Unadorned Notes: September 22-24, 2024
U.S. Factories Face China Competition; China Unveils Broad Economic Stimulus; U.S. Targets China in Auto Sector; Chinese Economist Detained After Criticizing Xi; China’s Power Plateaus Below U.S.
Economics, Finance, and Business
U.S. Business Steady, Prices Rise: U.S. business activity remained stable in September 2024, with the S&P Global Composite PMI at 54.4, signaling continued private sector expansion. However, prices for goods and services rose at the fastest rate in six months, driven by increased wage-related costs in the services sector. The input price index reached a one-year high of 59.1, and selling price inflation accelerated for the first time in four months. Despite solid economic growth, manufacturing activity declined to a 15-month low, and new orders in the private sector weakened. The Federal Reserve recently cut interest rates to support employment, though inflation concerns persist.1
U.S. Home Prices Rise Slightly: U.S. single-family home prices edged up 0.1% in July 2024 after being flat in June 2024, according to the Federal Housing Finance Agency. On an annual basis, prices increased 4.5%, marking the slowest year-over-year growth since June 2023. Declining mortgage rates and stable home prices could improve affordability, though a sharp drop in prices is unlikely due to persistent supply constraints. Regional variations were evident, with monthly price gains in the Pacific and East North Central regions and declines in the West South Central. All nine census regions posted annual gains, with the Middle Atlantic and New England regions seeing the largest increases.2
U.S. Consumer Confidence Drops: U.S. consumer confidence fell to 98.7 in September 2024, its largest decline since August 2021, driven by concerns over a weakening labor market. The drop in confidence was most pronounced among those aged 35 to 54 and households earning under $50,000. Despite higher inflation expectations and mixed assessments of future finances, more consumers planned to buy homes in the next six months due to falling mortgage rates. The Federal Reserve cut interest rates by 50 basis points, aiming to support the labor market and sustain low unemployment, currently at 4.2%. Stocks inched higher while U.S. Treasury yields rose, and the dollar weakened.3
U.S. Factories Face China Competition: Despite the Federal Reserve’s rate cut, U.S. manufacturers face challenges beyond borrowing costs, including supply chain disruptions, rising input prices, and competition from China. Marlin Steel’s Drew Greenblatt, whose customer returned to Chinese suppliers, highlights the continued pressure on American producers. Vice President Kamala Harris plans to introduce economic policies addressing these concerns, including strategies for competing with China. U.S. manufacturing employment has stagnated, shedding jobs in 2023 after strong gains in 2021-2022. Rising electricity costs and potential port strikes further complicate the outlook for U.S. factories.4
China Unveils Broad Economic Stimulus: China announced extensive stimulus measures to support its slowing economy, including cutting the reserve requirement ratio by 50 basis points, releasing 1 trillion yuan for lending. Interest rates will be reduced, including the seven-day reverse repo rate and mortgage rates, benefiting around 50 million households. The minimum down payment for second homes will be lowered to 15%, and new support will be provided for state-owned firms to acquire unsold housing. To revive the stock market, the government introduced funding tools, including a 500 billion yuan swap program and 300 billion yuan in low-cost loans for share purchases. The measures aim to boost market confidence and stabilize key sectors.5
DOJ Sues Visa for Monopoly: The U.S. Justice Department sued Visa, accusing it of monopolizing the debit card market and inflating processing fees, which cost consumers through higher prices. Visa handles over 60% of U.S. debit card transactions and collects more than $7 billion in fees annually, stifling competition by making rival networks prohibitively expensive. Retailers welcomed the lawsuit, claiming Visa’s practices harm both businesses and consumers by increasing prices. The suit follows past legal actions, including a blocked Visa acquisition of fintech company Plaid in 2020. Visa denied the charges, vowing to defend itself against the claims.6
U.S. Politics, Policies, and Geopolitics
GOP Faces Internal Divide on Shutdown: The Republican-led House is moving towards passing a stopgap bill to prevent a government shutdown, relying on Democratic support after internal GOP divisions. Speaker Mike Johnson’s proposal, extending federal funding to December 20, 2024, excludes voter registration restrictions demanded by Donald Trump. Hardline conservatives opposed the bill, forcing Johnson to bypass normal procedures for a two-thirds majority vote. The bill includes $232 million for election security and additional disaster relief funds. Senate Republicans warned that a shutdown before the election would be politically damaging.7
U.S. Targets China in Auto Sector: Top White House adviser Lael Brainard outlined measures to protect the U.S. auto industry from China’s overcapacity and unfair trade practices, comparing it to the “China shock” of the 2000s. The Biden administration aims to prevent a flood of underpriced Chinese electric vehicles (EVs) into the U.S. market, proposing a ban on key Chinese software and hardware in connected vehicles. The Commerce Department’s proposal would effectively bar nearly all Chinese cars from U.S. roads, while 100% tariffs on Chinese EV imports have already been implemented. The White House is also engaging with Mexico and Canada to prevent China from exploiting trade loopholes in the USMCA agreement. Brainard dismissed criticism of the administration’s EV policies, emphasizing the need for U.S. investment to ensure consumer choice.8
Trump Pledges 100% Tariff on Cars: Former president Donald Trump, the Republican presidential candidate, announced plans to impose a 100% tariff on all cars entering the U.S. from Mexico if he wins the 2024 election. The tariff would remain unless automakers shift production to the United States, Trump said during a speech in Georgia. His proposal aims to boost domestic manufacturing and employment by encouraging companies to build factories within the U.S. The policy is a key part of Trump’s broader economic platform ahead of the November 2024 election.9
Chinese Economist Detained After Criticizing Xi: Zhu Hengpeng, a prominent economist, was detained and removed from his posts after allegedly criticizing Chinese leader Xi Jinping’s economic policies in a private chat. Zhu, deputy director of the Institute of Economics at the Chinese Academy of Social Sciences (CASS), had worked there for over two decades, specializing in health economics. His disappearance reflects the Chinese Communist Party’s efforts to suppress dissent and control economic narratives amid a struggling economy. Zhu’s case coincided with a broader indoctrination campaign within CASS, enforcing strict party discipline. The status of Zhu’s investigation and legal representation remains unclear.10
China’s Power Plateaus Below U.S.: The Lowy Institute’s annual Asia Power Index shows China’s influence in the region plateauing below the U.S., driven by slower economic growth and structural challenges. Despite still commanding significant economic power, China’s growth has stalled, while the U.S. leads in six of eight power measures. China, however, surpasses the U.S. in military deployment capabilities in Asia. India has overtaken Japan for third place, bolstered by rich resources and diplomatic influence but still limited in projecting power east of the Malacca Strait. Australia rose to fifth, while Russia fell to sixth.11