Washington Insider -- Monday

Slowing Job Growth and New Concerns

Here’s a quick monitor of Washington farm and trade policy issues from DTN’s well-placed observer.

Corn Growers: USMCA Must Top Fall Agenda

Congress returns to Washington next week and passage of the new U.S.-Mexico-Canada Agreement (USMCA) should be at the top of their agenda, according to the National Corn Growers Association (NCGA).

Farmers have taken the opportunity to share this message with lawmakers at local events during the August break, it said, “and are eager to see the working group process bear fruit so the agreement can move forward for consideration.”

The group detailed that USMCA will “solidify a $4.56 billion export market and provide some certainty for farmers weathering a perfect storm of challenges. Ratifying USMCA will also instill confidence in other nations that the U.S. is a reliable partner and supplier, ensuring U.S. agriculture remains competitive for generations to come.”

Uncertainty Over Trade Policy Is Likely To Reduce US Economic Output

New research from the Federal Reserve indicates that trade uncertainty is likely to trim U.S. economic output by more than one percent through early 2020. Economists charted uncertainty with text analyses of newspaper articles and corporate-earnings calls.

Higher uncertainty could lead firms to delay their investment and reduce their hiring, lower consumer confidence and spending, and ultimately curtail economic activity around the world. “The rise in [trade policy uncertainty] in 2018 and 2019 has gone hand in hand with a slowdown in world industrial production and global grade,” said the research report.

The researchers found that an initial increase in trade-policy uncertainty in the first half of 2018 shaved around 0.8 percent from U.S. and global economic output in the first half of 2019. They further calculated that more-recent increases in uncertainty will now reduce U.S. output by more than one percent in the first half of 2020.

Washington Insider: Slowing Job Growth and New Concerns

Over the weekend, The Hill reported that “an underwhelming August jobs report is adding to fears of an economic slowdown, raising the stakes for President Trump's reelection bid.”

New government data showed that the economy added roughly 130,000 jobs in August. The Hill said that “undershot economists' expectations as the labor market continues to slow.”

The resilient job market has been one of the administration’s top selling points as it prepares for the re-election campaign on the strength of the U.S. economy, but the “disappointing August report threatens that message ahead of a critical stretch for the economy,” the report said.

The new job numbers come as the administration and China try to revive trade talks after more than a year of tit-for-tat tariff hits. Deputy staff-level talks are now set to begin later this month with hopes that they will open the door to a meeting between higher-level officials in October.

But with just 14 months until the 2020 election, the administration faces “a narrowing window to strike a truce with China that could steer the U.S. away from the edge of a recession,” The Hill said.

While trade experts have generally ruled out chances of a comprehensive agreement at this time, the U.S. and China could seek a smaller deal to ease tensions and tariffs, The Hill said. “Failure to do so could derail not only the economy, but also weaken the President’s shot at another White House term,” The Hill opined.

"Today's employment data, coupled with earlier revisions to 2018, suggest that we have hit a tipping point," wrote Diane Swonk, chief economist at Grant Thornton, in a Friday research note. "That is likely in response to trade tensions and the weakness we are seeing abroad."

The President has remained defiant in the face of growing pressure to end his fight with China, downplaying the risks to the economy and talk that he is losing leverage. He has repeatedly warned Beijing not to wait to strike a deal with his potential successor, insisting the U.S. economy is strong enough to weather a battle with China.

"'China is eating the Tariffs.' Billions pouring into USA. Targeted Patriot Farmers getting massive Dollars from the incoming Tariffs! Good Jobs Numbers, No Inflation(Fed). China having worst year in decades. Talks happening, good for all!," President Trump tweeted Friday.

He continued to downplay media reports of an economic slowdown. "The Economy is great. The only thing adding to 'uncertainty' is the Fake News!" he added just hours after the jobs report was released.

So far, consumers have been largely insulated from the direct effects of the trade war, even as business expansion, manufacturing and other trade-sensitive sectors faltered, The Hill said.

And, it noted that “while the U.S. faces higher odds of a recession, it still enjoys a strong labor market, steady consumer spending, and solid wage growth.” Roughly 571,000 workers joined the labor force in August, pushing participation rates higher and keeping unemployment steady at 3.7%.

"The stories in the paper have generated a psychology that is vastly worse than the reality," National Economic Council Director Larry Kudlow told reporters at the White House on Friday. "The underlying strength of the economy is much better than folks might think."

Even so, months of fading industrial output, heightened tensions and dour economic data from abroad appear to be closing in on the job market, The Hill argued as job growth as the average monthly job gain has fallen from 234,000 last year to 158,000 in 2019. Economists worry that this indicator may be trending toward the 100,000 monthly average gain that is required to stave off a recession.

The next test for the U.S. labor market will come in October, when president Trump is set to raise tariffs on $250 billion in Chinese imports to 30% from 25%. He also is set to finish imposing a 15% tariff on another $320 billion tranche of Chinese goods in December after applying those taxes to roughly half of those goods on Sept. 1.

The Federal Reserve is expected to soften that blow with a rate cut when the bank's policy committee meets in Washington later this month. The Hill says it expects a moderate 0.25-percentage point cut “as a hedge against a potential downturn,” far less than the 1-percentage point cut president Trump is seeking.

The president is pushing the Fed to slash interest rates in half from their 2% to 2.25% range, demanding a level of stimulus last seen during the 2008 recession. Fed Chair Jerome Powell, in a tweet posted shortly before the jobs report was released, countered during speech in Switzerland that "the most likely outlook for the U.S. is still moderate growth, a strong labor market, and inflation continuing to move back up," brushing off calls for a steep cut.

Powell also acknowledged that the Fed could only do so much to protect the economy from trade policy. "Uncertainty around trade policy is causing some companies to hold back now on investment," Powell said.

So, we will see. Administration analysts continue to insist that the outlook is mainly for fair economic weather – but that Fed interventions are long overdue. At the same time, economic observers are increasingly arguing that the U.S.-China fight is weakening the domestic economy, a debate producers should watch closely as it intensifies, Washington Insider believes.

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