Newsletter: The Fed Was More Bearish Than We Thought

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Good morning. Jeff Sparshott here with the latest on the Fed, trade, car sales, Japan’s stealthy economic outperformance, and Mexico’s apparent recession. Please send us any questions or comments by replying to this email.
Recalibration
The rationale for the Fed’s rate cuts may not be what it has long seemed, Chairman Jerome Powell suggested Monday night. For most of this year, Fed officials framed 2019 rate cuts not as a response to bad things happening to the economy, but as an insurance policy to reduce the risk of bad outcomes. After all, they delivered the cuts without clear evidence that the business cycle had turned. If the rate cuts were insurance, that implied they should be reversed if the risks did not materialize. But in his speech in Providence, R.I., Mr. Powell highlighted several reasons why the rate cuts might have been warranted based on new evidence that the Fed’s policy would otherwise have been too tight—for example, because the labor market wasn’t as strong as data previously suggested or because the neutral rate of interest was lower than estimated. If that’s the case, it means the Fed’s cuts were designed partly to recalibrate policy and there is no obvious reason to reverse them. —Nick Timiraos

WHAT TO WATCH TODAY
The U.S. trade balance in goods for October is out at 8:30 a.m. ET.
The S&P/Case-Shiller home-price index for September is out at 9 a.m. ET.
The Conference Board’s consumer confidence index for November is expected to rise to 126.8 from 125.9 a month earlier. (10 a.m. ET)
U.S. new-home sales for October are expected to rise to 705,000 from 701,000 a month earlier. (10 a.m. ET)
The Richmond Fed’s manufacturing survey for November is out at 10 a.m. ET.
Federal Reserve governor Lael Brainard speaks on the central bank’s strategic review at 1 p.m. ET.
TOP STORIES
Call Me Maybe
China offered its most positive message in recent weeks that trade talks with the U.S. are going smoothly. China’s Commerce Ministry said the two sides had “reached a consensus on properly resolving related issues.” The message, though short and formulaic, followed a phone call between China’s chief trade negotiator, Liu He, and his U.S. counterparts, Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin. Beijing and Washington are seeking an interim trade agreement that would, at minimum, put a hold on U.S. tariff increases while China gives some assurance that its state companies will buy more U.S. farm products, Chao Deng reports.
Trading Down
Investors have been pleased with signs of progress on the trade front. But China-U.S. tensions may not matter for global trade as much as they seem to think, Nathaniel Taplin writes.

China was losing global export market share before the trade war, and it still is, at about the same pace. The U.S. global export market share is the same as when President Trump began his tariff scrap with China in early 2018. 
This apparent stability masks big changes in individual bilateral trade flows. China, for example, has taken a significant hit from U.S. tariffs, but much of this has been offset by rapidly rising exports to Southeast Asia and Taiwan.
One thing this picture shows is how difficult it is to hold China’s feet to the fire on trade without buy-in from allies. More fundamentally, it shows how dependent trade flows are on things besides tariffs, particularly exchange rates and long-term factors such as demographics and innovative capacity.

Downshift
Global car sales last year fell for the first time since the recession. The market looks even worse in 2019. “The downturn in the global car market since the middle of 2018 has been a key force behind the slump in global manufacturing and the car sales picture is turning out a lot worse than we expected back in May,” said Fitch Ratings chief economist Brian Coulton. China is the biggest drag but weakness is widespread. The outlook: “There seems little reason to anticipate a rebound in global car sales in 2020,” Mr. Coulton said.

The dropoff in auto sales may be one factor contributing to a slowdown in world trade. Year-over-year global trade volumes fell for the fourth straight month in September, underscoring a broader squeeze on economic activity.

Big in Japan
There are worse things than Japanification. The word is code for meager growth, nonexistent inflation and ossified financial markets. But relative to its parlous reputation, Japan’s economic performance has been strong, especially in the context of its shrinking population. One reason: Japan has done very well at boosting the productivity of those workers it does have. Since 2010, Japanese labor productivity growth has outstripped its G-7 peers. Japan has also pulled millions of additional workers into the labor force, in particular raising labor market participation for females and those over 65 years of age, Mike Bird writes.

Down Mexico Way
Mexico’s economic activity was flat in the third quarter following three quarters of negative output, putting the economy on track for its worst yearly performance in a decade. Gross domestic product was unchanged from the second quarter in seasonally adjusted terms, the National Statistics Institute said Monday. Revised numbers showed GDP posting 0.1% contractions in each of the previous three quarters, Anthony Harrup reports. Most economists consider two consecutive quarters of negative growth to be a recession.
WHAT ELSE WE’RE READING
Gross domestic product is the wrong way to measure the economy. “It is clear that something is fundamentally wrong with the way we assess economic performance and social progress. Even worse, our metrics frequently give the misleading impression that there is a trade-off between the two; that, for instance, changes that enhance people’s economic security, whether through improved pensions or a better welfare state, come at the expense of national economic performance. Getting the measure right–or at least a lot better–is crucially important, especially in our metrics- and performance-oriented society. If we measure the wrong thing, we will do the wrong thing,” Columbia University professor and Nobel prize winner Joseph Stiglitz writes in the Guardian.
The town of Baldwin, a deep-red rural outpost in northeast Florida, lost its only grocery store in 2018. The solution? Open its own. “By definition, a collectively owned, government-run enterprise like the Baldwin Market is inherently socialist. But [Mayor Sean] Lynch, who has a nonpartisan position but governs a town where 68% of residents voted for Donald Trump in 2016, doesn’t see it that way. From his point of view, the town is just doing what it’s supposed to do: providing services to residents who already pay enough in taxes,” Antonia Noori Farzan writes in the Washington Post.
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