August 18, 2019

How the Recession of 2020 Could Happen

The economies in China and many of its Asian neighbors are getting weaker, partly as a result of the trade war with the United States. The European economy, which has muddled along for years with low growth, may be tumbling into a recession, and if Britain crashes out of the European Union with no exit deal on Oct. 31, Europe could face still deeper challenges.

Already, a key measure of business capital spending in the United States, “fixed nonresidential investment,” was in negative territory in the second quarter. And in the nation’s factories, the rate of growth has slowed for five consecutive months, according to the Institute for Supply Management’s index. Although this measure still showed growth, the July reading was the weakest since August 2016.

The trade war between China and the United States is a big part of the reason. The conflict has made it difficult for many global firms to plan their operations — and in some cases, it may lead them to sit on their hands rather than invest. The American strategy has been more successful at escalating trade tensions than in resolving them, so companies do not know whether tariffs will go away soon or will be a continuing cost of doing business.

“The president says we’re going to get a great deal and a great deal soon, but he’s been saying that for over a year,” said Phil Levy, a former trade official in the George W. Bush administration and a chief economist at Flexport, a freight forwarder that works with many companies involved in international trade. “You end up paralyzed. You have to make plans, but there is risk all over the place, so businesses get cautious and hold back on investment.”

It’s not just companies directly involved in trade with China that may see reason to hold back on investment. The turmoil in financial markets spurred by the trade war could make businesses of all sorts more cautious.

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Economic Trouble Signs Hang Over Trump’s Trade War

Delaying some of the tariffs, however, may actually have taken pressure off the Fed to act by increasing the chances that China and the United States will reach some sort of a deal before the full set of penalties take effect. In fact, while Wall Street forecasts had begun to point to a half-percentage-point rate cut in September, expectations of just a quarter-point cut increased after the tariff delay was announced.

Fed policy was not crucial to the decision to delay tariffs — that centered on consumers and the economy, according to people familiar with the deliberations — but the report that it is on advisers’ minds is noteworthy. It suggests that for at least some White House advisers, one consideration in shaping and selling trade policy is keeping the central bank pointed toward interest-rate cuts.

The Fed cut rates in July for the first time in more than a decade, partly in response to mounting risks from the trade war and a global economic slowdown. It signaled that it might make further cuts if global risks persisted and inflation stayed low.

Administration economists have continued to predict, as recently as July, that the economy will grow at a 3.2 percent rate this year, up from 2.5 percent last year. (Officials will complete a revised forecast at the end of October.) But if economic growth continues at its current pace through the fall, Mr. Trump will need a rapid acceleration — to more than 5 percent growth in the fourth quarter — to hit his administration’s initial target for this year.

On Wednesday, Mr. Trump wrote on Twitter: “China is not our problem, though Hong Kong is not helping. Our problem is with the Fed. Raised too much too fast.”

But the main threat to United States growth, most economists say, is slowing economic expansion abroad and the possibility that Mr. Trump’s trade war will intensify the global pullback and chill investment and expansion domestically.

“I don’t know if he’s necessarily doing this just to get the Fed to cut,” said Gennadiy Goldberg, senior United States rates strategist at TD Securities, but the trade war “puts the Fed between a rock and a hard place,” because it wants to avoid playing into politics but must also protect the economy.

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Labor Dept. Moves to Expand Religion Exemption for Hiring and Firing

The public has 30 days to comment on the proposed rule, after which the department can issue a final version. Many advocates said they would expect a variety of legal challenges if it is enacted.

Luke Goodrich, vice president and senior counsel of the Becket Fund for Religious Liberty, which advocates for the rights of people to express their religious faith, said the order was necessary to better align the religious exemption that exists for federal contractors with the broader exemption for religious organizations that exists under federal civil rights law. Under current law, a religious organization that is not a contractor could refuse to hire workers who do not share certain religious beliefs.

Thousands of companies have federal contracts, for food and information technology services, the provision of furniture and military equipment, and much more.

Holly Hollman, general counsel of the Baptist Joint Committee for Religious Liberty, a group that opposes government-funded religion, said the rule would not override state laws intended to protect certain workers, which are not typically pre-empted by federal rules.

In explaining the purpose of the rule, the Labor Department said some religious organizations had indicated they were hesitant to apply for federal contracts because they were unsure if the existing religious exemption applied to them.

“As people of faith with deeply held religious beliefs are making decisions on whether to participate in federal contracting, they deserve clear understanding of their obligations and protections under the law,” Patrick Pizzella, the acting labor secretary, said in a statement.

But Patricia A. Shiu, who ran the federal office that oversees compliance for federal contractors under President Barack Obama, said no contractors or prospective contractors had expressed such concerns during her more than seven years in the job.

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What’s the Deal With That Inverted Yield Curve? A Sports Analogy Might Help

But if you buy a 10-year Treasury note, you’re making a bet on the more distant future. The economy will probably change a lot over the next decade. You can’t predict exactly what will happen, but you are betting on the general direction of things: Do you expect the economy to heat up, creating inflation pressures and causing the Fed to raise rates? Or do you expect it cool down?

So purchase of a longer-term Treasury bond is like making one of those long-term bets with a casino on how a team will perform for many years to come. You have no idea what the details are of which players they will sign or who will be coaching the team. You are betting on the general direction.

How might that bet might look with two different teams?

The Arizona Cardinals were terrible last year, and most bettors expect them to be pretty bad this year as well: Vegas odds suggest they will only win five or six games. But they have drafted an exciting young quarterback (Kyler Murray) and hired a new coach.

Even if you’re not a believer in the Cardinals for this season, you could reasonably expect that they will get better in the coming years — that their future is better than their present. If most bettors believed that, you could tell that from the difference between the price of a 10-year Cardinals betting contract and a one-year Cardinals betting contract — it might reveal, for example, that the team is expected to go from winning 5 games this year to 9 games two or three years from now.

Or consider the Patriots. They have been the best team in the game for the past two decades, but their quarterback, Tom Brady, is 42 years old, and their coach, Bill Belichick, is 67. It would be reasonable to expect the team to decline over the next decade after these stars retire.

The prices of the Patriots one-year contract, in other words, would probably reflect greater optimism than their 10-year contract.

Essentially, the relative prices of those short-term versus long-term betting contracts would tell you whether a team is viewed as likely to be on the upswing or the downswing — not necessarily today but at some point in the next few years.

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As Recession Concerns Mount, Dozens of Central Banks Are Cutting Rates

Temporary benefits, like an increase in exports or inflation stabilization, might take the pressure off policymakers to enact longer-term economic changes, like industrial reorganization and work force training.

And central bank moves could draw the attention, and even action, of politicians who can directly intervene in currency markets.

Mr. Trump, for one, is convinced that other central banks set easy policy in order to devalue their currencies. He often suggests that the Fed should try to catch up.

“The Fed’s high interest rate level, in comparison to other countries, is keeping the dollar high, making it more difficult for our great manufacturers” to compete, Mr. Trump wrote on Twitter last Thursday. He previously tweeted about the European Central Bank’s reorienting its policy to lower the value of the euro, saying, “They have been getting away with this for years, along with China and others.”

The European Central Bank is expected to cut rates further into negative territory next month. Mr. Woo of Bank of America said he saw such moves as targeting currency, given that the demand-stoking benefits of negative rates are widely disputed.

Most major central banks — including the eurozone’s — are free of politics and have not engaged in outright manipulation, economists say. They focus on domestic inflation goals, which currency levels can, but do not always, drive.

China, where the central bank answers to the government, does have a history of intervening for competitive reasons, most economists agree, though the International Monetary Fund says the price of the renminbi is reasonable under current economic conditions. That makes the White House’s move to label China a manipulator mostly symbolic, because the I.M.F. would play a key role in making China realign its currency.

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Global Economic Trouble Is Brewing, and the Trade War Is Only Part of It

Sure, forestalling the latest China tariffs will help avoid a big hit to the profits of retailers and importers over the next few months — and it helps prevent American consumers from facing sticker shock during their holiday shopping.

But this is about something more consequential than a 10 percent tariff on iPhones. It’s really about the widening schism between the world’s two largest economies — one that cannot be reversed with a concession on tariffs by the president or with some soybean purchases by the Chinese. This clash is increasingly becoming part of the landscape that every global business must navigate.

The same could be said about the other geopolitical fires that risk flaring up. What will be the future of Hong Kong as China responds to pro-democracy protesters there? Will Britain leave the European Union on Oct. 31 as planned, and on what terms? Can India and Pakistan avoid a devastating armed conflict over Kashmir?

Oh, and the European economy may be heading toward recession; global central banks are largely at the end of the road in terms of what they can do to offset a new slump; and there is political dysfunction in many of the world’s biggest democracies that could limit their ability to respond to a new recession with fiscal policy or other tools.

If you’re a corporate C.E.O. making investment decisions, the environment in which you operate is shifting beneath your feet. Even with a seemingly bottomless supply of cheap capital available and a very low corporate tax rate, it feels awfully risky out there.

And indeed, through the first half of the year, falling business investment was a drag on American economic growth.

The latest developments don’t mean that a recession, or even a severe slowdown, is a certainty. The Federal Reserve, unlike its counterparts in other major economies, still has some room to cut interest rates to try to stimulate activity, and has shown it is willing to use that power. And American consumers have proved quite resilient this year even as business spending has stumbled; perhaps that will remain true.

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Markets Are Shaken by New Signs of Global Economic Trouble

When investors are confident in the economy, they demand higher bond rates, partly to offset the risk that sustained growth could produce inflation and dilute the bonds’ effective returns. For that reason, rates on long-term bonds are typically higher.

But on Wednesday, for the first time since 2007, yields on two-year Treasury notes briefly exceeded the interest rate on the benchmark 10-year note. This pattern, called an inverted yield curve, is frequently cited as a harbinger of recession, although it can take quite some time to be proved right.

Earnings growth, which has helped drive Wall Street’s remarkable gains in recent years, is also showing signs of petering out.

Second-quarter profits for companies in the SP 500 are coming in 0.7 percent lower than a year ago, according to data from John Butters, the senior earnings analyst at FactSet. If that figure holds — and more than 90 percent of the companies in the index have reported — it will mark the second straight quarter in which profits have declined, something often referred to as an earnings recession.

The slide was most pronounced among companies with the greatest exposure to the global economy and trade. Earnings at American semiconductor manufacturers, which rely on production networks in China and generate much of their sales there, fell about 25 percent.

More troubling for investors, profits seem likely to remain lackluster for at least the rest of 2019. Stocks bounced back strongly this year, in part, on optimism that the United States and China would inch closer to a trade deal and that earnings would rebound in the second half. That hope has faded as the trade tensions have ratcheted up with no end in sight.

Although China’s economy is growing more quickly than that of many Western competitors, it has slowed measurably since the start of the trade conflict. Wednesday’s reading on Chinese industrial production was weaker than expected, with July’s growth rate at 4.8 percent, the lowest since 2002.

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Couple’s Suit Over Parental Leave Is New Challenge to Big Law Firm

Ms. Calvert said that the fact that adoptive parents receive the same amount of paid leave as biological mothers supported the plaintiffs’ argument that the leave was for bonding, but that this fact was not decisive.

A policy like Jones Day’s does not appear to have been tested in court, but in 2015 CNN settled an analogous case with a biological father.

David Lopez, a former general counsel of the Equal Employment Opportunity Commission, said Mr. Savignac appeared to have a strong claim that his firing was unlawful. Mr. Savignac was fired three business days after he and Ms. Sheketoff said in an email to the firm that the leave policy was discriminatory, and he had previously earned strong performance reviews, according to the complaint.

Jones Day defended its policy, saying it grants birth mothers eight weeks of paid disability leave to avoid having to ask for medical evidence that they are still recovering from childbirth. The firm said the firing of Mr. Savignac had not been in retaliation for criticizing the leave policy, which it said he and Ms. Sheketoff had done in 2018 without repercussions. Rather, it said, it fired him because he had shown a “lack of courtesy” to colleagues and an “open hostility to the firm,” citing his email.

The firm also said its adoption-leave policy reflected the unique demands that adoptive parents can face, like foreign travel and legal proceedings.

Jones Day’s policy is at odds with a trend in which companies are increasingly eliminating the distinction between fathers and mothers or primary and secondary caregivers. They award all employees the same amount of family leave for a new child, though women who give birth can sometimes receive additional time to recover through disability leave.

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The Rise of the Virtual Restaurant

Uber and other delivery apps maintain that they are helping restaurants, not hurting them.

“We exist for demand generation,” said Ms. Sallenave. “Why would a restaurant be working with us if we weren’t helping them increase their orders?”

Delivery-only establishments in the United States date to at least 2013, when a start-up, the Green Summit Group, began work on a ghost kitchen in New York. With Grubhub’s backing, Green Summit produced food that was marketed online under brand names like Leafage (salads) and Butcher Block (sandwiches).

But Green Summit burned through hundreds of thousands of dollars a month, said Jason Shapiro, a consultant who worked for the company. Two years ago, it shut down when it couldn’t attract new investors, he said.

In Europe, the food-delivery app Deliveroo also started testing ghost kitchens. It erected metal kitchen structures called Rooboxes in some unlikely locations, including a derelict parking lot in East London. Last year, Deliveroo opened a ghost kitchen in a warehouse in Paris, where Uber Eats has also tried delivery-only kitchens.

Ghost kitchens have also emerged in China, where online food delivery apps are widely used in the country’s densely populated megacities. China’s food delivery industry hit $70 billion in orders last year, according to iResearch, an analysis firm. One Chinese ghost kitchen start-up, Panda Selected, recently raised $50 million from investors including Tiger Global Management, according to Crunchbase.

Those experiments have spread. Over the last two years, Family Style, a food start-up in Los Angeles, has opened ghost kitchens in three states. It has created more than half a dozen pizza brands with names like Lorenzo’s of New York, Froman’s Chicago Pizza and Gabriella’s New York Pizza, which can be found on Uber Eats and other apps.

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Trump’s Push to Bring Back Jobs to U.S. Shows Limited Results

In Mr. Trump’s first two years in office, companies announced plans to relocate just under 145,000 factory jobs to the United States, according to data and modeling by the Reshoring Initiative, a Washington nonprofit group. That is a record high in the group’s data, which dates back to the late 1980s, but it adds up to less than one month of average job gains in the United States in its decade-long expansion. More than half of those jobs — about 82,000 — were announced in 2017, before Mr. Trump’s tax cuts took effect.

Moreover, the Reshoring Initiative data show fewer than 30,000 jobs that companies say they will relocate to the United States because of Mr. Trump’s tariffs on imported steel, aluminum, solar panels, washing machines and a variety of Chinese goods. Researchers at A.T. Kearney said last month that Mr. Trump’s trade policies, including tariffs, had pushed factory activity not to the United States but to low-cost Asian countries other than China, like Vietnam.

Manufacturers of primary metals, which include steel and aluminum, have added fewer than 15,000 jobs since Mr. Trump took office, with more than half of those gains coming before Mr. Trump imposed tariffs on foreign-made metals last year.

Now manufacturing is struggling amid a global slowdown and fallout from the trade war, which Mr. Trump has escalated by imposing additional tariffs on Chinese goods and by labeling China a “currency manipulator.”

A May report by researchers at the International Monetary Fund concluded that the investment impact of the tax bill “has been smaller than would have been predicted based on the effects of previous U.S. tax-cut episodes” and that the strongest effects on investment were likely to have shown up in the first year after the law was enacted. Morgan Stanley’s Business Conditions Index shows companies’ plans for new investment plummeted this summer.

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