure on pay. Will that momentum be maintained?
GLORY DAYS
One goal of President Trump’s tariffs is to protect blue-collar jobs. Trade barriers won’t, however, bring many back.
The U.S. shed about 5.5 million manufacturing jobs between 2000 and 2017. Those losses were concentrated among lower-skilled positions often filled by men with less education, Eric Morath writes.
During the same 17 years, output from U.S. factories increased. That’s because manufacturing firms automated low-skill, routine tasks and became more reliant on robots and college-educated workers to boost production. Now that the shift has occurred, it is difficult to undo.
BEER CAN ECONOMICS
U.S. aluminum prices are falling despite a tariff aimed at boosting domestic production of the metal, Bob Tita reports. That’s good news for manufacturers of products such as beer cans and car hoods, which are paying 3% less for aluminum than they were before the Trump administration announced the tariff.
Some analysts believe aluminum prices will fall further as aluminum makers in the U.S. follow through on plans to restart idle production to take advantage of what they expected would be higher prices and greater demand from the tariff.
WHO WILL MAKE ALL THE TRIPLE-SOY LATTES?
Families of more modest means are leaving expensive American urban areas and being replaced by affluent newcomers. The result is a loss of the workers who help power sectors of the economy such as restaurants and hotels, and public services like schools and police departments.
New research from Issi Romem, chief economist at building-data website BuildZoom, finds that metropolitan areas such as San Francisco, New York, Los Angeles and Miami are seeing an influx of new residents from other parts of the U.S. who earn significantly more than those who are leaving, Laura Kusisto writes. The data shows that expensive American metros are losing lower- and middle-income families not just to the suburbs but to completely different metropolitan areas.
THE GOOD, THE BAD AND THE UGLY
The political backlash against tech has hammered the stocks of Tesla, Facebook and Amazon in recent weeks. Such public scrutiny can be good, bad or downright ugly for technological progress and recent events provide stark examples, Greg Ip writes.
For example, investigations into deaths related to autonomous vehicles could help identify and correct flaws in the technology and thus ease the way to commercialization. But President Trump’s attacks on Amazon suggest a kind of politicized regulation that would add to uncertainty, punish the most competitive companies and could ultimately hurt productivity and innovation.
AMERICA’S MAINFRAME
Amazon.com may be best known for transforming the U.S. retail industry, but one of the tech giant’s biggest customers is the U.S. government.
Amazon has won much of the business to help the government shift computing services from legacy mainframes onto the cloud, Ted Mann and Brody Mullins write. This extraordinary transformation has included the provision of services across Washington’s bureaucracy from the Department of Homeland Security to the Smithsonian Institution.
An even bigger prize looms: Amazon is seeking a 10-year contract with the Department of Defense that could be worth $10 billion.
WHEN GERMANY SNEEZES…
Europe’s growth engine sputtered at the start of 2018. German industrial orders rose less than expected in February as weak demand at home undercut robust demand from the eurozone. Contracts for goods made in Germany increased by 0.3% on the month in February after an upwardly revised drop of 3.5% in January.
Here’s the takeaway from ING Bank economist Carsten Brzeski: “There are two possible explanations for weak new orders in the first months of the year: either they are the result of one-off factors like the winter weather and more important an unusually high level of sickness absence due to the flu; or they are the first signs of a broader leveling off in the German industrial sector. In fact, it could actually be a combination of both. - Brian Blackstone
…EUROPE CATCHES A COLD
Consumption data for the eurozone showed a similar weakening trend. The European Union’s statistics agency said the seasonally adjusted volume of retail sales was 0.1% higher than in January, and 1.8% higher than in February 2017. Economists surveyed by The Wall Street Journal last week had expected to see a 0.5% rise from the previous month.
Sales have been weak since a November jump, despite a continued fall in unemployment and high levels of consumer confidence, writes Paul Hannon.
QUOTE OF THE DAY
“The Administration knew that if it imposed tariffs on Chinese goods, China would retaliate against U.S. agriculture. I warned President Trump as much in a White House meeting in February. Today shows that’s exactly what happened.” – Sen. Charles Grassley (R., Iowa)
TWEET OF THE DAY
WHAT ELSE WE’RE READING
President Trump has granted temporary steel and aluminum tariff waivers to Europe, Australia, South Korea and other allies. What if they eventually kick in? The Federal Reserve Bank of Dallas calculates that, if the trade barriers are implemented for everyone except Mexico and Canada, they would likely trim a quarter percent from the U.S. gross domestic product over the long run. “U.S. metals industries would likely expand, while heavy industries, such as machines and equipment, would probably contract along with aggregate capital formation.”
One benefit of international trade: it helps keep down prices on goods. But that benefit skews toward the wealthy. “Our results show that higher income consumers had the lowest import inflation over our time period, while lower income consumers had the highest import price inflation,” the Federal Reserve’s Colin Hottman and Ryan Monarch write. That suggests rising income inequality hasn’t been alleviated by the ability to buy cheap, foreign-made stuff at a big box store.
U.S. wages are stagnant because employers have more bargaining power than in prior decades. The reason? Fewer companies. Wisconsin Public Radio highlights research from University of Navarra’s José Azar, University of Pennsylvania’s Ioana Elena Marinescu and the Roosevelt Institute’s Marshall Steinbaum looking at a kind of monopsony, where only a few firms dominate hiring and effectively control local labor markets. (File this under “What Else We’re Listening To.”)
UP NEXT
Friday is jobs day! Economists expect U.S. nonfarm payrolls to increase by 178,000 and the unemployment rate to tick down to 4%. The net job gain is a big slowdown from February’s 313,000, but still reflective of a healthy labor market. If unemployment hits consensus, it would be the first time the jobless rate was at or below 4% since December 2000. The report is out at 8:30 a.m. ET.
Fed Chairman Jerome Powell will give his view of the economic outlook at 1:30 p.m. ET, and San Francisco Fed president John Williams is due to talk about the economy and monetary policy at 3 p.m. ET on Friday. Mr. Williams is set to become the next president of the New York Fed.
#china #usa #tech
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