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US Consumer Morale at Two-year Low; Factory Output Surges

U.S. consumer sentiment tumbled in early January to its lowest level since President Donald Trump was elected more than two years ago as a partial shutdown of the federal government and financial market

volatility stoked fears of a sharp deceleration in economic growth.

The drop in confidence reported by the University of Michigan on Friday was the clearest sign yet that the impasse in Washington over Trump’s demands for $5.7 billion to help build a wall on the U.S. border with Mexico was negatively affecting the economy.

Trump has touted high consumer confidence as an indication of the good job he is doing on the economy. While consumer sentiment remains relatively high, the gathering clouds over the economy could make households

more cautious about spending, leading to slower growth. Consumer spending accounts for more than two-thirds of the U.S. economy.

“This report on consumer sentiment is the first concrete evidence that the economy is going to fall and fall hard if Washington does not end the shutdown,” said Chris Rupkey, chief economist at MUFG in New York. “It is going to be hard to see real GDP growth of more than 1 to 1½ percent in the first quarter if the consumer goes on a buying strike.”

The longest government shutdown in U.S. history has left 800,000 government workers without paychecks. Private contractors working for many government agencies are also without wages.

The University of Michigan said its consumer sentiment index fell 7.7 percent to a reading of 90.7 this month, the lowest reading since October 2016 and the steepest drop since September 2015. Economists had forecast a reading of a 97.0.

The survey’s measure of current economic conditions decreased to 110.0 from a reading of 116.1 in December. Its measure of consumer expectations tumbled to a reading of 78.3, the lowest since October 2016, from 87.0 in late December.

Several factors

The University of Michigan attributed the decline in sentiment to “a host of issues including the partial government shutdown, the impact of tariffs, instabilities in financial markets, the global slowdown, and the lack of clarity about monetary policies.”

It said that half of the survey’s respondents “believed that these events would have a negative impact on Trump’s ability to focus on economic growth.”

Economists estimate the partial shutdown of the government, which started Dec. 22, is subtracting as much as two-tenths of a percentage point from quarterly GDP growth every week.

Other surveys have also shown an ebb in business sentiment.

“Sentiment among both households and businesses has been coming off the sugar highs, which were caused by tax cut hopes at the beginning of the Trump presidency,” said Harm Bandholz, chief U.S. economist at UniCredit in New York.

U.S. financial markets shrugged off the fall in sentiment, with investors focusing on another report Friday that showed manufacturing output had surged by the most in 10 months in December, and on hopes for progress in the U.S.-China trade row.

Stocks on Wall Street rallied, while the dollar rose against a basket of currencies and U.S. Treasury prices fell.

Factory activity

The broad-based jump in manufacturing output in December reported by the Federal Reserve could allay fears of a sharp slowdown in factory activity.

Manufacturing activity, which accounts for about 12 percent of the economy, is slowing as some of the boost to capital spending from last year’s $1.5 trillion tax cut package fades.

In addition, a strong dollar and cooling growth in Europe and China are hurting exports. Lower oil prices are also slowing purchases of equipment for oil and gas well drilling.

Production at factories increased at a 2.3 percent annualized rate in the fourth quarter after expanding at a 3.7 percent pace in the July-September period. It increased 2.4 percent in 2018, the largest gain since 2012, after advancing 1.2 percent in 2017.

“While the manufacturing strength in December is a favorable signal for the economy, we should keep in mind that it came after soft results in earlier months,” said Daniel Silver, an economist at JPMorgan in New York. “A broad range of manufacturing surveys also have been weakening lately, so the strength in the manufacturing output in December may prove to be short-lived.”

Last month, motor vehicle production surged 4.7 percent after gaining 0.2 percent in November. Excluding motor vehicles and parts, manufacturing advanced a solid 0.8 percent last month after gaining 0.1 percent in November.

December’s surge in manufacturing output, together with a rise in mining production, offset a weather-related drop in utilities, leading to a 0.3 percent increase in industrial production. Industrial output rose 0.4 percent in November. It increased at a 3.8 percent rate in the fourth quarter after

notching a 4.7 percent gain in the third quarter.

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EU Wants to Exclude Agriculture From Trade Talks With US

The European Union insisted Friday that agriculture be kept out of the EU-U.S. trade negotiations, despite Washington’s wishes to include the vast sector, and said any overall deal will be limited in scope.

The EU Commission announced its pro posals for a negotiating mandate from the 28 member states and said that the EU negotiations will be “strictly focused on the removal of tariffs on industrial goods, excluding agricultural products.”

EU Trade Chief Cecilia Malmstrom also said that she is preparing a target list of American products it will hit with punitive tariffs if the Trump administration goes through with its threat to impose duties on European auto imports.

Last July, during a period of heightened tensions over trade, U.S. President Donald Trump and EU Commission President Jean-Claude Juncker agreed to start talks meant to achieve “zero tariffs” and “zero subsidies” on non-automotive industrial goods.

With the U.S. criticizing the Europeans for allegedly dragging their feet in the talks, Malmstrom said “the EU is committed to upholding its side of the agreement reached by the two Presidents.”

Any agreement would fall well short of the scope of the free trade deal that had been discussed in recent years — but paused in 2016 after Trump slammed such wide-ranging international deals as unfair to the U.S.

Instead, Malmstrom said, the deal both sides are now looking at could be concluded “quite quickly. We could finalize this and it would be beneficial to all of us.”

 

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Gloomy Davos: Plenty of Crises, Few World Leaders

An array of crises will keep several world leaders away from the annual World Economic Forum (WEF) in Davos next week, which takes place against a backdrop of deepening gloom over the global economic and political outlook.

Anxieties over trade disputes, fractious international relations, Brexit and a growth slowdown that some fear could tip the world economy into recession are set to dominate the Jan. 22-25 Alpine meeting.

The WEF’s own Global Risks Report set the tone this week with a stark warning of looming economic headwinds, in part because of geopolitical tensions among major powers.

​No Trump, Macron or May

Some 3,000 business, government and civil society figures are scheduled to gather in the snow-blanketed ski resort, but among them are only three leaders of the Group of Seven most industrialized countries: Japanese Prime Minister Shinzo Abe, German Chancellor Angela Merkel and Italian Premier Giuseppe Conte.

Donald Trump, who stole the Davos limelight last year with a rare appearance by a sitting U.S. president, pulled out of this year’s event as he grapples with a partial U.S. government shutdown.

On Thursday, the White House said Trump had also canceled his delegation’s trip to Davos because of the shutdown, now in its 27th day. Treasury Secretary Steven Mnuchin and Secretary of State Mike Pompeo had been expected to lead the U.S. team, according to two senior administration officials.

French President Emmanuel Macron is also skipping the meeting as he seeks to respond to the “yellow vest” protests, while British Prime Minister Theresa May battles to find a consensus on Brexit.

​No Xi, either

Outside the G7, the leaders of Russia and India are shunning Davos, while China —whose president, Xi Jinping, was the first Chinese leader to attend the elite gathering in 2017 to offer a vigorous defense of free trade — is sending Xi’s deputy instead.

That will leave the likes of British Finance Minister Philip Hammond, Chinese Vice President Wang Qishan and a host of central bankers with the task of trying to reassure business chiefs.

“Davos will be dominated by a high level of anxiety about stock markets, a slowdown in growth and international politics,” said Nariman Behravesh, chief economist at IHS Markit. “The leadership presence is lower than last year but those who are going … will be seeking to impart a sense of confidence and calm business and investors’ nerves.”

​Forum still has its glitz

Before the U.S. cancellation, a Trump administration official had said the U.S. delegation would also discuss the importance of reforming institutions such as the World Trade Organization, the International Monetary Fund and the World Bank.

Trump has harshly criticized globalization and questioned U.S. participation in multilateral institutions such as the WTO, calling for a revamp of international trade rules.

Davos watchers said the absence of so many top leaders this year did not mean the glitzy forum had lost its status as a global stage for top politicians to present their agendas.

“Abe is going to Davos not just as Japanese prime minister but also as chair of the G20. It will be a perfect opportunity to lay the groundwork of upcoming G20 meetings,” said a Japanese government source familiar with international affairs.

“Of course there may be inconveniences such as missing opportunities to hold bilateral meetings, but that won’t undermine the importance of Davos,” he said.

A Chinese official who has attended Davos regularly but will not go this year said China had never expected to make progress at the meeting on the trade dispute with the United States. 

“It’s just an occasion for making a policy statement,” he said.

​Networking opportunities

The low turnout among major Western leaders may also give more prominence to political personalities who may otherwise be upstaged. Davos will be the first major international outing for Brazilian President Jair Bolsonaro, elected on a wave of anti-establishment and conservative nationalism also seen elsewhere.

He said on Twitter he would present “a different Brazil, free of ideological ties and widespread corruption.”

For business chiefs, the value of Davos lies not so much in the public sessions but in the networking and deal-making opportunities on the sidelines of the main conference.

“It’s the best place to pitch for ideas, build connections and get your brand known,” said Chen Linchevski, chief executive of Precognize, an Israel-based start-up developing software that prevents technical or quality failures at manufacturing plants.

“It’s the kind of place where in a few days you meet people you wouldn’t easily meet otherwise,” said Linchevski, who is paying 50,000 Swiss francs ($50,495) to attend the event.

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WSJ: US Treasury Secretary Mnuchin Weighs Lifting Tariffs on China

U.S. Treasury Secretary Steven Mnuchin discussed lifting some or all tariffs imposed on Chinese imports and suggested offering a tariff rollback during trade discussions scheduled for Jan. 30, the Wall Street Journal reported Thursday, citing people familiar with the internal deliberations.

But Trade Representative Robert Lighthizer has resisted the idea, and the proposal had not yet been introduced to President Donald Trump, according to the Journal.

U.S. stocks advanced on the news even as a Treasury spokesman working with the administration’s trade team denied the report.

“Neither Secretary Mnuchin nor Ambassador Lighthizer have made any recommendations to anyone with respect to tariffs or other parts of the negotiation with China,” the spokesman said.

“This an ongoing process with the Chinese that is nowhere near completion.”

Chinese Vice Premier Liu He will visit the United States on Jan. 30 and 31 for the latest round of trade talks aimed at resolving a bitter trade dispute between the world’s two largest economies.

In December, Washington and Beijing agreed to a 90-day truce in a trade war that has disrupted the flow of hundreds of billions of dollars of goods.

Mid-level U.S. and Chinese officials met in Beijing last week to discuss China’s offers to address U.S. complaints about intellectual property theft and increase purchases of U.S. goods and services.

Lighthizer did not see any progress made on structural issues during those talks, Republican U.S. Senator Chuck Grassley said earlier this week.

The Trump administration is scheduled to increase tariffs March 2 on $200 billion worth of Chinese goods to 25 percent from 10 percent.

The timeline is seen as ambitious, but the resumption of face-to-face negotiations has bolstered hopes of a deal.

China has repeatedly played down complaints about intellectual property abuses, and has rejected accusations that foreign companies face forced technology transfers.

Industrial stocks, which have been sensitive to trade developments, jumped 1.4 percent after the Wall Street Journal report.

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Indonesian Presidential Candidates Spar Over Corruption

Indonesian President Joko Widodo has accused his election rival of allowing corrupt candidates on his legislative ticket and failing to include women in senior positions.

Widodo and former General Prabowo Subianto, along with their running mates, faced off Thursday in the first of five debates before the April 17 election. The debate focused on terrorism, human rights, corruption, and law and order.

Opinion polls show Widodo commanding 52 percent to 54 percent popular support and Subianto 30 percent to 35 percent. About 10 percent of voters are undecided and another 15 percent are considered swing voters, meaning the race has the potential to tighten.

Subianto, making his second bid for president after being narrowly defeated by Widodo in 2014, waffled when asked why his party has the highest number of candidates with corruption records.

“Maybe the corruption they did was not huge, maybe he or she just, what I mean is, the theft was indeed wrong, but the most important thing to be eradicated was a corrupter who stole trillions of rupiah (hundreds of millions of dollars) of state money, of people’s money,” he said.

Questioning Subianto’s opening statement of a commitment to empowering women, Widodo said he has nine women in important Cabinet positions but there are few women in the leadership of Subianto’s Gerindra party.

Subianto said his party has many female candidates and criticized the quality of decision making by Widodo’s women ministers.

Widodo, the first Indonesian president from outside the country’s Jakarta elite, has made upgrading Indonesia’s infrastructure the signature policy of his five year-term.

In debating human rights, none of the candidates addressed Subianto’s involvement in human rights abuses during the dictator Suharto’s regime that ended two decades ago.

 

 

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Chinese Trade Negotiator to Visit US in Late January

China’s economic czar, Vice Premier Liu He, will travel to the United States later this month for the second round of negotiations aimed at resolving the ongoing trade war between the global economic giants.

Commerce Ministry spokesman Gao Feng told reporters in Beijing Thursday that Liu will visit Washington on January 30-31. He was invited by U.S. Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer.

U.S. negotiators were optimistic after the first round of talks in Beijing last week that the two sides would be able to resolve tariff disputes that have upset global markets.

The trade talks are the result of an agreement last month between President Trump and Chinese President Xi Jinping to stop the tit-for-tat tariff conflict between the two countries for 90 days starting on New Year’s Day.

The United States has long complained about access to the vast Chinese market and Beijing’s demands U.S. companies reveal their technology advances.

If no deal is reached by March 2, U.S. tariffs on $200 billion Chinese goods will rise from 10 percent to 25 percent.

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John Bogle, Founder of Vanguard, Dies at 89 

John C. Bogle, who simplified investing for the masses by launching the first index mutual fund and founded Vanguard Group, died Wednesday, the company said. He was 89.

Bogle did not invent the index fund, but he expanded access to no-frills, low-cost investing in 1976 when Vanguard introduced the first index fund for individual investors, rather than institutional clients.

The emergence of funds that passively tracked market indexes, like the Standard & Poor’s 500, enabled investors to avoid the higher fees charged by professional fund managers who frequently fail to beat the market. More often than not, the higher operating expenses that fund managers pass on to their shareholders cancel out any edge they may achieve through expert stock-picking.

Mutual fund industry critic

Bogle and Vanguard shook up the industry further in 1977. The company ended its reliance on outside brokers and instead began directly marketing its funds to investors without charging upfront fees known as sales loads.

Bogle served as Vanguard’s chairman and CEO from its 1974 founding until 1996.

He stepped down as senior chairman in 2000, but remained a critic of the fund industry and Wall Street, writing books, delivering speeches and running the Bogle Financial Markets Research Center.

The advent of index funds accelerated a long-term decline in fund fees and fostered greater competition in the industry. Investors paid 40 percent less in fees for each dollar invested in stock mutual funds during 2017 than they did at the start of the millennium, for example. But Bogle continued to maintain that many funds were overcharging investors, and once called the industry “the poster-boy for one of the most baneful chapters in the modern history of capitalism.”

Bogle also believed that the corporate structure of most fund companies poses an inherent conflict of interest, because a public fund company could put the interests of investors in its stock ahead of those owning shares of its mutual funds. Vanguard has a unique corporate structure in which its mutual funds and fund shareholders are the corporation’s “owners.” Profits are plowed back into the company’s operations, and used to reduce fees.

$5 trillion under management

Vanguard, based in Valley Forge, Pennsylvania, manages $5 trillion globally. It helped usher in a new era of investing, and index funds have increasingly become the default choice for investors. In 2017, investors plugged $691.6 billion into index funds while pulling $7 billion out of actively managed funds, according to Morningstar.

Vanguard offers both index and managed funds, but remains best-known for its index offerings. Vanguard’s original index fund, now known as the Vanguard 500 Index, is no longer the company’s biggest, but remains among the company’s lowest-cost funds.

Bogle spent the first part of his career at Wellington Management Co., a mutual fund company, then based in Philadelphia. He rose through the ranks and, in his mid-30s, was tapped to run Wellington.

He engineered a merger with a boutique firm that was making huge sums, but was ousted after the stock market tanked in the early 1970s, wiping out millions in Wellington’s assets. He said he learned an important lesson in how little money managers really know about predicting the market.

Knack for math

Bogle suffered several heart attacks and underwent a heart transplant in 1996, the year he stepped down as CEO. He reached the mandatory retirement age of 70 for Vanguard directors in 1999 and left as senior chairman the next year.

Vanguard did not provide a cause of death. Philly.com is reporting he died of cancer, citing Bogle’s family.

John Clifton Bogle was born in May 1929 in Montclair, New Jersey, to a well-off family; his grandfather founded a brick company and was co-founder of the American Can Co. in which his father worked.

Bogle attended Manasquan High School in Manasquan, N.J, for a time, then got a scholarship to the prestigious all-boys Blair Academy in Blairstown, New Jersey. It was at Blair that Bogle discovered his knack for math. He graduated from Blair in 1947 and was voted most likely to succeed.

Bogle graduated from Princeton with a degree in economics in 1951. His thesis was on the mutual fund industry, which was then still in its infancy.

Bogle is survived by his wife, Eve, six children, 12 grandchildren and six great-grandchildren.

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Giant US Bank Reveals 29 Percent Pay Gap Between Men, Women

Female employees at Citigroup Inc around the world are paid just 71 percent of what men earn, the giant bank said on Wednesday, declaring its intentions to close its gender pay gap.

A Citigroup shareholder group that sought data on the pay gap said the bank is the first U.S. company to disclose such figures.

The U.S.-based bank employs more than 200,000 people in more than 100 countries, and more than half those employees are female, it said.

Tackling the 29 percent gap means increasing the number of women in senior and higher-paying roles, promoting women to at least 40 percent of assistant vice president through managing director jobs, Citigroup said in a statement.

Citigroup said it disclosed the data in response to a shareholder proposal from Arjuna Capital, an investment management firm.

The bank said its “raw pay gap” showed median pay for females globally was 71 percent of the median for men.

The raw gap measures the difference in median total compensation not adjusted for job function, level and geography.

With those adjustments, women are paid an average of 99 percent of what men are paid, it said.

“We have work to do, but we’re on a path that I’m confident will allow us to make meaningful progress,” Sara Wechter, head of human resources, said in a statement.

In the United States overall, women last year working full-time year-round earned 80 percent of what men earned, according to commonly cited data from the U.S. Census Bureau.

Congress outlawed pay discrimination based on gender in 1963, yet public debate over why wages still lag drastically for women has snowballed in recent years.

Globally, the World Economic Forum reported an economic gap of 58 percent between the sexes for 2016, costing the global economy $1.2 trillion annually.

Last January, Citigroup said it was increasing compensation for women and minorities to bridge pay gaps in the United States, the United Kingdom and Germany, becoming the first big U.S. bank to respond to a shareholder push to analyze and disclose its gender pay gap.

This past year it expanded its pay equity review beyond those three countries to its workforce globally, it said.

 

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World Economic Forum Warns of Impact of Global Tensions

International tensions and nationalist politics can further weigh on the global economy this year and hinder efforts to deal with big issues such as climate change, the organizers of next week’s Davos forum warned Wednesday.

In its annual Global Risks Report, the World Economic Forum said the world is evolving into “a period of divergence following a period of globalization.”  A “darkening” economic outlook, in part fostered by geopolitical tensions between the United States and China, “looks set to further reduce the potential for international cooperation in 2019,” it said.

 

“With global trade and economic growth at risk in 2019, there is a more urgent need than ever to renew the architecture of international cooperation,” said Borge Brende, President of the World Economic Forum, which hosts an annual gathering of business and political leaders in the Swiss ski resort of Davos.

 

“We simply do not have the gunpowder to deal with the kind of slowdown that current dynamics might lead us towards,” he added.

 

In 2018, the global economy slowed more than most experts had predicted and stock markets posted their worst year in a decade. Much of that has been blamed on the standoff between the U.S. and China over trade that has led to both sides imposing tariffs on hundreds of billions worth of goods.

 

The report, which is based on the views of around 1,000 experts and decision-makers from around the world, found that 88 percent of respondents expect a “further erosion” of global trading rules and agreements that will hold back growth.

 

The U.S.-China relations will be one of the main talking points at next week’s gathering in Davos, with a number of high level representatives from each side due to attend, including U.S. Treasury Secretary Steven Mnuchin and China’s vice president, Wang Qishan. Britain’s upcoming exit from the European Union will be another key issue after British lawmakers overwhelmingly rejected the Brexit deal Prime Minister Theresa May had negotiated with the EU.

 

The 2016 vote to leave the EU had been driven in large part by a belief that Brexit would restore decision-making powers to Britain. U.S. President Donald Trump has used similar justifications to employ his “America First” policies on a range of international issues, such as climate change.

 

One area identified as being affected by the more fractured geopolitical environment is the need to modernize critical infrastructure projects around the world, such as roads, bridges and power networks, firstly and foremost to avoid accidents such as the collapse of a bridge in Genoa, Italy, last summer that killed 43 people.

 

John Drzik, President of Global Risk and Digital at Marsh, which helped with the preparation of the report, said the “more protectionist economic environment” is increasing costs and causing delays. The introduction of steel tariffs by the United States, he noted, raised the costs of an infrastructure project in Detroit by approximately 13 percent.

 

“Persistent underfunding of critical infrastructure worldwide is hampering economic progress, leaving businesses and communities more vulnerable both to cyberattacks and natural catastrophes, and failing to make the most of technological innovation,” he said.

 

 

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