Real Time Economics: Big Tech vs. Flyover Country

by I'm Struggling
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The divide between urban and rural America may only be getting worse. Amazon’s and Google’s plans to bulk up on the East Coast underscore the country’s diverging fortunes as some of the biggest companies look for a critical mass of workers with tech and other key skills. 

Good morning. Jeff Sparshott here to take you through the day’s top economic news. U.S. retail sales data, a key barometer of consumer spending, are out this morning. We’re also monitoring signs of a global slowdown, the cost of “free” social media, and the fate of Prime Minister Theresa May’s government after two senior members quit over Brexit. Let us know what you think by replying to this email.

TO HAVE AND HAVE NOT

Amazon.com and Google’s decisions to add tens of thousands of jobs to New York and the Washington area reflect a growing divide in the U.S. A few big cities, particularly on the coasts, are soaking up high-tech talent and are also becoming wealthier, more liberal and more ethnically diverse—shifting the economic, political and cultural landscape of the nation, Shayndi Raice and Janet Adamy write.

Smaller cities are also pulling in educated workers, but are having trouble competing for the nation’s most prized jobs and biggest projects, while rural areas are falling behind. 

BRIGHT LIGHTS, BIGGER CITY

As global competition dried up manufacturing jobs in small towns, the U.S. became more dependent on the growth of knowledge and service jobs that tend to proliferate in dense places. Five cities—New York, Chicago, Dallas, Houston, San Francisco—accounted for a third of all Fortune 500 headquarters and half of Fortune 500 firms’ profits last year, according to the University of Toronto’s Richard Florida. The Washington area, which had just four corporate headquarters in 1975, was home to 17 last year. New York had 70, more than any other U.S. city.

In the past 10 years, employment in U.S. cities has grown 7% and the number of businesses has grown 11%, while employment has contracted in nonmetro areas and the number of businesses there has barely changed.

WHAT TO WATCH TODAY

U.S. retail sales for October, out at 8:30 a.m. ET, are expected to rise 0.5% from the prior month.

U.S. import prices for October, out at 8:30 a.m. ET, are expected to rise 0.2% from the prior month.

U.S. jobless claims, out at 8:30 a.m. ET, are expected to remain low.

The New York Fed Empire State manufacturing survey for November, out at 8:30 a.m. ET, is expected to fall to 20 from 21.1 a month earlier.

The Philadelphia Fed manufacturing survey for November, out at 8:30 a.m. ET, is expected to fall to 20 from 22.2.

It’s another day chock full of Fed talk. Fed vice chairman for supervision Randal Quarles testifies before the Senate Banking Committee at 10 a.m. ET, Chairman Jerome Powell reviews post-Hurricane Harvey recovery efforts in Houston at 11:30 a.m. ET, Atlanta’s Raphael Bostic speaks at a banking conference in Madrid at 1 p.m. ET, and the Minneapolis’ Neel Kashkari participates in a Q&A with the Minnesota AgriGrowth Council at 3 p.m. ET.

TOP STORIES

RED FLAGS

The Federal Reserve is keeping a close eye on the global economy. “You still see solid growth, but you see growing signs of a bit of a slowdown. And it is concerning,” Fed Chairman Jerome Powell said Wednesday.

The global growth outlook was one of a number of challenges Mr. Powell flagged. He didn’t say that any of them were strong or surprising enough right now to change the Fed’s current policy path of gradually lifting rates, and he said he remains optimistic about the U.S. economy, Nick Timiraos reports. “I’m very happy about the state of the economy now,” Mr. Powell said. “Our policy is part of the reason why our economy is in such a good place right now.”

SO WHAT’S THE PROBLEM?

The global economy has hit a soft patch, putting the U.S.’s robust growth at risk should it persist. Economic output in Japan and Germany contracted in the third quarter, while in October consumer spending in China hit its slowest pace in five months and bank lending fell, William Boston, Josh Zumbrun and Nina Adam report.

One-time events played a role in some of these bumps. But across the globe, economists and business executives warned about a common denominator that is hurting growth: trade battles among the U.S., China and others. Tariffs are hitting some businesses, and worries about the impact of worsening trade discord are also weighing on sentiment.

TARIFFS ON MY MIND

International companies in the U.S. say potential tariffs on automobile and auto-parts imports would be the most damaging of the Trump administration’s trade actions, surpassing the tariffs that have been imposed between the U.S. and China, and the global tariffs on steel and aluminum, Josh Zumbrun reports.

Companies, even outside the automobile industry, are closely watching as the administration debates whether to impose the auto tariffs, a new survey from the Organization for International Investment shows. Asked to rate the impact on U.S. competitiveness of various policies, CFOs said the auto tariffs—if implemented—would nearly cancel out all the positive impact of the administration’s 2017 tax overhaul. 

THERE’S NO SUCH THING AS A FREE LUNCH

Google and Facebook make their money by giving away their products and then selling ads. Unfortunately, the zero-price business model is a source of many of the problems plaguing the Internet. It’s no coincidence that Google, Facebook and Twitter Inc.—which garner more than 80% of their revenue from advertising—are the ones most often accused of propagating toxic content and eroding privacy, while Microsoft Corp. and Apple, whose revenue comes from selling software, hardware and services, fly under the radar, Greg Ip writes.

Think about why price matters: It’s how the market rations precious resources. When it comes to generating volume, free is a dream; when it comes to quality control, it’s a nightmare. To generate ads, search and social media platforms must maximize users and engagement. To target those ads, they must learn as much about their users as possible. This pits volume and revenue against quality and privacy.

QUOTE OF THE DAY

Ultimately, you deserve a Brexit Secretary who can make the case for the deal you are pursuing with conviction. I am only sorry, in good conscience, that I cannot.—Brexit Secretary Dominic Raab, in his resignation letter to Prime Minister Theresa May

TWEET OF THE DAY

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WHAT ELSE WE’RE READING

“Does a big bazooka matter?” The European Central Bank asks the question in a new research paper. The conclusion, when it comes to exchange rates, is yes. The authors found that the ECB’s quantitative easing program—which led to a big rise in the ECB’s balance sheet—weakened the euro-dollar rate by 12%. The takeaway: “We find that QE measures have large and persistent effects on the exchange rate, and that they materialize through a change in interest rate differentials, partly reflecting expectations of the future monetary policy stance.”

The Catholic Church’s Jesuit order founded religious missions in modern-day Argentina, Brazil and Paraguay in 1609. Until they were booted out in 1767, they instructed the indigenous Guarani in reading, writing, and various crafts. “I show that in areas of former Jesuit presence—within the Guarani area—educational attainment was higher and remains so (by 10%-15%) 250 years later. These educational differences have also translated into incomes that are 10% higher today,” Felipe Valencia Caicedo writes in The Quarterly Journal of Economics. “The enduring effects observed are consistent with transmission mechanisms of structural transformation, occupational specialization, and technology adoption in agriculture.”

UP NEXT: FRIDAY

European Central Bank President Mario Draghi speaks in Frankfurt at 3:30 a.m. ET.

Eurozone consumer prices for October are out at 5 a.m. ET.

U.S. industrial production for October, out at 9:15 a.m. ET, is expected to rise 0.2% from a month earlier.

The Kansas City Fed’s manufacturing survey for November is out at 11 a.m. ET.

The Chicago Fed’s Charles Evans speaks on the economy and monetary policy at 11:30 a.m. ET.

Read more: blogs.wsj.com

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