Newsletter: Oil Output, Feeble Factories and Cautious Consumers

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It’s a big week for U.S. economic data with key manufacturing numbers out Tuesday, service-sector figures Thursday and the September jobs report on Friday. To get the week started, let’s take a look at the slowing shale boom, a tiny rebound for China’s factories, yield curves, U.S. consumers, retail jobs and the repo market.

Just When I Needed You Most

The American shale boom is slowing as innovation plateaus—and just when shale’s importance in global markets has reached new highs following an attack on the heart of Saudi Arabia’s oil infrastructure, Christopher M. Matthews and Rebecca Elliott report.

  • U.S. shale oil production now accounts for about 8 million barrels a day, or roughly 10% of oil world-wide. That has helped protect the U.S. and the world from geopolitical supply shocks.
  • But U.S. oil production increased by less than 1% during the first six months of the year, down from nearly 7% growth over the same period last year. The slowdown is driven partly by core operational issues, including wells producing less than expected and sweet spots running out sooner than anticipated.
  • The challenges raise the prospect that the technological and engineering advances that have allowed shale companies to unlock record amounts of oil and gas from rock formations have begun to level off.

WHAT TO WATCH TODAY 

Germany’s consumer-price index for September is out at 8 a.m. ET.

The Chicago purchasing managers index for September is expected to tick up to 50.5 from 50.4 a month earlier. (9:45 a.m. ET)

The Dallas Fed manufacturing survey for September is expected to fall to 2.0 from 2.7 a month earlier. (10:30 a.m. ET)

The Bank of Japan releases its quarterly tankan survey of business sentiment at 7:50 p.m. ET.

TOP STORIES

Bad News Gets a Little Better

Gauges of China’s manufacturing activity perked up a little in September. The official manufacturing purchasing managers index rose to 49.8 from 49.5 in August—though it has stayed below the 50-mark that separates expansion from contraction for five straight months now. The bright spot: A subindex measuring total new orders rose above 50 for the first time since May as domestic demand increased. The Caixin China manufacturing PMI, a private gauge of activity, showed a stronger rebound in September, though export orders remained subdued, Grace Zhu reports. One reason China is relying on domestic demand: the U.S.-China trade dispute. High-level talks are set for next week.

Another sign of the times: Chinese government-linked investors are snapping up stakes in private companies at a record rate, as the trade war, economic slowdown and credit squeeze heap pressure on businesspeople.

Inverted Yield Curve? Keep Calm and Carry On.

A widely watched U.S. recession signal has been blinking red for months. But Britain’s experience with an inverted yield curve suggests it is less worrisome than the American experience indicates, Anna Isaac reports.

  • Every time the U.S. 10-year Treasury yield has sustained a drop below the three-month T-bill since the 1970s, a recession has followed. 
  • In the U.K., a decline in the yield on 10-year gilts (as British government bonds are known) below the two-year has foretold the last three recessions in that country. But the U.K. yield curve also inverted in the mid- and late 1980s and the better part of 1998 to 2002 without a downturn.
  • These false positives illustrate that factors other than recession fears or domestic monetary policy can trigger curve inversion. Financial regulations, low and even negative rates elsewhere, and inflation expectations may all have a role.
  • But…Americans shouldn’t ignore the inverted yield curve: Even if it doesn’t presage a storm, bad weather may still be on the way.

U.S. Economy Gets a Downgrade

Consumers slowed spending and businesses cut back on investment in August, signs that a wobbling global economy and rising tariffs are sapping U.S. economic momentum. Economists lowered their estimates of third-quarter economic growth following the latest weak data: Macroeconomic Advisers’ closely watched model for gross domestic product showed growth slowing to 1.7% in the third quarter, down from a previous estimate of 2.2%, Sarah Chaney and Paul Kiernan report.

The latest development in consumer spending: Layaway for sweaters, makeup or other everyday items. Thousands of merchants, including Walmart, Urban Outfitters and soon H&M, are offering loans or other plans that allow payment in installments. Merchants are tapping into the financial challenges many U.S. families face, and the plans often resonate with young adults wary of carrying credit-card balances, AnnaMaria Andriotis and Peter Rudegeair report.

Forever Losing Workers

Fast fashion retailer Forever 21 filed for bankruptcy protection on Sunday and said it planned to close hundreds of stores. That’s another hit for an industry that’s shed 194,100 workers since the start of 2017—about 80,000 of those losses just this year. It’s the retail apocalypse, right?

Maybe not. Job openings, while down from a cyclical peak last year, are still elevated. Layoffs aren’t especially out of line with post-recession levels. Quits, however, have been high. Perhaps workers are simply leaving for more stable or better-paying jobs. Rank-and-file pay in retail is rising but still low—$16.72 an hour on average vs. $23.59 for the private sector as a whole. Average weekly hours also are shorter.

So yes the industry is changing. But with unemployment low, workers have options outside of shopping malls. “Working in an industry that’s shedding workers can be quite painful, but it’s much better for that to happen in a stronger labor market,” says Indeed Hiring Lab’s Nick Bunker.

Flat-Footed Fed

The New York Fed is tamping down an unexpected bout of turbulence in money markets that caught officials and investors off guard this month. A sudden shortage of cash caused interest rates to spike unexpectedly on very short-term loans banks make to each other overnight, called repurchase or “repo” agreements. The Fed’s response, flooding the system with temporary funding, soothed markets. But some economists and financial analysts say the Fed was caught flat-footed amid dysfunction that threatened to jam the transmission of central-bank policy decisions to the broader economy, Nick Timiraos reports. 

Watch markets this week: The New York Fed said it plans to keep injecting funds through Oct. 10 and has increased the sizes in recent days. The approach will be tested Monday, when the third quarter ends and banks may refrain from overnight lending in order to show strong balance sheets. Reduced lending could put pressure on the repo market and create more volatility.

WHAT ELSE WE’RE READING

European Central Bank President Mario Draghi says he’s done his part to help the economy. Now it’s time for Germany to step up. “Have we done enough? Yes, we have done enough—and we can do more. But more to the point what is missing? The answer is fiscal policy, that’s the big difference between Europe and the U.S.,” he tells the Financial Times.

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