Washington Insider -- Thursday
Economic Prospects Improved
Here's a quick monitor of Washington farm and trade policy issues from DTN's well-placed observer.
US-CHINA PHASE ONE DEAL TO BE SIGNED JAN. 15: TRUMP
The phase-one U.S.-China trade deal will be signed Jan. 15 at the White House, President Donald Trump said in a tweet Tuesday (Dec. 31).
Trump also confirmed that "high level representatives of China will be present" at the ceremony. Earlier reports had suggested Chinese trade officials led by Vice Premier Liu He would be in Washington through the middle of next week to sign the trade deal.
Additional U.S.-China trade talks are set to begin "at a later date," Trump said, adding he would travel to Beijing to kick off "phase two" trade deal negotiations.
Provisions of the phase-one agreement include purchases of U.S. ag products by China, a promise by China to bolster intellectual property protections and new enforcement provisions, among others. The final text of the deal is still undergoing a legal scrub and is expected to be released following the signing.
SOME DIRECT SHIPMENTS AVOID U.S. TARIFFS ON CHINA
Direct shipments of goods from China to the U.S. worth $800 or less, which are exempt from current tariffs, appear to be growing, the Wall Street Journal said. The $800 threshold is known as the de minimis exemption.
WSJ cited data from the U.S. Census Bureau showing an 11% increase in the value of shipments of goods worth less than $2,000 since the trade war began in July 2018, despite the value of all shipments dropping around 15% over the same period.
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Many consumers are purchasing the goods, which often include electronics, auto parts and clothing, directly from Chinese suppliers using marketplaces like Amazon.com.
U.S. Trade Representative (USTR) Robert Lighthizer has voiced opposition to the current threshold and attempted to have it lowered for goods from Mexico and Canada during negotiations over the US-Mexico-Canada Agreement (USMCA). He noted other countries often set much lower de minimis thresholds than the U.S. imposes on them and argued the situation "adds to the trade deficit," in testimony to a House panel earlier this year.
WASHINGTON INSIDER: ECONOMIC PROSPECTS IMPROVED
In something of a shift from recent trends, Bloomberg is reporting this week that "as a new decade dawns, some, but not all, of the dark clouds hanging over the U.S. economy have cleared."
Looking back, it calls 2019 "a year on the edge" that began with a government shutdown, was dominated early by fears of recession as the trade war with China intensified into a battle "that hurt business investment and threatened the economic expansion." Nevertheless, last year continued the country's longest expansion on record -- thanks to "nonplussed" Americans who kept on spending.
The strength was fueled by job gains that unexpectedly picked up steam late in the year, bucking forecasts for a slowdown and now "downside risks have eased somewhat as the Federal Reserve lowered interest rates three times, U.S.-China tensions cooled and the UK election removed some of the Brexit uncertainty that's haunted the global economy."
Still, Bloomberg thinks, "this outlook doesn't necessarily mean growth will enjoy a resurgence." Economists still expect a slowdown to about 1.8% for gross domestic product growth in 2020, which is around what most analysts see as the long-run potential rate but well short of the 3% that President Donald Trump pledged to achieve.
In addition, the trade war with China is far from over, corporate debt is piling up, global growth remains sluggish and Boeing Co.'s production halt on the troubled 737 Max jet will ripple through factories, Bloomberg emphasizes and focuses on "five key trends in the U.S. economy to watch" in 2020.
It notes that the job market outperformed projections at the tail end of the year, with unemployment matching a half-century low and wages picking up -- particularly among the average, non-supervisory worker where gains are approaching 4%. A strong payroll gain of 266,000 in November was enough to undermine projections that things were shifting into lower gear.
It also warns "that narrative" could weaken a bit with payroll revisions due in February that will make the past look less shiny. Analysts still reckon that a downshift will arrive in 2020, with average monthly job gains slipping in the third quarter as the pool of available workers shrinks further -- a trend that "suggests" that this year will be the time that wage gains accelerate and finally push inflation higher.
However, Bloomberg allows that even if it cools a bit, "the labor market alone is likely to continue sustaining spending on goods and services, the economy's lifeblood, as well as in housing. It sees the real estate sector as primed for a stronger 2020 -- thanks to lower interest rates -- after "a dismal 2018 and yawn-inducing 2019." Builders and consumers are optimistic, permits are rising and there's plenty of pent-up demand. Yet supplies may continue to be thin amid constraints like restrictive zoning regulations and baby boomers staying in their homes.
The report identifies the manufacturing sector as "appearing" to be emerging from its contraction that lasted two quarters in 2019 but thinks that trend is "not about to go gangbusters." For one thing, demand may take some time to recover following the China trade truce and companies could remain wary until a more comprehensive agreement is reached.
In addition, the "strong dollar will continue to weigh on exports." With manufacturers eyeing a pullback in spending next year for the first time since 2009, their health will potentially hold back growth from being more robust.
Bloomberg also argues that while the "national-level data may remain solid, states could run hot or cold." What happens in local economies is seen as key for the 2020 presidential election, given how narrow 2016 victories were in a few swing states. That means factory-job numbers in places like Michigan, Pennsylvania and Wisconsin are likely to get outsize attention following conflicting data in 2019 -- and shifting demographics along with an influx of transplants in once-reliable Republican strongholds like Texas "could make making things less predictable in other places as well."
In addition, Bloomberg says "risks lurk in the shadows of a 2020 outlook for steady growth." Debt is one of them, it says, as former Fed officials are among those warning of dangers of a prolonged period of easy policy, which can increase investors' appetite for riskier and higher-yielding assets. It also notes the possibility of a re-escalation in the trade war with China along with continued sluggishness in the global economy and weakness in business investment.
Finally, the group thinks that wage gains could accelerate more forcefully and finally feed through to inflation, putting pressure on the Fed to raise rates.
So, we will see. The economy still is seen as clearly improved in recent weeks, but key areas of uncertainty remain and should be watched closely by producers as the year with its many election-linked fights proceeds, Washington Insider believes.
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