Newsletter: Construction Conundrum, Recession Signals, China Update

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Unemployment in the construction industry is at a record low but wage gains are decelerating, a recession indicator stopped blinking red, American businesses are girding for a protracted trade fight with China, and Boris Johnson tries again for his Brexit deal. Let’s get Tuesday started.

Can We Build It?

U.S. existing-home sales are expected to fall slightly from August to September, capping a steady but unspectacular run for the housing market.

One factor holding back sales: a limited supply of homes on the market, which means less selection and rising prices. One reason for low inventory: Home construction is still running below its half-century average. One big complaint among builders: It’s hard to find enough workers for all the projects at hand. Indeed, the September unemployment rate for construction, at a not seasonally adjusted 3.2%, was lower than the national average and the lowest for that month since the series began in 2000.

One wrinkle: While unemployment is rock bottom, wage gains in the sector are below the national average and in fact decelerating. If employers are really desperate for workers, why aren’t they raising wages more? One theory, via Associated General Contractors economist Ken Simonson: “Companies may only be paying new workers 2%-3% more than they paid for the same position a year ago but they are hiring workers at a lower skill level for the same job. In other words, unit labor cost—the amount of output that a firm gets from an hour of work—is rising more than wages.”


The U.K. Parliament is set for more Brexit votes. Prime Minister Boris Johnson faces two further votes today that will decide whether he can deliver on his pledge for the U.K. to exit the European Union by Oct. 31.

U.S. existing-home sales for September are expected to slip to an annual pace of 5.48 million from 5.49 million a month earlier. (10 a.m. ET)

The Richmond Fed’s manufacturing survey for October is out at 10 a.m. ET.

Treasury Secretary Steven Mnuchin testifies on housing policy before the House Financial Services Committee at 10 a.m. ET.


Inversion Reversion

A tried and true U.S. recession signal stopped blinking red. That’s good-ish news.

What is it? 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. That very phenomenon, an inverted yield curve, started toward the end of May and largely continued into this month. Now, it seems to have corrected itself amid rising hopes for U.S.-China trade, a smooth Brexit and another rate cut from the Federal Reserve.

Are we in the clear? Maybe. “The Fed’s rate cuts and the growing optimism on U.S.-China trade relations has un-inverted the yield curve, with the 10-year Treasury yield rising back above the yield on 3-month bills. That implies that the risks of a recession over the coming year, while still elevated, are fading,” Capital Economics economist Paul Ashworth says.

Note of caution. At Bloomberg Opinion, Allianz chief economic adviser Mohamed El-Erian writes that a return to normal doesn’t mean everything is normal. “Instead, it is yet another reminder of how traditional market signs have been distorted by years of unconventional central bank policies.”


All isn’t well in bond markets, of course. An array of business challenges are hitting low-rated companies, driving selling in the bottom tier of the corporate-debt market. The result: Yields have been climbing for months on the lowest-rated group of corporate bonds. Investors and analysts closely watch junk bonds because companies with subpar credit ratings tend to be affected by economic problems sooner than others, Sam Goldfarb reports.

Not Fade Away

Businesses have started to diversify supply-chain investments away from China. Why? “When we talk to companies, there’s a realization that no matter what happens with this trade deal, we’re going down a trajectory of a much more confrontational relationship with China that’s very unlikely to shift in the opposite direction in the future,” said Jacob Parker, a vice president at the U.S.-China Business Council. 

  • Trade talks update: U.S. Trade Representative Bob Lighthizer on Monday said high-level talks pick up Friday: “We think we’re making great progress.” The goal is to have a “phase-one deal” for President Trump and President Xi Jinping to sign next month when they meet at an Asia-Pacific Cooperation summit in Santiago, Chile.


‘The Poor Have No Opportunities’

A weekend of unrest in Chile’s capital triggered by a proposed increase in subway fares extended into Monday, as demonstrators expressed their dismay over economic inequalities and the struggles of working people. “The poor have no opportunities and the people are tired of the politicians,” said Soledad Sepúlveda, a 37-year-old health care worker who said she struggles to get by despite holding two jobs. The death toll rose to 11, as authorities tried to restore order in the wake of looting, arson and attacks on the capital’s modern subway system that jolted this prosperous and normally stable country, Maolis Castro and Kejal Vyas report.


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Who’s tipping their Uber drivers? About 40% of riders—and only sometimes, new research shows. Stanford University economist Bharat Chandar and coauthors conducted an experimental study of 40 million UberX trips across the U.S. from mid-August through mid-September 2017. The findings, published in a National Bureau of Economic Research paper, showed nearly 60% of Uber riders never tipped their drivers. Among those who did, gender differences were stark. Male riders tipped more than female riders. Rider characteristics, like gender and rider rating, were a bigger determinant of tipping patterns than driver characteristics were, the research contends, underscoring the importance of the demand side of the gig economy.

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