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Good morning! Today we look at the torrid pace of U.S. economic growth and why that might not last, new lows for the yuan and the rupee, the latest developments in President Trump’s trade policy, and the paltry personal saving rate of American consumers.
The U.S. economy is roaring, at least for now. Macroeconomic Advisers, which runs one of the more sophisticated forecasting models, is tracking a 5.3% growth rate in the second quarter. That would be the fastest pace in almost 15 years. A narrowing trade deficit, tax cuts coupled with more government spending, a resurgent consumer and decent business investment are all supporting what appears to be a strong rebound in growth. The Atlanta Fed’s GDPNow model shows a slightly less robust 4.5% growth rate and such estimates jump around as new data arrives, but overall the economy appears on solid footing halfway through the year.
CAN IT LAST?
Growth has averaged about 2% during the current expansion, and we’ve seen economic head fakes before—gross domestic product advanced 5.2% in the second quarter of 2014 only to quickly revert to the mean. What could go wrong?
1.) A sharp narrowing of the trade deficit may be a one-off, caused in part by weather and an unsustainable jump in exports. “In our view, the surge in exports of food, feed, and beverages could reflect efforts by the private sector to book exports ahead of tariff increases,” economists at Barclays said.
2.) Business investment hasn’t accelerated—six months after corporate tax cuts kicked in—and politics may weigh on spending decisions. “The significant tailwind from corporate tax cuts is now being offset by other forces, most likely the uncertainties associated with the ongoing trade war,” Deutsche Bank’s Torsten Slok said.
3+.) Consumers are spending but not saving (see Chart of the Day), global growth has appeared shaky and the U.S. economy isn’t really built to expand at such an accelerated pace—the Congressional Budget Office says potential growth is about 2%.
Do you think the U.S. economy is finally breaking out of the roughly 2% rate of growth that has marked the expansion? Write to Jeffrey Sparshott at firstname.lastname@example.org, tweet to @WSJecon and visit wsj.com/economy for the latest news. (Responses may be quoted in this newsletter.)
WHAT TO WATCH TODAY
Germany’s consumer price index for June is out at 8 a.m. ET. Data from individual states point to an EU-harmonized annual inflation rate of 2.1%, analysts at Morgan Stanleyid.
U.S. jobless claims, out at 8:30 a.m. ET, are expected to rise slightly to 220,000.
Revised U.S. gross domestic product for the first quarter, out at 8:30 a.m. ET, is expected to show a 2.2% advance, unchanged from the prior estimate.
European Union leaders meet in Brussels Thursday and Friday to discuss immigration, Brexit and U.S. tariffs. Expect immigration to dominate the agenda, as a political crisis threatens German Chancellor Angela Merkel’s government and Italy refuses to admit migrants rescued at sea.
DOLLAR BILL BLUES
While we’re on the topic of what could go wrong, how about a too-strong dollar? China’s central bank guided the yuan to its weakest value against the dollar in more than six months and the Indian rupee hit an all-time low against the dollar Thursday. The dollar has been climbing against most currencies as investors flee to safe-haven assets and the Federal Reserve raises interest rates. China and India have other factors at play: Investors are worried rising oil prices will undermine India’s strong economic fundamentals, China’s central bank lowered its reference rate. The results are the same: U.S. exports are more expensive in an overseas market, foreign goods are cheaper in the U.S.
YUAN FOR THE MONEY
China is worried about potential side-effects from the yuan’s slide. The country’s top economic planning body told heavily indebted property companies to curb their issuance of dollar-denominated bonds. Concern has been growing inside China that property companies, which generate revenue in yuan, would find it hard to service and repay their dollar debt as the Chinese currency weakens, Shen Hong and Manju Dalal report. Beijing’s move could lead to a sharp fall in Asian corporate dollar-bond issuance.
BEHIND THE SCENES
President Donald Trump backed away from plans to create tough new restrictions on Chinese investments in the U.S. and U.S. technology exports to China, defusing one fight with Beijing. The White House decision to back away from a fight on investments and U.S. exports could provide an opening for renewed negotiations, Bob Davis, Peter Nicholas and Lingling Wei report. Among those urging talks is former Treasury Secretary Henry Paulson, who used to be Treasury Secretary Steven Mnuchin’s boss at Goldman Sachs and meets regularly with China’s top economic envoy, Liu He. Blackstone Group Chief Executive Stephen Schwarzman is also acting as a back channel between the two governments.
CHART OF THE DAY: SAVING
The U.S. economy’s strong second-quarter growth is propelled in part by a rebound in consumer spending. How sustainable is that? Americans are buying more but they’re saving a lot less, leaving themselves in a more precarious position and perhaps more prone to pull back if there’s a sign of trouble on the horizon. We will get a better read on spending and saving habits when the Commerce Department releases its consumer spending report for May on Friday. “One area that bears watching is the personal saving rate, as it remains quite low at 2.8%. The saving rate has only been below the 3% level three times over the past 10 years,” economists at Wells Fargo said.
On Wednesday, we asked: “What do you think about Harley-Davidson decision to shift some production overseas?” Here are some reader responses (sometimes lightly edited and condensed).
The company’s decision to shift production overseas shows that tit-for-tat trade measures are a lose-lose strategy. – Miranda Xafa, senior scholar at the Centre for International Governance Innovation
This is real-time data demonstrating the effects of current economic policy. It’s a global market, global economy, global supply chain with global customers. How many times might this repeat itself before a correction in policy is needed? – Jim Coffou, Coffou Partners
A public company’s responsibility is to its shareholders and certainly not to political leadership’s misinformed trade policies. – John Distelhorst
QUOTE OF THE DAY
We love the countries of the European Union. But the European Union, of course, was set up to take advantage of the United States. To attack the piggy bank, right? We cannot let that happen. – President Trump, speaking at a rally in Fargo, N.D.
TWEET OF THE DAY
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WHAT ELSE WE’RE READING
Race shapes opportunity in the U.S., especially for men. “For instance, black men have much lower chances of climbing the income ladder than white men even if they grow up on the same block. In contrast, black and white women have similar rates of mobility,” Raj Chetty, Nathaniel Hendren, Maggie Jones and Sonya Porter write at VoxEU. The disparity appears driven by neither differences in family characteristics nor innate abilities. “Our results show that the black–white gap in upward mobility is driven primarily by environmental factors that can be changed.”
What happens when a Walmart Supercenter moves into the neighborhood? If you’re in a lower-income bracket, you eat better. “Results suggest that closer proximity to a Walmart Supercenter improves the food security of households and children, as measured by number of affirmative responses to a food insecurity questionnaire and an indicator for food insecurity. The effects are largest among low-income households and children, but are also sizeable for middle-income children,” Charles Courtemanche, Art Carden, Murugi Ndirangu and Xilin Zhou write in a National Bureau of Economic Research working paper.
UP NEXT: FRIDAY
German unemployment for June is out at 3:55 a.m. ET.
Eurozone consumer prices for June are out at 5 a.m. ET.
The U.S. personal income and outlays report for May, out at 8:30 a.m. ET, is expected to show incomes up 0.4%, consumer spending up 0.4% and core inflation up 0.2% from the prior month.
University of Michigan consumer sentiment for June is expected to slip to 99.0 from a preliminary reading of 99.3.
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