April 21, 2018

Bulging Debt May Spell Trouble for Energy, Telecom and Retail

Mr. Wildstein said the retail industry was “bifurcated.” “The department store model is being disrupted by Amazon,” he said, and many department stores are suffering. On the other hand, he said, the home improvement giants are seemingly unaffected: “Home Depot and Lowe’s continue to do well.”

Brian Ruffner, manager of the Federated Bond fund, said auto parts stores should also flourish in a positive economic environment

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An empty aisle at a PetSmart store in New York. Credit Jeenah Moon for The New York Times

Debt loads aren’t merely a concern for fixed-income investors. Equity investors need to be aware of debt loads at troubled companies because, in a severe case, bankruptcy would wipe out the value of any stock holdings.

For equity investors who are bullish about online retail outlets and skeptical about more traditional stores, the ProShares Long Online/Short Stores exchange-traded fund may be a useful vehicle: It invests in online purveyors while betting against challenged brick and mortar retailers.

Energy is another industry where debt is worrisome. Oil and gas companies carry large loads of lower-rated debt that is due to mature in the next five years, according to S.P. New fracking technology has helped to expand domestic oil and gas output and loosened the Organization of the Petroleum Exporting Countries’ grip on prices. But as the new supply depresses prices, it also pinches cash flow.

Indeed, 14 of 16 midsize and larger drillers tracked by Gordon Douthat, a director of equity research at Wells Fargo Securities, had higher capital spending costs than cash flow last year: Anadarko Petroleum, Noble Energy and Pioneer Natural Resources are among them.

Carl Kaufman, who manages the Osterweis Strategic Income fund, said of domestic drillers: “Those companies don’t throw off any cash.”

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One central problem is the modest level of oil prices which, despite a recent rebound, remain well below highs of over $100 a barrel. Mr. Wildstein said he expects them to remain “around $60” “We don’t believe they’ll go back to the $70s or $80s,” he said.

For investors who are bearish on the price of oil, there is the ProShares UltraShort Bloomberg Crude Oil E.T.F. For equity investors who expect domestic drillers to rebound eventually, there are E.T.F.s like iShares U.S. Oil and Gas Exploration Production.

Telecom debt also is worth watching. Citing increased price competition, Moody’s has a negative outlook on the entire sector. Bill Wolfe, Moody’s senior vice president, said the industry was rife with “large companies with a lot of debt,” including Frontier Communications, CenturyLink and Sprint.

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A Verizon store in New York. The company has a strong wireless network, but it carries a great deal of debt. Credit Jeenah Moon for The New York Times

Verizon Communications also carries a large debt load, but it may be something of a special case. “They’re an extremely large issuer,” Mr. Wildstein said.

One important positive for Verizon, Mr. Wolfe said, is that it has “the premier wireless network.” But the cost of upgrading that network may also be a Verizon vulnerability. The company is moving aggressively to put in place 5G technology, which uses higher frequencies to speed wireless transmission. But 5G is expensive to install, and it faces widespread opposition in many municipalities and from some scientists, who say it entails health risks.

Mr. Wildstein’s fund holds Verizon debt, and he says the company may be overly dependent on its wireless network. It needs to diversify by acquiring a cable provider or media company, he said.

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Robert Persons, a manager of the MFS Corporate Bond fund, is also concerned about Verizon’s 5G expenditures. “We are monitoring that closely,” he said. With uncertainty and controversy overhanging the 5G rollout, he wonders: “Will it be worth the capital investment?”

Verizon lists its total debt as $117.1 billion. “We want to strengthen the balance sheet,” Matthew D. Ellis, the company’s chief financial officer, said on a Jan. 23 earnings call. “You should expect us to deleverage from where we are today,” he added.

Outside these industries, debt is high for much of corporate America but probably manageable, several analysts said.

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“The leverage is elevated — companies are borrowing more,” said Mr. Wolfe of Moody’s. But since they are borrowing at historically low rates, their repayment abilities have not been measurably affected, he noted.

Among investment-grade companies, the ratio of earnings before interest, tax, depreciation and amortization, or Ebitda, to interest expense has inched up to 9.9 in the 12 months through Sept. 30, 2017, from 9.7 in 2010. Companies with speculative-grade — also known as high-yield — debt have also seen their Ebitda-to-interest expense ratios improve a bit, Moody’s reports.

The broad outlook for corporate bonds isn’t entirely rosy. Interest rates have been rising, and S.P. estimates that more than $4 trillion in corporate debt will have to be refinanced — presumably at even higher interest rates — by the end of 2022. But S. P. doesn’t expect this refinancing to cause undue problems.

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Article source: https://www.nytimes.com/2018/04/13/business/bulging-debt-may-spell-trouble-for-energy-telecom-and-retail.html?partner=rss&emc=rss

Trump Weighs Return to Trans-Pacific Partnership. Not So Fast, Say Members.

“We’ve got a deal” already, said Steven Ciobo, Australia’s trade minister, who added, “I can’t see that all being thrown open to appease the United States.”

[Read about President Trump’s reversal on the Trans-Pacific Partnership, which came at a gathering of politicians from farm states that stand to lose from any trade war with China.]

An early test of the potential for the United States to rejoin could come as soon as next week, when Shinzo Abe, Japan’s prime minister and an ardent champion of the pact, is to meet with Mr. Trump at his Mar-a-Lago resort in Palm Beach, Fla.

Mr. Trump’s renewed interest in the pact depends on whether the United States could strike a better deal than President Barack Obama did, Mr. Trump said in a Thursday night tweet. Still, negotiations with a group of longtime trading partners could hold appeal at a time of increasing tensions with China.

Mr. Trump faces a growing domestic backlash from corporations, farmers and others over fears that he is igniting a trade war with China, the United States’ largest single trading partner. Mr. Trump has warned that he could levy tariffs on $150 billion in Chinese goods, prompting Beijing to threaten retaliatory measures aimed at American soybeans, airplanes and other products.

Negotiating a new pact could take years. Still, rekindling negotiations could make it hard for China to play off the United States against its allies by promising to shift business from one to another if a trade war breaks out. It could be a way to assuage American farmers and businesses hurt by Chinese tariffs by assuring robust markets for American products in countries that signed onto the deal, like Japan, Australia and South Korea. It would give the pact a great deal more heft and help position it as an economic counterweight to China, which increasingly dominates the Asia-Pacific region.

More broadly, it signals to the region that the United States is not giving up on trade, despite Mr. Trump’s sometimes harsh words. Even as officials in other countries expressed skepticism on Friday, they said they would like to hear what Washington has to offer. “Japan would like to listen to the U.S.’s view,” said Mr. Suga, the Japanese official.

What Is TPP? Behind the Trade Deal That Died

On his first full workday in office, President Trump delivered on a campaign promise by abandoning the enormous trade deal that had became a flashpoint in American politics.

The barriers to a new pact are considerable. Many current members of the pact feel they already gave considerable ground to the United States to strike the original deal, particularly in sensitive areas like protections for pharmaceutical companies.

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For its part, the Trump administration worries that the partnership will become a zero-tariff backdoor for Chinese goods into the American market. It worries that companies that have moved much of their supply chains to China could make components there, ship them to a member of the Trans-Pacific Partnership for assembly, then sell them in the United States tariff-free. It wants to toughen requirements for how much of the product is made within a participating country, which could make the goods less competitive.

Their worries focus largely on Vietnam, a member of the current version of the pact. It has a large population, and a few big American companies, like Intel, have already invested heavily in setting up factories there that make products practically from scratch. But many other companies that are exporting goods from Vietnam rely heavily on imports from China. Vietnam’s huge garment industry, for example, relies greatly on fabric and accessories imported from China, according to garment manufacturing executives.

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Vietnamese officials did not respond to requests for comment on Friday. Frederick Burke, managing partner for Vietnam at the American law firm Baker McKenzie, said that the Vietnamese government is “very aware of and focused on the issue of circumvention” in trade.

Renegotiating the Trans-Pacific Partnership may not be quick. Mr. Trump’s trade negotiators already have their hands full this spring trying to complete changes to the North American Free Trade Agreement. They need to decide whether to extend temporary exemptions from the president’s new tariffs on imported steel and aluminum. Above all, they are locked in a series of increasingly acrimonious trade spats with China.

China is making its own outreach efforts in the meantime. Wang Yi, its foreign minister, will travel to Tokyo on Sunday. China has played up free trade talks with Japan and with South Korea, which is not a member of the partnership.

Sheila A. Smith, a Japan expert at the Council on Foreign Relations in Washington, said the Trump administration may have realized that it does not have the leverage it thought to renegotiate a new trade deal with Japan, and that embracing the regional pact may be the best fallback.

The Trump administration “could walk right back in with the exact same deal from last year that they walked out of, and claim victory,” said Ms. Smith, who noted that the government of Mr. Abe “has been continuously and quietly encouraging the U.S. administration to take another look” at the pact.

One lingering question would be how China would react. The pact’s rules were designed in part to challenge China by encouraging members to loosen state support of their economies and relax trade rules — steps Beijing would have to take if it hoped to someday join the pact and enjoy its lower trade barriers.

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China is not likely to be troubled by a United States move to join the Trans-Pacific Partnership as long as the Trump administration is doing so for strictly trade reasons, said He Weiwen, a former Commerce Ministry official and trade specialist who is now a senior fellow at the influential Center for China and Globalization in Beijing.

But the Chinese government is likely to be dismayed if the United States is reconsidering it as part of any revival of the Obama administration’s geopolitical pivot to Asia, or as part of any attempt to isolate China, Mr. He cautioned.

“That’s what we should be careful about,” he said.

Some current members of the pact greeted Mr. Trump’s comments on Thursday warmly. A spokeswoman for Singapore’s Ministry of Trade and Industry said it welcomed the American interest. “The TPP was designed to be an inclusive agreement, which is open to like-minded countries willing and able to meet its high standards,” the spokeswoman said.

Still, even American allies suggest a long road ahead if Mr. Trump moves forward.

“If the United States genuinely did wish to re-enter, that would trigger another process of engagement and negotiation,” Jacinda Ardern, the prime minister of New Zealand, said on television, adding that she still planned to go forward with the deal as-is. “It’s not just a matter of slotting into an existing deal.”

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Article source: https://www.nytimes.com/2018/04/13/world/asia/trump-tpp-asia.html?partner=rss&emc=rss

Rent Control Campaign in California Is Taken to the Streets

“It’s very doable,” she said.

Countering a Crisis

Until recently, rent control was mostly limited to a few urban areas in New York, California and New Jersey, as well as the District of Columbia. About half of states prohibit cities from even considering the idea, according to the National Apartment Association. But as cities have become magnets for high-paying jobs, producing higher rents and fights over gentrification, tenants’ movements have spread.

Last year Portland, Ore., passed a law requiring landlords to pay relocation costs for renters evicted without cause, while legislators in Washington State considered but ultimately killed a law that would have lifted a prohibition on rent control and paved the way for cities like Seattle to pass rent regulations. In Denver, Minneapolis and Nashville, tenants are fighting displacement, pushing for expanded protections and organizing into tenants’ unions.

“Towns and cities everywhere are seeing new organizing to build tenants’ unions, fight for renters’ rights and change these laws,” said Ryan Acuff, an organizer based in Rochester, N.Y., for the Homes for All Campaign, a national coalition of tenant activists.

In California, where one in five people lives in poverty once rent is figured in, lawmakers have offered a flurry of bills to streamline building regulations, expand tenant protections and put more money toward subsidized housing. For many tenants, those efforts are not nearly enough. Up and down the state, activists and renters’ groups are using California’s tradition of citizen government to put voter initiatives on the ballot.

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Ms. Camacho, followed by Ms. Her, left a gathering at a union hall to canvass a neighborhood. If the Sacramento initiative qualifies for the ballot and is approved by voters, rent increases would be capped at 5 percent a year. Credit Jim Wilson/The New York Times

There was a similar movement two years ago, when activists in a handful of cities in Silicon Valley and the surrounding San Francisco Bay Area promoted rent-control initiatives. They met with middling success, but as rents have risen further and rising homelessness has become an issue statewide, tenants’ groups are betting that voters will be much more receptive this time.

As a result, this year’s rent-control drives are more ambitious, in county seats like Sacramento, Santa Rosa, Santa Cruz and Santa Ana; big Los Angeles suburbs like Pasadena, Glendale, Inglewood and Long Beach; and the San Diego suburb of National City.

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Some organizers are so confident that they are willing to try do-overs. The Santa Rosa City Council passed a rent-control measure in 2016, prompting a landlord-backed proposal that repealed the measure in a special election last year. Now, after the fires that destroyed thousands of homes across Santa Rosa and surrounding Sonoma County last year, organizers are getting ready to collect signatures for an initiative to put rent control back in place.

“People are already supportive of rent control, and even more so after the fire,” said Davin Cardenas, a director at the North Bay Organizing Project. “The need has not gone away, so we feel like we have a very good chance of winning.”

A Costly Proposition

Running in parallel to the various local rent-control drives is a statewide initiative that would repeal a longstanding state law limiting local rent regulations. That measure is backed by the Los Angeles-based AIDS Healthcare Foundation, whose director, Michael Weinstein, has put tens of millions behind ballot measures on health care and housing issues. That effort, should it end up on the ballot, is likely to escalate into a war of radio, billboard and television ads that could surpass $100 million in combined spending, according to political consultants who have run statewide campaigns.

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Article source: https://www.nytimes.com/2018/04/12/business/economy/california-housing.html?partner=rss&emc=rss

A California Housing Fight, Waged With Pen and Walking Shoes

“It’s very doable,” she said.

Countering a Crisis

Until recently, rent control was mostly limited to a few urban areas in New York, California and New Jersey, as well as the District of Columbia. About half of states prohibit cities from even considering the idea, according to the National Apartment Association. But as cities have become magnets for high-paying jobs, producing higher rents and fights over gentrification, tenants’ movements have spread.

Last year Portland, Ore., passed a law requiring landlords to pay relocation costs for renters evicted without cause, while legislators in Washington State considered but ultimately killed a law that would have lifted a prohibition on rent control and paved the way for cities like Seattle to pass rent regulations. In Denver, Minneapolis and Nashville, tenants are fighting displacement, pushing for expanded protections and organizing into tenants’ unions.

“Towns and cities everywhere are seeing new organizing to build tenants’ unions, fight for renters’ rights and change these laws,” said Ryan Acuff, an organizer based in Rochester, N.Y., for the Homes for All Campaign, a national coalition of tenant activists.

In California, where one in five people lives in poverty once rent is figured in, lawmakers have offered a flurry of bills to streamline building regulations, expand tenant protections and put more money toward subsidized housing. For many tenants, those efforts are not nearly enough. Up and down the state, activists and renters’ groups are using California’s tradition of citizen government to put voter initiatives on the ballot.

Photo
Ms. Camacho, followed by Ms. Her, left a gathering at a union hall to canvass a neighborhood. If the Sacramento initiative qualifies for the ballot and is approved by voters, rent increases would be capped at 5 percent a year. Credit Jim Wilson/The New York Times

There was a similar movement two years ago, when activists in a handful of cities in Silicon Valley and the surrounding San Francisco Bay Area promoted rent-control initiatives. They met with middling success, but as rents have risen further and rising homelessness has become an issue statewide, tenants’ groups are betting that voters will be much more receptive this time.

As a result, this year’s rent-control drives are more ambitious, in county seats like Sacramento, Santa Rosa, Santa Cruz and Santa Ana; big Los Angeles suburbs like Pasadena, Glendale, Inglewood and Long Beach; and the San Diego suburb of National City.

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Continue reading the main story

Some organizers are so confident that they are willing to try do-overs. The Santa Rosa City Council passed a rent-control measure in 2016, prompting a landlord-backed proposal that repealed the measure in a special election last year. Now, after the fires that destroyed thousands of homes across Santa Rosa and surrounding Sonoma County last year, organizers are getting ready to collect signatures for an initiative to put rent control back in place.

“People are already supportive of rent control, and even more so after the fire,” said Davin Cardenas, a director at the North Bay Organizing Project. “The need has not gone away, so we feel like we have a very good chance of winning.”

A Costly Proposition

Running in parallel to the various local rent-control drives is a statewide initiative that would repeal a longstanding state law limiting local rent regulations. That measure is backed by the Los Angeles-based AIDS Healthcare Foundation, whose director, Michael Weinstein, has put tens of millions behind ballot measures on health care and housing issues. That effort, should it end up on the ballot, is likely to escalate into a war of radio, billboard and television ads that could surpass $100 million in combined spending, according to political consultants who have run statewide campaigns.

Continue reading the main story

Article source: https://www.nytimes.com/2018/04/12/business/economy/california-housing.html?partner=rss&emc=rss

U.S. Seeks Quick Nafta Deal, but Allies Balk as It Gives Little Ground

Trump administration officials are eager to conclude negotiations quickly, largely because they must secure a deal by May to meet all of the necessary deadlines to have their revised Nafta agreement approved by the current Republican-controlled Congress. Some trade advisers say the possibility of Democrats retaking the majority in the House in November’s midterm elections could put congressional approval of Mr. Trump’s Nafta deal at risk, given that many Democrats oppose Nafta.

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The plant for ArcelorMittal Dofasco, a steel producer, in Hamilton, Ontario. American Nafta negotiators want to require that 70 percent of certain auto parts made of steel and aluminum to be made in North America. Credit Peter Power/Reuters

Mexico is also facing a presidential election July 1 that could complicate talks by bringing a different political party into power. Trump administration trade advisers are also enmeshed in an escalating conflict with China that threatens to become a trade war.

On Monday, the president said the United States was “fairly close” on a Nafta deal, but he also reiterated his threat to withdraw from the pact if a new agreement is not reached.

The administration’s desire to quickly resolve Nafta could give Canada and Mexico more leverage. Trade experts say a Nafta deal seems more likely than it has in months, since the United States sees new urgency to conclude talks and is at least offering different proposals. But the United States does not appear to be ceding much ground. Larger concessions will need to be made to reach a deal, observers say — and those could come in the final moments.

Antonio Ortiz-Mena, a former Mexican diplomat in the United States, said he believed a deal would be possible in the coming weeks if negotiators were prepared to compromise. However, he said, “I think the biggest threat to Nafta is the United States overplaying its hand and not being flexible enough.”

The Nafta provision regarding automobiles has been among the most contentious, given Mr. Trump’s focus on the car industry and its importance to all three nations’ economies.

American negotiators have dropped an earlier demand that half of the value of an automobile be made solely in the United States to qualify for Nafta’s zero tariffs. Instead, they are asking for an unspecified percentage of each vehicle to be made by workers earning at least an average wage rate for the North American industry, to be recalculated each year. According to preliminary calculations, that wage could be approximately $16 to $17 an hour.

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However, other parts of the proposal are unchanged, or add layers of rules. In keeping with its earlier proposal, the United States is asking for 85 percent of the value of a car to be made in North America to qualify for Nafta’s benefits, up from 62.5 percent under the current Nafta deal. But it has set up a complex tiered system for other auto parts, for example requiring 85 percent of engines and advanced batteries to be made in North America, as well as 70 percent of monitors, wiring sets and autonomous vehicles parts, and 50 percent of brake pads and spark plugs.

It also requires 70 percent of certain auto parts made of steel and aluminum to be made in North America — a further boon to the American steel and aluminum industry, which the Trump administration has sought to protect.

These auto rules may be subject to a periodic review, for example every five years. Car companies would have three years to work on redesigning their supply chains before the rules went into effect.

Mexico has countered with an offer to raise the overall requirement for North American content in Nafta cars to 70 percent, up from 62.5 percent currently, people close to the talks said. It has also agreed to accept a proposal by Canada to add in the value of research and development when calculating how much of a car is produced in North America. But Mexico continues to reject the other provisions in the American proposal on automobiles, and insists that the industry be given seven years to transition to the new rules, rather than three.

Auto parts makers, which would likely see their sales rise as a result of the new rules, seemed more amenable to the proposal. But some auto manufacturer representatives said the new proposals were as “equally unworkable” as the original ones. They said the tiered system was excessively complicated and could drive up administrative costs as companies try to comply with the rules.

Many valuable car components — electronic systems, for example — are largely made in Asia, and rebuilding a manufacturing base for these parts in North America in just three years would be no simple matter.

Since the United States levies only a 2.5 percent tariff on cars imported into the country, tougher Nafta rules might just push companies to automate their production facilities or make cars elsewhere, critics say. At a certain point, companies may find it cheaper to manufacture cars in China or Southeast Asia, and import them into the United States instead.

The United States also appears to be largely standing firm on other contentious issues, including rules for government purchases, methods of settling trade disputes and a provision under which Nafta would automatically expire every five years, unless the countries voted to reapprove it.

The Trump administration has said those changes are necessary to revive American manufacturing and undo incentives that encourage companies to move their factories to low-cost countries like China and Mexico. Company representatives counter that the use of global supply chains has now become the norm in many industries, and without the ability to source products from around the world, American companies would simply not be able to compete.

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Article source: https://www.nytimes.com/2018/04/11/us/politics/nafta-negotiations-trump.html?partner=rss&emc=rss

Fed Officials Have Concerns About Trade, March Meeting Minutes Show

However, the minutes reflect officials’ uncertainty about how big that boost might be, and when it might come, because there is little historical precedent for such fiscal stimulus when unemployment is so low. The minutes also show that policymakers “suggested that uncertainty about whether all elements of the tax cuts would be made permanent, or about the implications of higher budget deficits for fiscal sustainability and real interest rates, represented sources of downside risk to the economic outlook.”

The meeting was the first under the Fed’s new chairman, Jerome H. Powell. At the session’s conclusion, officials announced that they would raise interest rates for the sixth time since the end of the Great Recession, in the range of 1.5 to 1.75 percent. Officials released economic projections indicating that they expected to raise rates three times next year, more than the two increases in 2019 that they had forecast in December. The Fed said at the time the economy was continuing to get stronger and that the central bank remained on track to keep raising rates gradually. Mr. Powell echoed those sentiments at a news conference after the meeting.

The minutes suggest that decision on interest rates generated little controversy: “All participants agreed that the outlook for the economy beyond the current quarter had strengthened in recent months,” and that they expected the annual inflation rate to rise in the months to come.

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Feed hoppers in Polo, Ill., this month. The Fed’s March meeting minutes show policymakers discussing concerns in the farm industry about the potential impact of the Trump administration’s decision to impose tariffs on imports. Credit Daniel Acker/Reuters

But the minutes say that a “couple of participants” suggested the Fed would benefit from holding off until a future meeting to raise rates, in order to wait for more data to confirm evidence that the rate of inflation was approaching the Fed’s target of 2 percent annual growth.

Officials also debated the benefits of the economy’s running hot — with unemployment very low and growth above forecast trends — for a prolonged period of time, weighing the potential for drawing more workers back to the labor force against the risk of financial instability and “significant” inflation growth.

Officials seemed to shrug off the increase in stock market volatility in February, attributing it in part to Labor Department reports that the suggested growth in wages — and, with it, inflation — was gaining steam, which could force the Fed to raise rates faster than expected. “Many participants reported that their contacts had taken the previous month’s turbulence in stride,” the minutes read.

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The official statement released immediately after the March meeting did not mention trade policy concerns, which roiled financial markets after the Trump administration announced its plans to impose tariffs on imported steel and aluminum, as well as on some other Chinese goods. Mr. Powell acknowledged those concerns at his news conference, saying that trade policy had begun to worry business leaders who speak with Fed officials. Still, he played down any immediate threat to growth.

“There’s no thought that changes in trade policy should have an effect on the current outlook,” Mr. Powell said at the news conference, adding that could change if a global trade dispute escalated.

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In a speech in Chicago last week, Mr. Powell elaborated on the Federal Open Market Committee’s concerns during a question-and-answer session.

“The discussion about tariffs is at a relatively early stage, and we talked about this at the F.O.M.C. meeting a couple of weeks ago now,” he said. “And people really don’t see yet any implications in the near term for the outlook, because we don’t know the extent to which the tariffs will actually come into effect and, if so, how big will that effect be and what will the timing of it be.”

Any negative effects from tariffs could put the Fed in a bind, forcing policymakers to break what Mr. Powell and his predecessors have repeatedly characterized as a delicate balance between supporting economic growth and job creation, and holding inflation to the target growth rate. Economists generally view tariff fallout as stagflationary, meaning it hurts growth and also feeds inflation. Taxes on imported goods raise prices for businesses and consumers, pushing up the inflation rate, while also dampening consumption and economic growth.

The minutes suggest that Fed officials are worrying more about that possibility than they have acknowledged publicly: “Most participants also cited trade policy as a source of either uncertainty or downside risk,” the minutes say.

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Article source: https://www.nytimes.com/2018/04/11/us/politics/fed-interest-rates-trade.html?partner=rss&emc=rss

Economists Say U.S. Tariffs Are Wrong Move on a Valid Issue

Mr. Trump has long railed against Chinese trade practices, and he has long criticized previous presidents for their approach to the issue. This year, he has pushed aggressively on the issue. He levied tariffs on imported steel and aluminum that were largely viewed as a shot at Chinese oversupply of those metals. Then he proposed as much as $150 billion in tariffs on other imports from China.

His advisers have stressed that economists largely agree with Mr. Trump that the Chinese are stealing American intellectual property and restricting access to their market in ways that put American companies at a disadvantage.

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President Trump signing a memorandum withdrawing the United States from the Trans-Pacific Partnership shortly after he took office. Proponents say American participation would have unified a dozen countries against the Chinese on trade issues. Credit Doug Mills/The New York Times

“No free-market guy, no free-trade guy disagrees on this subject,” Larry Kudlow, the new director of the National Economic Council, said on CNN’s “State of the Union” on Sunday. “The guild, if you will, the brethren of the economic profession have all agreed that something has to be done.”

Peter Navarro, the director of Mr. Trump’s Office of Trade and Manufacturing Policy, told NBC’s “Meet the Press” on Sunday that “what we have here is a situation where every American understands that China is stealing our intellectual property, they’re forcing the transfer of our technology when companies go to China, and by doing that, they steal jobs from America, they steal factories from America, and we run an unprecedented $370-billion-a-year trade deficit in goods. This is an unsustainable situation.”

Many economists agree that China needs to be confronted on several trade issues, though very few share Mr. Trump’s fixation on the United States’ trade deficit with China. Most say bilateral trade deficits are not a good measure of market access or the fairness of trade agreements.

“I think the basic issue that the Trump administration is pointing to — the lack of intellectual-property protection — is a serious one, particularly for the United States,” said N. Gregory Mankiw, a Harvard economist who headed President George W. Bush’s Council of Economic Advisers. “It’s a completely serious and appropriate issue for the administration to be concerned with.”

What worries Mr. Mankiw and others is Mr. Trump’s threat of tariffs, which administration officials have portrayed both as a bargaining chip and as a policy Mr. Trump would certainly carry through on.

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Economic forecasters are just beginning to predict how tariffs would affect growth. Goldman Sachs analysts wrote this week that the currently proposed tariffs would cut less than 0.1 percentage points off American growth this year, but also said that “it is harder to rule out continued escalation to a level that does ultimately have a first-order impact on the economy” if the United States and China could not find compromise.

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Because tariffs would raise prices for American businesses and consumers that buy imported goods, “you’re hurting yourself if you follow through with it,” Mr. Mankiw said. “It just seems to me to be a not very smart threat to be making, given that it would not be rational to follow through with it.”

Economists who don’t like tariffs but favor action against China largely say the United States should be forming a multinational coalition to confront the Chinese.

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Presidential advisers have cited economists’ support for the view that Chinese trade practices put American companies at an unfair disadvantage. “The guild, if you will, the brethren of the economic profession have all agreed that something has to be done,” said Larry Kudlow, above, the new director of the National Economic Council. Credit Doug Mills/The New York Times

“Any good strategy has to include getting other countries on your side,” said Jason Furman, an economist at Harvard’s Kennedy School of Government who headed the Council of Economic Advisers under President Barack Obama. “If it’s the United States versus China, we’re similar-sized economies. If it’s the United States and the world versus China, that’s not something China can win.”

Mr. Furman, Mr. Mankiw and others said the United States should continue to press its case against China before the World Trade Organization — a strategy that Mr. Navarro and other advisers to Mr. Trump say has not produced favorable results in the past. The economists who disagree with the administration’s approach also stress, frequently, that joining the Trans-Pacific Partnership would have given the United States leverage in this dispute.

Since Mr. Trump quit the pact, 11 other countries have forged ahead on it. He said this year that he would reconsider joining the agreement if it was renegotiated to benefit the United States more substantially.

“It’s obviously a terrible mistake” to have quit the agreement, said Austan Goolsbee, an economist at the University of Chicago’s Booth School of Business and another past chairman of Mr. Obama’s Council of Economic Advisers. “This was a coalition of the vast majority of the economies of Asia outside of China, agreeing to principles exactly of the form that we’re now saying that we want. We would be in a lot better situation if we had all of those people on our side.”

Mr. Trump’s unilateral approach, including his tariff threats, has drawn qualified support from at least one unlikely high-profile economist: Martin Feldstein, of Harvard, a chairman of President Ronald Reagan’s Council of Economic Advisers.

Mr. Feldstein began a syndicated op-ed column last month, on the subject of Mr. Trump’s steel and aluminum tariffs, by declaring, “Like almost all economists and most policy analysts, I prefer low trade tariffs or no tariffs at all.” But he went on to criticize China’s intellectual-property policies and predict that the United States “cannot use traditional remedies for trade disputes or World Trade Organization procedures to stop China’s behavior.”

American negotiators, Mr. Feldstein wrote, would use tariff threats “as a way to persuade China’s government to abandon the policy of ‘voluntary’ technology transfers.”

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“If that happens, and U.S. firms can do business in China without being compelled to pay such a steep competitive price,” he continued, “the threat of tariffs will have been a very successful tool of trade policy.”

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Article source: https://www.nytimes.com/2018/04/11/business/economy/trump-economists.html?partner=rss&emc=rss

Economic Scene: ‘How Long Can We Last?’ Trump’s Tariffs Hit Home in the U.S.

President Ronald Reagan established a limited pool of imports that it apportioned among foreign producers. The first President George Bush renewed it. Mr. Clinton deployed diplomacy and antidumping measures to protect American steel makers. And in 2002 President George W. Bush put a new ring of “safeguards” around steel that lasted 20 months, until the World Trade Organization ruled them illegal.

They mostly shrugged off the repercussions for the many manufacturing companies that relied on steel. But in 2003, the United States International Trade Commission surveyed manufacturers about the effects. Not only did the tariffs imposed by the Bush administration put many American companies at a competitive disadvantage, but companies also reacted in ways that did the American economy no good.

Almost 500 steel consumers responded to at least some of the questions asked by the commission. About half of respondents reported paying higher prices. And roughly half reported problems procuring steel of the quality and quantity they needed. Over a third reported delayed deliveries; 132 reported steel shortages. About one in six said these problems had reduced sales, and one in three said they had cut into its profitability. A total of 82 companies — including 11 makers of auto parts, nine welded-pipe producers and five makers of fasteners — said they had lost sales to foreign competitors because of the higher cost of steel.

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How Trump’s Protectionism Could Backfire

President Trump’s tariffs against steel and aluminum imports, designed to protect blue-collar workers, could instead undermine their livelihood.

Some steel consumers shifted from importing steel to importing assembled steel parts that were not subject to the new tariffs. York International — which makes air-conditioning systems, furnaces and the like — reported importing steel assemblies and complete products from overseas. The auto-part maker Metaldyne simply moved some of its operations to South Korea, where it could obtain cheaper steel.

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Mr. Larsen is sympathetic to the plight of American steel companies. Though it is owned today by Everest Kanto Cylinder based in Mumbai, India, CP Industries emerged as an independent company in a 1989 spinoff from U.S. Steel. And still, whatever old loyalties persist, it makes little sense to force the company to obtain its steel domestically. For starters, no company in the United States produces pipes big enough to make its trademark six-ton containers.

The company estimated that it could get only a fifth of the steel pipe it needed domestically, from only one American firm. Domestic pipe is, moreover, delivered in random lengths and requires additional milling, cutting and testing, raising processing costs by about 16 percent. And Chinese pipes are much cheaper, the company added: Pipes from China delivered in Philadelphia cost $1,680 per metric ton, while U.S. Steel is charging $2,728 per metric ton at its works in Lorain, Ohio. A 25 percent tariff will not close the gap.

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One option for CP Industries would be to import German steel, which is not subject to the new tariffs. But doing so would take time and be expensive. Credit Ross Mantle for The New York Times

CP Industries isn’t simply going to let itself be pushed out of business. An option to consider is importing German steel — which so far has been exempted from the protectionist fusillade. But it will take time to shift suppliers. And German steel will be more expensive.

Of course, there is lobbying. CP Industries has requested a waiver from the tariffs, and it is working to get Pennsylvania’s congressional delegation on its side. Something else it could do is move part or all of the manufacturing process overseas to avoid the steel tariffs.

“We have a whole list of ideas that we could execute,” Mr. Larsen told me. “But nothing we do will be more efficient than what we are doing now. And it will mean less value added in the United States.”

Mr. Larsen is not, by the way, an evangelist for free trade at all costs. Six years ago, when he was at Taylor-Wharton International, a manufacturer of smaller vessels for high-pressure gas, he teamed up with Norris Cylinder to bring an antidumping case against Chinese rivals and won. The government imposed an antidumping duty on Chinese imports to level the playing field.

He would love to try that approach against his new Chinese competitors. But Mr. Trump nipped the strategy in the bud: Dumping — selling below cost in order to drive rivals out of business and gain market share — is not necessary when you are suddenly granted a 10 percent cost advantage. That’s roughly the kind of edge that the steel tariffs gave the makers of high-pressure gas vessels in China.

“As it stands today,” Mr. Larsen lamented, “they cannot be overcome.”

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Article source: https://www.nytimes.com/2018/04/10/business/economy/tariffs-steel.html?partner=rss&emc=rss

Federal Budget Deficit Projected to Soar to Over $1 Trillion in 2020

The tax overhaul, which includes permanent tax cuts for corporations and temporary ones for individuals, will increase the size of the economy by an average of 0.7 percent from 2018 to 2028, according to the budget office.

But that added economic growth does not come close to paying for the tax overhaul, which the budget office said would add more than $1.8 trillion to deficits over that period, from lost tax revenue and higher interest payments.

Many Republicans have said the tax overhaul would vault economic growth over 3 percent a year for a sustained period, generating more revenue than the tax cuts would cost. But the budget office expects the economy to grow at an annual average rate of 1.9 percent over the next decade. Growth would start strong, at 3.3 percent this year and 2.4 percent next year, but then slow considerably.

And if the temporary tax cuts for individuals are extended past their scheduled expiration at the end of 2025, the price tag for the tax overhaul would be even greater.

Mr. Trump has talked about embarking upon “Phase 2” of tax cuts, which could include making those individual tax cuts permanent.

Democrats jumped on the projections to castigate Republicans over their economic record.

“From Day 1,” the Senate Democratic leader, Chuck Schumer of New York, said, “the Republican agenda has always been to balloon the deficit in order to dole out massive tax breaks to the largest corporations and wealthiest Americans, and then use the deficit as an excuse to cut Social Security and Medicare.”

Representative Nancy Pelosi of California, the House Democratic leader, was equally harsh: “The C.B.O.’s report exposes the staggering costs of the G.O.P. tax scam and Republicans’ contempt for fiscal responsibility.”

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For their part, Republicans were remarkably quiet: “Without question, we have challenging work ahead,” said Representative Steve Womack of Arkansas, the chairman of the House Budget Committee.

This fiscal year, which ends Sept. 30, the budget deficit is expected to total $804 billion, up from $665 billion last fiscal year, according to the projections. In a decade, the red ink is expected to reach $1.5 trillion.

Deeper Deficit Projections

Recent tax and spending bills are expected to widen deficits. Federal debt held by the public is now projected to be $2.2 trillion larger in 2027 than was projected in January 2017.

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Deficits are projected to surpass $1 trillion, levels not seen since the last recession. But because the economy is much stronger, deficits as a share of gross domestic product are not projected to be as severe.

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Recent tax and spending bills are expected to widen deficits. Federal debt held by the public is now projected to be $2.2 trillion larger in 2027 than was projected in January 2017.

Deficits are projected to surpass $1 trillion, levels not seen since the last recession. But because the economy is much stronger, deficits as a share of gross domestic product are not projected to be as severe.

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By Alicia Parlapiano

The forecast is considerably bleaker than the budget office’s projections in June last year, before Congress approved the tax cuts and agreed to increase spending.

The $804 billion projected deficit for the current fiscal year is $242 billion larger than what the budget office had expected in June. In addition, the budget office now projects a cumulative deficit of $11.7 trillion over the next decade, an increase of $1.6 trillion from last June’s projection for that time period.

By 2023, according to the budget office, interest costs are projected to exceed what the government spends on the military. By 2028, interest payments will reach $915 billion, more than triple the interest costs last year.

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The government’s mounting debt has seemed of little consequence on Capitol Hill in recent months as Republicans in Congress passed a sweeping package of tax cuts. But in a sign that Republicans are growing concerned about the political liability of soaring deficits, the House will vote Thursday on a constitutional amendment to require balanced budgets.

Representative Jeff Duncan, a conservative Republican from South Carolina, took to Twitter to say, “To every House Democrat on social media today complaining about the debt and deficit for the first time: I look forward to seeing you vote for the balanced budget amendment later this week. That is of course assuming you are actually serious about addressing our debt.”

Since such constitutional amendments require two-thirds of the House and Senate to agree, it is unlikely to pass Congress, let alone be ratified by the states.

But the flurry of recent legislation is making it difficult for Republicans to continue blaming President Barack Obama and Democrats for the government’s fiscal condition.

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This year, lawmakers approved a two-year budget deal that raised strict caps on military and domestic spending by a total of about $300 billion. That deal paved the way for Congress to pass a $1.3 trillion spending bill last month.

Before passing the tax overhaul and the spending legislation, lawmakers were already facing worrisome projections about growing deficits, driven by increased spending on Medicare and Social Security as well as growing interest costs.

The budget office now projects that the deficit will top $1 trillion two years sooner than it had expected last June.

The budget office did project economic benefits from the tax overhaul. Analysts said the law will increase employment by 1.1 million jobs over the next decade. The law will also raise Americans’ wages and salaries by an average of 0.9 percent annually, a less optimistic projection than White House economists offered last year when the bill was being considered.

The budget office analysis also projects that the law will result in interest rates that are a half percentage point higher than they would have been without it. In its early years, the budget office said, the law will boost the strength of the dollar, allowing Americans to buy more imports and sell fewer exports to the rest of the world — and thus, increase the national trade deficit, counter to Mr. Trump’s desire to reduce it.

Michael A. Peterson, the president and chief executive of the Peter G. Peterson Foundation, which advocates reining in budget deficits, said the report “confirms that major damage was done to our fiscal outlook in just the past few months.”

Mr. Hall, the budget office director, said that beyond a decade, the debt would continue to rise compared with the size of the economy. He warned of the possible consequences if lawmakers put off addressing the trajectory of the government’s finances.

“The longer you wait,” he said, “the more draconian the measures have to be to fix the problem.”

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Article source: https://www.nytimes.com/2018/04/09/us/politics/federal-deficit-tax-cuts-spending-trump.html?partner=rss&emc=rss

The Big Question for Markets: Is There a Kudlow or Powell ‘Put’?

The market sell-off abruptly halted on Wednesday after Mr. Kudlow told reporters in the White House driveway, in effect, not to sweat the incipient trade war. He said it was possible the tariffs would never come to pass and that the president was “ultimately a free trader” who “wants to solve this with the least amount of pain.”

The Standard Poor’s 500 index ended that day up 1.2 percent.

So the question is whether Mr. Kudlow — not so much the individual, but the trade war-averse faction within the administration of which he is perhaps the most visible member — and others are going to be in position to prevent the administration from doing anything economically destructive on trade.

The pattern on trade policy through the first 14 months of the Trump administration has been to pair blustery talk — about pulling out of the North American Free Trade Agreement, for example — with more modest policy actions and negotiations that may avert real economic damage.

But the question is whether that dynamic is changing, with the departure of more internationalist voices within the administration like Mr. Kudlow’s predecessor, Gary Cohn, and the former secretary of state Rex Tillerson.

If Mr. Kudlow is able to offer only soothing words in the White House driveway — and those words aren’t matched by restraint in policymaking — the Kudlow Put will turn out to be fairly worthless. A warning sign about that possibility came Thursday night, when the administration threatened tariffs on an additional $100 billion in Chinese imports, in retaliation to China’s retaliation.

This is the kind of escalation that would, if it became policy rather than mere threat, be quite ominous for financial markets. Again on Friday, Mr. Kudlow offered calming messages, saying “there are all kinds of back-channel discussions going on.” But given the continued escalation after his earlier attempts at calm, the Kudlow Put didn’t quite work, and the market fell 2 percent that day.

Then there is Mr. Powell, who is in his second month as Federal Reserve chairman. He delivered a speech Friday that threw into doubt whether the Powell Put exists — at least with respect to potential economic disruption from a trade war.

Article source: https://www.nytimes.com/2018/04/09/upshot/the-big-question-for-markets-is-there-a-kudlow-or-powell-put.html?partner=rss&emc=rss