Washington braces for its first potential government shutdown under House Speaker Kevin McCarthy’s speakership as the fiscal year-end nears on September 30. The high-stakes funding clash represents an early test of McCarthy’s ability to lead a fractious Republican majority.
The face-off caps months of growing friction between McCarthy and the hardline House Freedom Caucus that helped install him as Speaker in January. To gain their votes, McCarthy pledged he would not advance spending bills without “majority of the majority” Republican backing.
That concession has now put McCarthy in a bind as the shutdown deadline approaches without a funding agreement in place. The Freedom Caucus is demanding McCarthy leverage the must-pass spending legislation to cut budgets and advance conservative policies, like defunding the FBI.
However, McCarthy knows Senate Democrats would never accept such ideological provisions. And a prolonged government shutdown could batter the fragile economy while eroding public faith in governance competence.
With only days remaining, McCarthy weighs risky options without easy solutions. Scheduling a vote on a stripped-down continuing resolution to temporarily extend current funding would break his promise to the Freedom Caucus.
Yet refusing to hold a vote risks blame for an unpopular shutdown. McCarthy also considers putting a Senate-passed funding bill to a House floor vote, prompting Freedom Caucus warnings that doing so would incite calls for his ouster.
The Speaker urgently needs to unify Republicans behind a way forward. But McCarthy must balance the Freedom Caucus’ demands against the consequences of failing to avert a shutdown.
Navigating these pressures will test McCarthy’s ability to govern a narrow 222-seat majority. It will also gauge whether he can effectively steer the party into the 2024 elections amid internal divisions.
With only 18% of Americans supporting shutdowns over policy disputes according to polls, McCarthy likely wants to avoid a disruptive funding lapse. A 2013 closure lasting 16 days is estimated to have shaved 0.2-0.6% from economic growth that quarter.
From furloughing 800,000 federal workers to suspending services, even a short shutdown could batter public trust in leadership. The military’s over 1.3 million active duty members would see pay disrupted. National Parks could close, impacting over 297 million annual visitors.
The high-risk brinkmanship highlights the difficulty McCarthy faces satisfying the party’s warring moderate and Freedom Caucus wings. Finding a solution that keeps government open while saving face with hardliners will prove a true test of McCarthy’s political dexterity.
Past shutdowns under divided government have tended to end once public pressure mounted on the blamed party. While Republicans control the House, most fault would land on them for manufacturing a crisis.
Yet McCarthy cannot disregard the Freedom Caucus, whose backing enabled his ascension to power. The days ahead will reveal whether McCarthy has the savvy to extricate the GOP from a crisis partly of its own making.
McCarthy’s handling of the funding impasse will set the tone for his entire speakership. At stake is nothing less than his ability to govern, deliver on promises, and prevent self-inflicted wounds entering 2024.
Oil prices climbed over 1% Friday after Russia banned diesel and gasoil exports. The move aims to increase Russia’s domestic supply but reduces the global oil market.
West Texas Intermediate crude climbed back above $90 per barrel following the news. Brent futures also gained, topping $94. Energy analysts say the Russian ban will likely sustain upward pressure on oil prices near-term.
Russia is a leading diesel producer globally. How much the export halt affects US fuel prices depends on how long it remains in place, says Angie Gildea, KPMG’s head of energy. But any drop in total global oil supply without lower demand will lift prices.
The ban comes as US gas prices retreat from 2022 highs, now averaging $3.86 nationally. Diesel is around $4.58 per gallon. Diesel powers key transport like trucks and ships. The loss of Russian exports could spur further diesel spikes.
However, gas prices may keep easing for most of the US, says Tom Kloza of OPIS. Western states could see increases.
Kloza believes crude may rise $2 to $3 per barrel in the near-term. But gasoline margins are poised to shrink even if oil nears $100 again. The US transition to cheaper winter fuel could also limit price hikes.
Goldman Sachs sees Brent potentially hitting $100 per barrel in the next 12 months. Sharper inventory declines are likely as OPEC supply falls but demand rises, says Goldman’s head of oil research.
The White House has criticized OPEC+ for the production cuts. US gasoline demand recently hit a seasonal record high over 9.5 million barrels per day. Jet fuel use is also rebounding towards pre-pandemic levels.
Strong demand, paired with reduced Russian oil exports, leaves the market more exposed to supply disruptions. Hurricane Ian showed how quickly price spikes can occur.
The Biden Administration plans to keep tapping the Strategic Petroleum Reserve into 2023 to restrain cost increases. But further export bans or output reductions could overwhelm these efforts.
While tighter global fuel supplies might not directly translate to the US, Russia’s latest move signals volatility will persist. Energy prices remain sensitive to supply and demand shifts.
More export cuts could accelerate oil’s return to triple-digits. But for US drivers, the road ahead on gas costs seems mixed. Falling margins and seasonal shifts could limit prices, but risks linger.
The Federal Reserve left interest rates unchanged on Wednesday but projected keeping them at historically high levels into 2024 and 2025 to ensure inflation continues falling from four-decade highs.
The Fed held its benchmark rate steady in a target range of 5.25-5.5% following four straight 0.75 percentage point hikes earlier this year. But officials forecast rates potentially peaking around 5.6% by year-end before only gradually declining to 5.1% in 2024 and 4.6% in 2025.
This extended timeframe for higher rates contrasts with prior projections for more significant cuts starting next year. The outlook underscores the Fed’s intent to keep monetary policy restrictive until inflation shows clearer and more persistent signs of cooling toward its 2% target.
“We still have some ways to go,” said Fed Chair Jerome Powell in a press conference, explaining why rates must remain elevated amid still-uncertain inflation risks. He noted the Fed has hiked rates to restrictive levels more rapidly than any period in modern history.
The Fed tweaked its economic forecasts slightly higher but remains cautious on additional tightening until more data arrives. The latest projections foresee economic growth slowing to 1.5% next year with unemployment ticking up to 4.1%.
Core inflation, which excludes food and energy, is expected to fall from 4.9% currently to 2.6% by late 2023. But officials emphasized inflation remains “elevated” and “unacceptably high” despite moderating from 40-year highs earlier this year.
Consumer prices rose 8.3% in August on an annual basis, down from the 9.1% peak in June but well above the Fed’s 2% comfort zone. Further cooling is needed before the Fed can declare victory in its battle against inflation.
The central bank is proceeding carefully, pausing rate hikes to assess the cumulative impact of its rapid tightening this year while weighing risks. Additional increases are likely but the Fed emphasized future moves are data-dependent.
“In coming months policy will depend on the incoming data and evolving outlook for the economy,” Powell said. “At some point it will become appropriate to slow the pace of increases” as the Fed approaches peak rates.
For now, the Fed appears poised to hold rates around current levels absent a dramatic deterioration in inflation. Keeping rates higher for longer indicates the Fed’s determination to avoid loosening prematurely before prices are fully under control.
Powell has reiterated the Fed is willing to overtighten to avoid mistakes of the 1970s and see inflation fully tamed. Officials continue weighing risks between high inflation and slower economic growth.
“Restoring price stability while achieving a relatively modest increase in unemployment and a soft landing will be challenging,” Powell conceded. “No one knows whether this process will lead to a recession.”
Nonetheless, the Fed chief expressed optimism that a severe downturn can still be avoided amid resilient household and business spending. The labor market also remains strong with unemployment at 3.7%.
But the housing market continues to soften under the weight of higher rates, a key channel through which Fed tightening slows the economy. And risks remain tilted to the downside until inflation demonstrably falls closer to target.
For markets, clarity that rates will stay elevated through 2024 reduces uncertainty. Stocks bounced around after the Fed’s announcement as investors processed the guidance. The path forward depends on incoming data, but the Fed appears determined to keep rates higher for longer.
A perfect storm is brewing in the US housing market. Mortgage rates have surged above 7% just as millennials, the largest generation, reach peak homebuying age. This collision of rising interest rates and unmet demand is causing substantial disruption, as seen in the sharp decline in home sales, cautious builders and a looming affordability crisis that threatens the broader economy.
Mortgage rates have taken off as the Federal Reserve aggressively raises interest rates to fight inflation. The average 30-year fixed rate recently hit 7.18%, according to Freddie Mac, the highest level since 2001. This has severely hampered housing affordability and demand. Fannie Mae, the mortgage finance giant, forecasts total home sales will drop to 4.8 million this year, the slowest pace since 2011 when the housing market was still recovering from the Great Recession.
Fannie Mae expects sales to struggle through 2024 as rates remain elevated. It predicts the US economy will enter a recession in early 2024, further dragging down the housing market. Home prices are also likely to drop as high rates impede sales. This could hurt consumer confidence and discretionary spending, considering the critical role housing plays in household wealth.
Higher rates have pumped up monthly mortgage payments and made homes less affordable. Take a $500,000 home purchased with a 20% down payment. At a 2.86% mortgage rate two years ago, the monthly payment would have been $1,656. With rates now at 7.18%, that same home has a monthly cost of $3,077, according to calculations by Axios. That 87% payment surge makes purchasing unattainable for many buyers.
These affordability challenges are hitting just as millennials reach peak homebuying age. The largest cohorts of this generation were born in the late 1980s and early 1990s, making them between 32 and 34 years old today. That’s when marriage, childbearing and demand for living space typically accelerate.
However, homebuilders have been reluctant to significantly ramp up construction with rates so high. Housing starts experienced a significant decline of 11.3% in August, according to Census Bureau data, driven by a decline in apartment buildings. Single-family starts dipped 4.3% to an annual pace of 941,000, 16% below the average from mid-2020 to mid-2022. Homebuilder sentiment has also plunged, according to the National Association of Home Builders.
This pullback in new construction comes even as there is strong interest from millennials and other buyers. Though mortgage rates moderated the overheated housing market earlier this year, national home prices remain just below their all-time highs, up 13.5% from two years ago, according to the S&P Case-Shiller index.
Some analysts say the only solution is to significantly boost supply. But that seems unlikely with builders cautious and financing costs high. The housing crisis has no quick fix and will continue to be an anchor on the broader economy. Millennials coming of age and mortgage rates spiraling upwards have sparked a perfect storm, broken the housing market, and darkened the country’s economic outlook.
Pain at the pump has made an unwelcome return, with gas prices rapidly rising across the United States. The national average recently climbed to $3.88 per gallon, while some states now face prices approaching or exceeding $6 per gallon.
In California, gas prices have spiked to $5.79 on average, up 31 cents in just the past week. It’s even worse in metro Los Angeles where prices hit $6.07, a 49 cent weekly jump. Besides California, drivers in 11 states now face average gas prices of $4 or more.
This resurgence complicates the Federal Reserve’s fight against high inflation. Oil prices are the key driver of retail gas costs. With oil climbing back to $90 per barrel, pushed up by supply cuts abroad, gas prices have followed.
West Texas Intermediate crude rose to $93.74 on Tuesday, its highest level in 10 months, before retreating below $91 on Wednesday. The international benchmark Brent crude hit highs above $96 per barrel. Goldman Sachs warned Brent could reach $107 if OPEC+ nations don’t unwind production cuts.
For consumers, higher gas prices add costs and sap purchasing power, especially for lower-income families. Drivers once again face pain filling up their tanks. Households paid an average of $445 a month on gas during the June peak when prices topped $5 a gallon. That figure dropped to $400 in September but is rising again.
Politically, high gas also causes headaches for the Biden administration. Midterm voters tend to blame whoever occupies the White House for pain at the pump, whether justified or not. President Biden has few tools to immediately lower prices set by global markets.
However, economists say oil and gas prices must rise significantly further to seriously jeopardize the U.S. economy. Past recessions only followed massive oil price spikes of at least 100% within a year. Oil would need to double from current levels, to around $140 per barrel, to inevitably tip the economy into recession, according to analysis.
Nonetheless, the energy resurgence does present challenges for the Fed’s inflation fight. While core inflation has cooled lately, headline inflation has rebounded in part due to pricier gas. Consumer prices rose 0.1% in August, defying expectations of a drop, largely because of rising shelter and energy costs.
This complicates the Fed’s mission to cool inflation through interest rate hikes. Some economists believe the energy volatility will lead the Fed to pencil in an additional quarter-point rate hike this year to around 4.5%. However, a dramatic policy response is unlikely with oil still below $100 per barrel.
In fact, some argue the energy spike may even inadvertently help the Fed. By sapping consumer spending power, high gas prices could dampen demand and ease price pressures. If energy costs siphon purchases away from discretionary goods and services, it may allow inflation to fall without more aggressive Fed action.
Morgan Stanley analysis found past energy price shocks had a “small” impact on core inflation but took a “sizable bite out of” consumer spending. While bad for growth, this demand destruction could give the Fed space to cool inflation without triggering serious economic damage.
For now, energy volatility muddies the inflation outlook and complicates the Fed’s delicate task of engineering a soft landing. Gas prices swinging upward once again present both economic and political challenges. But unless oil spikes drastically higher, the energy complex likely won’t force the Fed’s hand. The central bank will keep rates elevated as long as underlying inflation remains stubbornly high.
The U.S. national debt surpassed $33 trillion for the first time ever this week, hitting $33.04 trillion according to the Treasury Department. This staggering sum exceeds the size of the entire U.S. economy and equals about $100,000 per citizen.
For investors, the ballooning national debt raises concerns about future tax hikes, inflation, and government spending cuts that could impact markets. While the debt level itself may seem abstract, its trajectory has real implications for portfolios.
Over 50% of the current national debt has accumulated since 2019. Massive pandemic stimulus programs, tax cuts, and a steep drop in tax revenues all blew up the deficit during Covid-19. Interest costs on the debt are also piling up.
Some level of deficit spending was needed to combat the economic crisis. But years of expanding deficits have brought total debt to the highest level since World War II as a share of GDP.
With debt now exceeding the size of the economy, there is greater risk of reduced economic output from crowd-out effects. High debt levels historically hamper GDP growth.
Economists worry that high debt will drive up borrowing costs for consumers and businesses as the government competes for limited capital. The Congressional Budget Office projects interest costs will soon become the largest government expenditure as rates rise.
Higher interest rates will consume more tax revenue just to pay interest, leaving less funding available for programs and services. Taxes may have to be raised to cover these costs.
Rising interest costs will also put more pressure on the Federal Reserve to keep rates low and monetize the debt through quantitative easing. This could further feed inflation.
If interest costs spiral, government debt could eventually reach unsustainable levels and require restructuring. But well before that, the debt overhang will influence policy and markets.
As debt concerns mount, investors may rotate to inflation hedges like gold and real estate. The likelihood of higher corporate and individual taxes could hit equity valuations and consumer spending.
But government spending cuts to social programs and defense would also ripple through the economy. Leaner budgets would provide fiscal headwinds reducing growth.
With debt limiting stimulus options, creative monetary policy would be needed in the next recession. More radical measures by the Fed could introduce volatility.
While the debt trajectory is troubling, a crisis is not imminent. Still, prudent investors should account for fiscal risks in their portfolio positioning and outlook. The ballooning national debt will shape policy and markets for years to come.
The Federal Reserve is stuck between a rock and a hard place as it aims to curb high inflation without inflicting too much damage on economic growth. This precarious balancing act has major implications for both average citizens struggling with rising prices and investors concerned about asset values.
For regular households, the current bout of high inflation straining budgets is public enemy number one. Prices are rising at 8.3% annually, squeezing wages that can’t keep pace. Everything from groceries to rent to healthcare is becoming less affordable. Meanwhile, rapid Fed rate hikes intended to tame inflation could go too far and tip the economy into recession, slowing the job market and risking higher unemployment.
However, new economic research suggests the Fed also needs to be cognizant of rate hikes’ impact on the supply side of the economy. Supply chain bottlenecks and constrained production have been key drivers of this inflationary episode. Aggressive Fed action that suddenly squelches demand could backfire by inhibiting business investment, innovation, and productivity growth necessary to expand supply capacity.
For example, sharply higher interest rates make financing more expensive, deterring business investment in new factories, equipment, and technologies. Tighter financial conditions also restrict lending to startups and venture capital for emerging technologies. All of this could restrict supply, keeping prices stubbornly high even in a weak economy.
This means the Fed has to walk a tightrope, moderating demand enough to curb inflation but not so much that supply takes a hit. The goal is to lower costs without forcing harsh rationing of demand through high unemployment. A delicate balance is required.
For investors, rapidly rising interest rates have already damaged asset prices, bringing an end to the long-running stock market boom. Higher rates make safe assets like bonds more appealing versus risky bets like stocks. And expectations for Fed hikes ahead impact share prices and other securities.
But stock markets could stabilize if the Fed manages to engineering the elusive “soft landing” – bringing down inflation while avoiding recession. The key is whether moderating demand while supporting supply expansion provides stable growth. However, uncertainty remains high on whether the Fed’s policies will thread this narrow needle.
Overall, the Fed’s inflation fight has immense stakes for Americans’ economic security and investors’ asset values. Walking the tightrope between high inflation and very slow growth won’t be easy. Aggressive action risks supply problems and recession, but moving too slowly could allow inflation to become entrenched. It’s a delicate dance with high stakes riding on success.
The Consumer Price Index (CPI) increased 0.6% in August on a seasonally adjusted basis, quickening from the 0.2% rise seen in July, according to the Bureau of Labor Statistics’ latest report. Over the past 12 months through August, headline CPI inflation stands at 3.7% before seasonal adjustment, up from 3.2% for the 12-month period ending in July.
The August monthly gain was primarily driven by a spike of 10.6% in the gasoline index. Gasoline was coming off a tamer 0.2% increase in July. Food prices also contributed to inflationary pressures, with the food at home index edging up 0.2% again last month. The food away from home index rose 0.3%.
Meanwhile, the energy index excluding gasoline picked up as well. Natural gas costs ticked up 0.1%, electricity prices rose 0.2%, and fuel oil prices surged 9.1%.
The core CPI, which removes volatile food and energy categories, rose 0.3% in August after a 0.2% gain in July. The shelter index has been a main driver of core inflation. It covers rental costs and owners’ equivalent rent, both of which have rapidly increased due to imbalances between housing supply and demand.
On an annual basis, the energy index has fallen 3.6%, as gasoline, natural gas and fuel oil costs are down over the past 12 months. However, the food and core indexes are up 4.3% and 4.3% year-over-year, respectively.
Within the core CPI, the main drivers have been shelter costs, up 7.3% over the last 12 months, along with auto insurance (+19.1%), recreation services (+3.5%), personal care (+5.8%) and new vehicles (+2.9%). Medical care services inflation has also accelerated to 6.6% over the past year.
Geographically, inflation varies significantly by region. The Northeast has seen 4.2% CPI inflation over the past year, the Midwest 3.9%, the South 3.7%, and the West just 2.9%. By city size, larger metropolitan areas over 1.5 million people have experienced 3.8% inflation, compared to 3.6% for mid-sized cities and 3.7% in smaller cities.
August’s monthly data shows inflation quickened after signs of cooling in July. While gasoline futures retreated in September, shelter inflation remains stubbornly high with no meaningful relief expected until mortgage rates decline substantially.
With core inflation running well above the Fed’s 2% target, further interest rate hikes are anticipated to combat still-high inflation. But the path to a soft economic landing appears increasingly narrow amid recession risks.
The next CPI update will be released in mid-October, shedding light on whether persistent pricing pressures are continuing to squeeze household budgets. For now, the August report shows inflation picking up steam after the prior month’s encouraging data.
Yet the larger concern remains the entrenched inflation in essentials like food, rent and medical care. Shelter inflation in particular has shown little sign of abating, as rental rates and housing prices remain disconnected from incomes.
Mortgage rates have soared above 6% in 2023 after starting the year around 3%. The sharp rise in financing costs continues to shut many homebuyers out of the market. Until mortgage rates meaningfully decline, shelter inflation is likely to persist.
And that will be challenging as long as the Fed keeps interest rates elevated. Monetary policy has lagged in responding to inflation, putting central bankers in catch-up mode. Further rate hikes are expected in the coming months absent a significant cooling in pricing pressures.
But the risks of the Fed overtightening and spurring a recession continue to intensify. The path to a soft landing for the economy is looking increasingly precarious.
For consumers, it means further inflationary pain is likely in store before a sustained moderation emerges. Budgets will remain pressured by pricier essentials, leaving less room for discretionary purchases.
While the monthly data will remain volatile, the overall trend points to stubborn inflation persisting through year-end. The Fed will be closely watching to see if their actions to date have slowed price gains enough. If not, consumers should prepare for more rate hikes and resulting economic uncertainty into 2024.
New applications for U.S. unemployment benefits fell unexpectedly last week to the lowest level since mid-February, signaling the job market remains tight even as broader economic headwinds build.
Initial jobless claims declined by 13,000 to 216,000 in the week ended September 2, the Labor Department reported Thursday. That was below economist forecasts for a rise to 234,000 and marked the fourth straight week of declines.
Continuing claims, which track ongoing unemployment, also dropped to 1.679 million for the week ended August 26. That was the lowest point since mid-July.
The downward trend in both initial and continuing claims points to ongoing resilience in the labor market amid strong employer demand for workers.
There are some emerging signs of softness, however. The unemployment rate ticked higher to 3.8% in August as labor force participation increased. Job growth also moderated in the latest month, though remains healthy.
Worker productivity rebounded at a 3.5% annualized pace in the second quarter, the fastest rise since 2020. Moderating labor cost growth could also help the Federal Reserve combat high inflation.
While jobless claims remain near historic lows, economists will keep a close eye on any notable changes that could indicate potential layoffs, although the Federal Reserve has recently taken a more measured approach to rate hikes aimed at moderating economic demand.
Currently, the most recent data confirms a remarkably robust job market, despite concerns about inflation and slowing growth. This resilience provides hope that any potential economic downturn in the future might be less severe than previously anticipated.
China and Japan are actively defending their currencies against the rising US dollar, sparking inflation concerns. Both the yen and yuan have depreciated significantly due to market expectations of prolonged higher interest rates by the US Federal Reserve.
In response, China’s central bank is providing robust guidance through its daily yuan reference rate to prevent excessive weakening. Japan has issued a stern warning against rapid yen depreciation, signaling readiness for intervention.
Despite these efforts, doubts linger about their effectiveness, especially if the Federal Reserve maintains a hawkish stance or China’s economic recovery remains sluggish. The strong US dollar also affects European currencies, with the euro and pound hitting their lowest levels since June, raising concerns of quicker rate cuts by eurozone and UK central banks to counter rising borrowing costs. Investors globally watch closely as central banks and the Federal Reserve navigate these currency dynamics, with potential implications for inflation and future monetary policies.
The U.S. jobs report for August is out, with 187,000 jobs added to the economy in August. This is slightly higher than the 170,000 economists had expected. On the other side, unemployment is up slightly, at 3.8%. This is 0.3% higher than economists had predicted. Wages increased slightly, up 0.2% month-over-month, and remain up more than 4% over last year.
About the U.S. Jobs Report
The U.S. jobs report, specifically the nonfarm payroll report, is a critical economic indicator that holds immense significance for both financial markets and policymakers. This report, typically released on the first Friday of each month by the U.S. Bureau of Labor Statistics, provides crucial insights into the health of the labor market in the United States.
The report serves as a barometer of economic health. It offers valuable data on the number of jobs created or lost in the previous month, the unemployment rate, and wage growth. This information helps economists and investors gauge the overall economic performance and can influence their outlook on future economic conditions. If job creation exceeds expectations, it can signal a robust economy, potentially leading to higher consumer spending and business investments.
This report also has a significant impact on financial markets. Stock, bond, and currency markets can experience substantial volatility on the day of the report’s release. Positive job growth can boost investor confidence and lead to stock market gains, while weaker-than-expected data can trigger market sell-offs. Additionally, the Federal Reserve closely monitors the jobs report when making decisions about interest rates and monetary policy, making it a key factor in shaping the direction of these markets in the medium to long term.
In summary, the U.S. jobs report is a vital economic indicator that provides insights into the labor market’s health and has a profound impact on financial markets, influencing investor sentiment, asset prices, and even central bank decisions. It is closely watched by economists, investors, and policymakers alike for its role in shaping economic outlooks and investment strategies.
Image: President Jimmy Carter and Chinese Vice Premier Deng Xiaoping meet outside of the Oval Office on Jan. 30, 1979
The US and China May Be Ending an Agreement on Science and Technology Cooperation − A Policy Expert Explains What This Means for Research
A decades-old science and technology cooperative agreement between the United States and China expires this week. On the surface, an expiring diplomatic agreement may not seem significant. But unless it’s renewed, the quiet end to a cooperative era may have consequences for scientific research and technological innovation.
The possible lapse comes after U.S. Rep. Mike Gallagher, R-Wis., led a congressional group warning the U.S. State Department in July 2023 to beware of cooperation with China. This group recommended to let the agreement expire without renewal, claiming China has gained a military advantage through its scientific and technological ties with the U.S.
The State Department has dragged its feet on renewing the agreement, only requesting an extension at the last moment to “amend and strengthen” the agreement.
The U.S. is an active international research collaborator, and since 2011 China has been its top scientific partner, displacing the United Kingdom, which had been the U.S.‘s most frequent collaborator for decades. China’s domestic research and development spending is closing in on parity with that of the United States. Its scholastic output is growing in both number and quality. According to recent studies, China’s science is becoming increasingly creative, breaking new ground.
This article was republished with permission from The Conversation, a news site dedicated to sharing ideas from academic experts. It represents the research-based findings and thoughts of,Caroline Wagner, Professor of Public Affairs, The Ohio State University.
As a policy analyst and public affairs professor, I research international collaboration in science and technology and its implications for public policy. Relations between countries are often enhanced by negotiating and signing agreements, and this agreement is no different. The U.S.’s science and technology agreement with China successfully built joint research projects and shared research centers between the two nations.
U.S. scientists can typically work with foreign counterparts without a political agreement. Most aren’t even aware of diplomatic agreements, which are signed long after researchers have worked together. But this is not the case with China, where the 1979 agreement became a prerequisite for and the initiator of cooperation.
In 1987 former President Jimmy Carter visited Yangshuo, his wife Rosalyn and he insisted that went around Yangshuo countryside by bicycle.
A 40-Year Diplomatic Investment
The U.S.-China science and technology agreement was part of a historic opening of relations between the two countries, following decades of antagonism and estrangement. U.S. President Richard Nixon set in motion the process of normalizing relations with China in the early 1970s. President Jimmy Carter continued to seek an improved relationship with China.
China had announced reforms, modernizations and a global opening after an intense period of isolation from the time of the Cultural Revolution from the late 1950s until the early 1970s. Among its “four modernizations” was science and technology, in addition to agriculture, defense and industry.
While China is historically known for inventing gunpowder, paper and the compass, China was not a scientific power in the 1970s. American and Chinese diplomats viewed science as a low-conflict activity, comparable to cultural exchange. They figured starting with a nonthreatening scientific agreement could pave the way for later discussions on more politically sensitive issues.
On July 28, 1979, Carter and Chinese Premier Deng Xiaoping signed an “umbrella agreement” that contained a general statement of intent to cooperate in science and technology, with specifics to be worked out later.
In the years that followed, China’s economy flourished, as did its scientific output. As China’s economy expanded, so did its investment in domestic research and development. This all boosted China’s ability to collaborate in science – aiding their own economy.
Early collaboration under the 1979 umbrella agreement was mostly symbolic and based upon information exchange, but substantive collaborations grew over time.
A major early achievement came when the two countries published research showing mothers could ingest folic acid to prevent birth defects like spina bifida in developing embryos. Other successful partnerships developed renewable energy, rapid diagnostic tests for the SARS virus and a solar-driven method for producing hydrogen fuel.
Joint projects then began to emerge independent of government agreements or aid. Researchers linked up around common interests – this is how nation-to-nation scientific collaboration thrives.
Many of these projects were initiated by Chinese Americans or Chinese nationals working in the United States who cooperated with researchers back home. In the earliest days of the COVID-19 pandemic, these strong ties led to rapid, increased Chinese-U.S. cooperation in response to the crisis.
Time of Conflict
Throughout the 2000s and 2010s, scientific collaboration between the two countries increased dramatically – joint research projects expanded, visiting students in science and engineering skyrocketed in number and collaborative publications received more recognition.
As China’s economy and technological success grew, however, U.S. government agencies and Congress began to scrutinize the agreement and its output. Chinese know-how began to build military strength and, with China’s military and political influence growing, they worried about intellectual property theft, trade secret violations and national security vulnerabilities coming from connections with the U.S.
Recent U.S. legislation, such as the CHIPS and Science Act, is a direct response to China’s stunning expansion. Through the CHIPS and Science Act, the U.S. will boost its semiconductor industry, seen as the platform for building future industries, while seeking to limit China’s access to advances in AI and electronics.
A Victim of Success?
Some politicians believe this bilateral science and technology agreement, negotiated in the 1970s as the least contentious form of cooperation – and one renewed many times – may now threaten the United States’ dominance in science and technology. As political and military tensions grow, both countries are wary of renewal of the agreement, even as China has signed similar agreements with over 100 nations.
The United States is stuck in a world that no longer exists – one where it dominates science and technology. China now leads the world in research publications recognized as high quality work, and it produces many more engineers than the U.S. By all measures, China’s research spending is soaring.
Even if the recent extension results in a renegotiated agreement, the U.S. has signaled to China a reluctance to cooperate. Since 2018, joint publications have dropped in number. Chinese researchers are less willing to come to the U.S. Meanwhile, Chinese researchers who are in the U.S. are increasingly likely to return home taking valuable knowledge with them.
The U.S. risks being cut off from top know-how as China forges ahead. Perhaps looking at science as a globally shared resource could help both parties craft a truly “win-win” agreement.
Heading Into the Unofficial End of Summer, Powell Gave the Market a Lot to Think About
The last “unofficial” week of summer will likely be characterized by light trading, which could amplify volatility. This week follows what is viewed by many as a more hawkish tone than expected by Fed Chair Powell on Friday. The next FOMC meeting is not until September 19–20; that is a long time to obsess over every economic number, and there are many key numbers that will be released this week. Investors will be watching the labor report, alongside the PCE price index, personal income and spending data, JOLTS job openings, ISM Manufacturing PMI, and the second estimate of Q2 GDP growth.
Monday 8/28
• 10:30 AM ET, the Dallas Fed Manufacturing Index is expected to post a 16th straight negative number, at a steep minus 21.0 in August versus minus 20.0 in July. The survey asks manufacturers whether output, employment, orders, prices and other indicators increased, decreased or remained unchanged over the previous month. Responses are aggregated into an index where positive values generally indicate growth while negative values generally indicate contraction.
Tuesday 8/29
• 10:00 AM ET, Consumer Confidence is expected to dip slightly in August, at a consensus 116.5 versus July’s 117.0. This report has exceeded not only the consensus in the last three reports but the full consensus range as well.
• 10:00 AM ET, The JOLTS report consensus for July is 9.559 million near its June’s 9.582 million level. Economist consensus have been fairy accurate for this well monitored indicator. The JOLTS report tracks monthly change in job openings and offers rates on hiring and quits.
Wednesday 8/30
• 8:30 AM ET, GDP (the second estimate of second-quarter) is expected to show no change from 2.4 percent growth in the quarter’s first estimate. Personal Consumption Expenditures (PCE), at 1.6 percent growth in the first estimate, is expected to come in at 1.7 percent in the second estimate.
• 10:00 AM ET, Pending Home Sales are expected to fall by 0.4% after rising .3% in June. The National Association of Realtors developed the Pending Home Sales report as a leading indicator of housing activity. Specifically, it is a leading indicator of existing home sales, not new home sales. A pending sale is one in which a contract was signed, but not yet closed. It usually takes four to six weeks to close a contracted sale. Home transactions are a harbinger for economic activity.
• 10:00 AM ET, The State Street Investor Confidence Index measures confidence by looking at actual levels of risk in investment portfolios. This is not an attitude survey. The State Street Investor Confidence Index measures confidence directly by assessing the changes in investor holdings of equities. The prior number (July) was 96.2%.
• 10:30 PM ET, EIA The Energy Information Administration (EIA) provides the Petroleum Status Report weekly with information on petroleum inventories in the US, whether produced in the US or abroad. The level of inventories helps determine prices for petroleum products.
Thursday 8/30
• 7:30 AM ET, The Challenger Job-Cut Report for August will be reported and compared to last months 23,697 job cuts.
• 8:30 AM ET, Jobless claims for the week ended 8/26 are expected to come in at 238,000. The prior week the figure was 230,000.
• 8:30 AM ET, Personal Income is expected to have risen 0.3 percent in July with Consumption Expenditures expected to increase a solid 0.6 percent. These stats will be compared with June’s 0.3 percent increase for income and 0.5 percent increase for consumption.
• 9:45 AM ET, The Chicago PMI is expected to have risen in August to 44.6 versus 42.8 in July which was the eleventh straight month of sub-50 contraction.
• 3:00 PM ET, Farm Prices for July are expected to have risen month over month by 0.4%, however year-on-year declined by 5.3%. Farm prices are a leading indicator of food price changes in the producer and consumer price indices. There is not a one-to-one correlation, but general trends move in tandem. Inflation is a general increase in the prices of goods and services.
• 4:30 PM ET, The Fed’s Balance Sheet totaled $8.139 trillion last week. Further declines in line with the Feds quantitative tightening (QT) is expected.
Friday 9/1
• 8:30 AM ET, the Employment Situation report is expected to show a moderating but still strong 170,000 increase for nonfarm payroll growth in August versus 187,000 in July which was a bit lower than expected. Average hourly earnings in August are expected to rise 0.3 percent on the month for a year-over-year rate of 4.4 percent; these would compare with 0.4 and 4.4 percent in the prior two reports. August’s unemployment rate is expected to hold unchanged at 3.5 percent.
• 10:00 AM ET, The ISM manufacturing index has been in contraction the last nine months. August’s consensus is 46.8 versus July’s 46.4.
• 10:00 AM ET, Construction Spending for July is expected to have risen 0.5% to match June’s 0.5% increase that had benefited from a second strong month for residential spending.
What Else
There is no early close scheduled for the US markets on Friday before the three day Labor Day weekend.
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