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Good morning. Today we look at whether U.S. economic growth has already peaked, the mystery of low inflation, how tariffs are reshaping the Farm Belt, and key elections in Latin America and Europe.
THE TIDE IS HIGH
The U.S. economy just posted one of the best six-month stretches of the past decade. There’s a good chance it’s all downhill from there. Economists surveyed by The Wall Street Journal estimate growth will slow in the coming quarters. The Fed is expecting a lowly 1.8% rate by 2021. “We think U.S. growth may have just peaked,” said Michael Gapen, chief U.S. economist for Barclays Capital.
Few believe a recession is near, and the expansion is widely expected to become the longest on record next year, Jon Hilsenrath and Harriet Torry write. But two big drivers of growth this year—consumers and government spending—will likely slow in the months ahead: Consumers because the impetus from income-tax cuts will diminish and government when a deal to boost spending runs out next September. Finally, the White House projection of sustained 3% growth hinges on a business-investment boom. It looked like that was happening early in the year but has faded since, suggesting corporate tax cuts may not have the long-lasting impact that was intended.
WHAT TO WATCH TODAY
U.S. personal income for September, out at 8:30 a.m. ET, is expected to rise 0.3% and consumer spending is expected to climb 0.4% from the prior month.
The personal consumption expenditures price index excluding food and energy, closely watched by the Fed, is expected to rise 1.9% from a year earlier, a slight slowdown from the 2% gain in August.
The Chicago Fed’s Charles Evans gives opening remarks at summit on regional competitiveness at 8:45 a.m. ET.
The Dallas Fed manufacturing survey for October, out at 10:30 a.m. ET, is expected to slip to 27.0 from 28.1 a month earlier.
Treasury releases its quarterly financing estimates at 3 p.m. ET.
TOO GOOD TO BE TRUE?
It’s not just economists thinking about a possible slowdown. Two of the biggest credit-card issuers are tightening lending standards, an unusual move in a strong economy that may signal longer-term concerns about consumers’ financial health. Capital One Financial and Discover Financial Servicesid they have become more cautious in how they’re handling credit limits. The two lenders said they don’t currently see signs of deterioration in consumers’ ability to pay their debts but do question how much longer the economic recovery will last, AnnaMaria Andriotis reports.
“In so many ways, one can’t help but be struck by…just how good the economy [at] this point is,” Capital One Chief Executive Richard Fairbank said on the company’s earnings call. “And in some ways, it almost feels too good to be true.”
The Federal Reserve’s preferred inflation gauge is expected to post another mild reading Monday. The Fed targets 2%. In August, headline PCE registered at 2.2% and core, which excludes food and energy, held at 2% for the fourth straight month. Those numbers might slip a little, highlighting how soft inflation has been during the latest expansion. Indeed, there’s been something of an inflation mystery. Look at the better-known consumer-price index. Since the expansion started in July 2009, overall consumer prices are up about 17%, well below levels from other recent expansions.
That doesn’t mean prices are moving in lockstep across all goods and services. Hospital and college costs have skyrocketed. Falling prices, meanwhile, often reflect technological innovation and quality improvements on goods that remain relatively expensive. The American Enterprise Institute’s Bret Swanson estimates that it might have cost around $28 million to purchase the basic building blocks of today’s iPhone XS back in 1991.
So is inflation broken? Fed Vice Chairman for Supervision Randal Quarles this month asked whether inflation better reflects economic activity or the public’s trust in the central bank’s ability to meet its inflation target. “There are risks in pushing the economy into a place it does not want to go if we limit ourselves to navigating by what might be a faulty indicator,” he said. Indeed, the theoretical relationship between inflation and unemployment, known as the Phillips Curve, hasn’t always been obvious in recent years.
SHRIVELING SOYBEAN EXPORTS
U.S. farmers in 2018 planted more soybeans than corn for the first time in more than three decades, betting on strong demand from China. But tariffs on U.S. soybeans have hurt that bet: U.S. exporters have sold less soybeans to China, typically the largest foreign buyer of the crop, in the past seven weeks than in a single week last fall. Soybeans inspected for export from ports in the Pacific Northwest—a main U.S. originator of soybeans bound for China—recently stood 82% below their year-ago level. Prices for the oilseeds have dropped 11% this year, Jesse Newman and Jacob Bunge report. The result: American farmers are preparing to reshape the U.S. Farm Belt by planting more corn and less soybeans next year over a land mass potentially equal to the size of Connecticut.
BIG ECONOMIES AT THE BALLOT BOX
Brazil: A firebrand ex-army captain swept to victory in Brazil’s presidential election, joining the growing ranks of antiestablishment leaders across the world and shifting Latin America’s largest nation sharply to the right. Jair Bolsonaro, a champion of Brazil’s 1964-1985 right-wing dictatorship that he once served, promised to unite Brazilians, reform public finances and negotiate more trade deals with developed nations, Samantha Pearson and Luciana Magalhaes report.
Germany: Angela Merkel won’t seek re-election as chairwoman of her conservative party after 18 years at the helm. The move comes after her party’s poor showing in Hesse, home to Germany’s financial industry, and series of nationwide polls putting the party at a historic low. Ms. Merkel has told the senior party officials that she would remain chancellor, but her opponents within the party say replacing her as chairwoman could be possible step toward replacing her as chancellor, Bojan Pancevski reports.
TWEET OF THE DAY
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WHAT ELSE WE’RE READING
If I can do it, so can you. “We find evidence for two kinds of peer effects: being observed by a peer can postpone the decision to give up, while observing a peer can be informative and have more sustainable effects. In particular, we show that successful peers affect perseverance positively if they communicate their success in a motivating way and negatively otherwise,” Berno Buechel, Lydia Mechtenberg and Julia Petersen write in the Journal of Economic Behavior and Organization.
What happens when the government mandates paid sick time? “We do not find much evidence that employment or wages were significantly affected by the mandates that typically allow employees to earn one hour of paid sick leave per work week, up to seven days per year,” Stefan Pichler and Nicolas Ziebarth write in a forthcoming Journal of Human Resources.
UP NEXT: TUESDAY
German unemployment for October is out at 4:55 a.m. ET.
Eurozone GDP for the third quarter is out at 6 a.m. ET.
German consumer prices are out at 9 a.m. ET.
The S&P/Case-Shiller home price index for August is out at 9 a.m. ET.
The Conference Board’s consumer confidence index for October, out at 10 a.m. ET, is expected to fall to 136.5 from 138.4 a month earlier. In September, confidence hit an 18-year high as robust job growth and a strong economic outlook bolstered Americans’ expectations for the future.
China’s official gauge of the country’s factory activity for October is out at 9 p.m. ET. Economists expect the purchasing managers index to edge lower to about 50.6 in October from September’s 50.8, which was a seven-month low.
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