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Good morning. Today we look at third-quarter economic growth, how government spending is goosing while housing is hurting GDP, and why Fed Chairman Jerome Powell has a secret weapon against political pressure that Paul Volcker never did.
THE STOCK MARKET ISN’T THE ECONOMY
U.S. stocks tumbled Wednesday, sending the Dow industrials into the red for the year and putting the Nasdaq Composite Index down more than 10% from its recent high. Few investors are predicting a recession in the near term, but some are debating whether the market will withdraw further under pressure from higher interest rates, softening global growth expectations and continued political tumult.
The short-term economic outlook in the U.S., by contrast, is bright. Gross domestic product data out Friday is expected to show the economy expanded at a healthy 3.4% pace in the third quarter. That’s a step down from 4.2% in the spring but would still mark the best back-to-back stretch since mid-2014. Of course, the second quarter may have been the high-water mark—most forecasters expect growth to ease as federal stimulus fades and interest rates rise. The Fed expects 2.4% growth next year and 2% in 2020.
Friday’s data will be a bit noisy. Notably, trade is expected to hold back and inventories boost GDP. That’s a flip-flop from the second quarter likely related to political tensions, tariffs and temporarily shifting trade patterns. But the big pillars of the economy are expected to remain strong, with consumer spending aided by robust job growth and tax cuts, and business investment slowing but still supported by household demand and tax breaks.
Want a clearer picture? Look at final sales to private domestic purchasers. It tracks demand from businesses and consumers in the domestic economy, effectively lopping out volatile government, inventory and international trade data. By that measure, the economy was even stronger in the second quarter than headline number suggests.
Are you concerned that market volatility could spill into the broader economy? Write to Jeffrey Sparshott at email@example.com, tweet to @WSJecon and visit wsj.com/economy for the latest news. (Responses may be quoted in this newsletter.)
WHAT TO WATCH TODAY
The European Central Bank releases a policy decision at 7:45 a.m. ET, followed by a press conference at 8:30 a.m. ET. The ECB is expected to keep policy unchanged amid uncertainty related to Italy’s budget, Brexit, international trade and global growth.
U.S. durable goods orders for September, out at 8:30 a.m. ET, are expected to fall 1.7% from the prior month.
The advance U.S. trade report for September is out at 8:30 a.m. ET.
U.S. jobless claims, out at 8:30 a.m. ET, are expected to rise to 214,000.
U.S. pending home sales for September, out at 10 a.m. ET, are expected to hold steady.
The Kansas City Fed’s manufacturing survey for October is out at 11 a.m. ET.
Fed governor Richard Clarida speaks on the outlook for the U.S. economy and monetary policy at 12:15 p.m. ET, and the Cleveland Fed’s Loretta Mester speaks at the NYU Money Marketeers forum at 7 p.m. ET.
Markets: Comcast, Twitter, Southwest Airlines, Dunkin’ Brands and American Airlines report before the bell. Amazon.com, Alphabet, Snap, Intel and Chipotle report after markets close.
What else is driving the economy? A sharp pickup in government spending, particularly on defense, has helped fuel a broad acceleration in U.S. economic growth in the past year and a half. The U.S. economy has expanded at a 2.9% annual rate since April of 2017, significantly faster than the 2.2% pace between mid-2009—when the expansion started—and April 2017. Faster government spending accounted for nearly half of the acceleration, Kate Davidson reports.
President Trump and Republicans say tax cuts and less regulation have accelerated growth. Democrats say faster growth is uneven and unsustainable. The role of government spending has gotten less attention from either side.
And now for some bad news: the housing market was a drag on the economy through the first half of the year and may well be again in the second. The latest evidence came Wednesday with new-homes sales slumping for the fourth consecutive month and inventories swelling to the highest level in years.
Hurricane season may be partly to blame for the latest drop. “The scourge of storms and higher construction costs aside, builders can read the early signs of a cooling housing market as well as anyone—including a slowing in home value growth, rising mortgage rates, and an uptick in price cuts,” says Zillow Senior Economist Aaron Terrazas. In other words, don’t expect a quick turnaround.
REALLY, WE’RE NOT LISTENING
Cleveland Fed President Loretta Mester said President Trump’s criticism of interest-rate increases doesn’t affect discussions at the central bank: “The committee…is focused on setting policy on behalf of the public to hit our congressionally mandated goals—price stability, full employment—and that’s really the focus of the meetings.” Mr. Trump this week stepped up his attacks on Fed Chairman Jerome Powell, calling the central bank “the biggest risk” to the economy.
IF ONLY VOLCKER HAD THE DOT PLOT
In his forthcoming memoir former Fed chairman Paul Volcker discloses he was summoned to the White House in the summer of 1984 where chief of staff James Baker, with President Ronald Reagan looking on, told him: “The president is ordering you not to raise interest rates before the election.” He decided not to tell anyone: “How could I explain that I was ordered not to do something that at the time I had no intention of doing?” What if President Donald Trump tells current chairman Jerome Powell the same thing, clearly a risk given the president’s intensifying criticism? One big change since then is that whereas the Volcker Fed’s rate moves were shrouded in mystery, Mr. Powell and his colleagues publish their plans (the so-called “dot plot”) for the next three years each quarter; currently they expect to raise rates one more time this year, around three times in 2019 and once in 2020. Changing course without an obvious economic reason would draw intense scrutiny. Politicized rate decisions can still happen, but they’ll be harder to hide. – Greg Ip
CHARTS OF THE DAY: AUTUMN FALL
Tech stocks in New York tumbled Wednesday, wiping out the gains for the year in the Dow Jones Industrial Average and S&P 500. Asia followed: Every major market across the region slumped on Thursday. Japan’s Nikkei 225 fell the most, dropping 3.9% to a more-than six month low.
QUOTE OF THE DAY
Our own information—from the everyday to the deeply personal—is being weaponized against us with military efficiency. Today, that trade has exploded into a data-industrial complex. – Apple CEO Tim Cook, speaking at a privacy conference organized by the European Union
TWEET OF THE DAY
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WHAT ELSE WE’RE READING
China’s economic prowess has had violent consequences in Mexico. “Mexican manufacturing job loss induced by competition with China increases cocaine trafficking and violence, particularly in municipalities with transnational criminal organizations. When it becomes more lucrative to traffic drugs because changes in local labor markets lower the opportunity cost of criminal employment, criminal organizations plausibly fight to gain control,” Melissa Dell, Benjamin Feigenberg and Kensuke Teshima write in a forthcoming American Economic Review: Insights.
Weaker currencies can be a plus for businesses by making exports more competitive. Just not in emerging markets. The main reason: dollar-denominated bond issuance makes emerging markets vulnerable to a stronger dollar. “Whereas currency depreciation would favor the competitiveness of exporting firms, our results suggest that the negative impact of the financial channel swamps the trade competitiveness effect,” according to a paper published by the Bank for International Settlements.
UP NEXT: FRIDAY
U.S. GDP for the third quarter, out at 8:30 a.m. ET, is expected to rise at a 3.4% annual pace.
The University of Michigan’s consumer sentiment survey for October, out at 10 a.m. ET, is expected to hold steady at 99.
The European Central Bank’s Mario Draghi speaks in Brussels at 10 a.m. ET.
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