Newsletter: Let’s Make a Deal – Real Time Economics

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This is the web version of the WSJ’s newsletter on the economy. You can sign up for daily delivery here.The One Where the U.S. and China Sign a DealThe U.S. and China signed a trade deal that officials say will lead to a sharp increase in sales of U.S. goods and services to China, further open Chinese markets to foreign firms and provide strong new protections for trade secrets and intellectual property. The eight-part agreement acts as a cease-fire in a two-year trade war that has roiled markets world-wide and cut into global growth. But it leaves in place U.S. tariffs on about $370 billion in Chinese goods, or about three-quarters of Chinese imports to the U.S., Bob Davis, Lingling Wei and William Mauldin report.
Possible tariff reductions will be left to later negotiations, which will cover a host of difficult issues at the heart of the trade battle, including Chinese subsidies to domestic companies and Beijing’s oversight of Chinese state-owned firms. Those talks are expected to begin fairly soon but not conclude until after the U.S. presidential election in November.

WHAT TO WATCH TODAY
The European Central Bank releases minutes from its Dec. 11-12 meeting at 7:30 a.m. ET.
U.S. retail sales for December are expected to climb 0.3% from the prior month. (8:30 a.m. ET)
U.S. jobless claims are expected to rise to 216,000 from 214,000 a week earlier. (8:30 a.m. ET)
U.S. import prices for December are expected to rise 0.4% from the prior month. (8:30 a.m. ET)
The Philadelphia Fed’s manufacturing survey for January is expected to rise to 4.0 from 0.3 the prior month. (8:30 a.m. ET)
U.S. business inventories for November are expected to fall 0.2% from the prior month. (10 a.m. ET)
The National Association of Home Builders housing market index for January is expected to fall to 74 from 76 the prior month. (10 a.m. ET)
The Philadelphia Fed’s Patrick Harker speaks on the economic outlook at 9 a.m. ET and Fed governor Michelle Bowman speaks on the outlook for housing at 10 a.m. ET.
European Central Bank President Christine Lagarde speaks in Frankfurt at 1 p.m. ET.
China’s gross domestic product for the fourth quarter is expected to advance at a 6.1% pace. That would bring the full-year GDP growth to about 6.2%, the slowest pace in nearly three decades. (9 p.m. ET)
TOP STORIES
More or Less
The U.S.-China deal is both less and more than it appears. U.S. exporters to China, mainly farmers, will gain from big Chinese purchases. But trying to fix a country’s overall trade deficit by focusing on just one partner is a lot like trying to fix a very leaky dike with one finger. China can buy a lot more U.S.-produced pork or manufactured goods, but that will push up U.S. prices, making such goods less attractive at home and in other markets abroad. That means more exports to China, but probably far less to other places. The way targeting China worked out last year illustrates this well: In the 12 months ended in November, the deficit with China was $56 billion lower than in November 2018. But the deficit with the rest of the world rose $49 billion, Nathaniel Taplin writes.

Investors cheered the deal. The Dow Jones Industrial Average closed above 29000 for the first time and the S&P 500 hit a record Wednesday.

Last word from the signing ceremony: Chinese Vice Premier Liu He said the country’s economy grew by more than 6% in 2019. China will release its official 2019 economic data Friday in Beijing (Thursday evening U.S. time). “We maintain our optimism about China’s economic operations this year and have even more confidence for the country’s long-term development,” Mr. Liu told state media after signing the trade deal.
Enough With the Trade Deal Already. Let’s Talk Fed.
The Federal Reserve and other central banks have long been the unchallenged drivers of financial markets and the business cycle. That era is drawing to a close. With interest rates now stuck around zero, central banks are left without their principal lever over the business cycle. The eurozone economy is stalling, but the European Central Bank, having cut rates below zero, can’t or won’t do more. Since 2008, Japan has had three recessions with the Bank of Japan, having set rates around zero, largely confined to the sidelines. The U.S. might not be far behind, Greg Ip writes. “We are one recession away from joining Europe and Japan in the monetary black hole of zero rates and no prospect of escape,” said Harvard economist Larry Summers. 
What’s next? Business cycles in the future might resemble those of the 19th century, when monetary policy didn’t exist. From 1854 to 1913, the U.S. had 15 recessions. Many were severe.
Freight Recession
North American freight volumes posted their sharpest year-over-year drop since the Great Recession in December. The Cass Freight Index, a measure of freight volumes and expenditures, showed weakness across the transport industry as high inventories and a manufacturing downturn weighed on the sector. Stifel analyst Dave Ross doesn’t expect a rebound in 2020: “The tariff relief from the phase-one deal seems to be just that–a relief for some, but not a stimulus.”

Feedback loop: The manufacturing downturn is weighing on the freight industry. The freight industry downturn is weighing on manufacturers. Orders for heavy-duty Class 8 trucks, the big rigs that haul freight long distances, fell nearly 64% in 2019 after a record surge in 2018, according to industry data provider FTR. Another bad sign: Trucking payrolls fell by 3,500 in December. The sector gained just 2,200 jobs during a challenging 2019, down sharply from 44,100 in 2018.

Set Fire to the Rain
Environmental risks have jumped to the top of the concerns of government, academic and business leaders as the effects of climate change have struck harder and more rapidly than many expected, according to a report from the World Economic Forum ahead of its annual meeting next week in Davos, Switzerland. The report said business leaders were lagging behind other respondents in focusing on climate risks, suggesting some companies were in danger of underestimating the danger, Stephen Fidler reports.
2019 ranked as the second-warmest year since systematic record-keeping began in 1880, capping the warmest decade in modern times, scientists at NASA and the National Oceanic and Atmospheric Administration said in an annual climate report.

WHAT ECONOMISTS ARE SAYING ABOUT THE TRADE DEAL
“The phase-one deal is akin to step one in couples’ therapy: The two parties have agreed to talk to each other and made some promises to uphold the relationship. But deeper structural tensions concerning industrial subsidies, technology rivalry, and other non-tariff barriers risk further decoupling in 2020.” —Gregory Daco, Oxford Economics
“U.S. producers who supply China will benefit, while consumers and those producers who supply non-Chinese markets will lose out.” —Michael Feroli, J.P. Morgan Chase
“This phase one of the agreement is a big step forward, and by including sufficient detail, it establishes the framework for vastly improved economic and trade relations between the U.S. and China, and a simmering of global trade policy uncertainties.” —Mickey Levy, Berenberg Capital Markets
“The modest scale of the roll-back of existing tariffs means that the deal will provide little, if any, boost to U.S. GDP growth in 2020.” —Paul Ashworth, Capital Economics
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