Jan 7, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

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"You'll never say hello to you until you get it on the red line overload. You'll never know what you can do until you get it up as high as you can go." - See who said it and why it matters at the bottom.

1 big thing: Company tax incentives don't spur economic growth

Illustration: Sarah Grillo/Axios

More than two years after Amazon announced its search for a second headquarters and cities around the U.S. bent over backwards to offer the megacompany as much free cash and incentives as they could, new research confirms what economists have been saying for years: Such programs are a waste of money.

Driving the news: A new paper from researchers at Princeton and Columbia Business School found "no evidence" that business tax incentives given to individual companies increased broader economic growth at the state and local level.

Why it matters: It's not just Amazon's highly publicized HQ2 that has attracted massive tax subsidies from city and state governments.

  • Research shows states continue to offer up increasingly large sums of money to big-name companies in an effort that proves more effective at generating headlines than economic growth.

Details: In 2014, the study found that about $7 billion — or about a third of total state incentive spending that year — "went to .0072% of new firms and 1.41% of all jobs created by those firms."

  • An earlier study found that despite their ineffectiveness, incentives offered to individual companies tripled between 1990 and 2015.
  • The Princeton/CBS study estimates that state and local governments spend at least $30 billion a year on business tax incentives — well above the 2014 total.
  • About a quarter of all business tax incentives are given to a very small collection of firms opening offices in new locations — less than .01% of firms opening in new locations in 2014.

The intrigue: New York offered Amazon $800 million more in incentives than was previously known and was even prepared to pay part of some employees’ salaries, WSJ reported Sunday.

  • Amazon has since announced plans to lease 335,000 square feet on Manhattan’s West Side without any special tax credits, and executives have said the HQ2 decision was based more on where employees would want to live than incentives.
  • Newark had dangled $7 billion and officials in Maryland had offered $5 billion, both far exceeding packages offered by Virginia and New York.

Between the lines: Co-authors Cailin Slattery and Owen Zidar wrote in the study that they found a slightly negative effect on housing markets for municipalities that attract new companies with incentives, "seeing, on average, a 4% decrease in house prices."

  • "This apparent decline in house prices provides some weakly suggestive evidence that the welfare effects of these subsidies might be negative on average."
2. Catch up quick

Japan's service sector saw the largest contraction in more than three years, which, combined with other data, indicates its overall economic growth contracted in Q4. (Reuters)

China will direct money from the nation’s $10 trillion household savings into funds that invest in equities, which is expected to translate into a huge windfall for its stock market. (SCMP)

Facebook will remove deepfakes and other manipulated videos from its platforms, but not parody or satire. The company didn't elaborate on how it would decide the difference. (Axios)

The Pentagon plans to send additional U.S. troops and B-52 bombers to the Middle East as tensions rise in Iran and Iraq. (WSJ)

The soon-to-open American Dream megamall in New Jersey has a 90% lease rate for its 3.3 million square feet of space, bucking the theme of the retail apocalypse. (Bloomberg)

3. U.S. consumers' tariff worries are simmering
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Reproduced from CivicScience; Chart: Axios Visuals

After the Trump administration signed the "phase one" trade deal to halt new tariffs that were expected to hit Chinese imports on Dec. 15, the number of Americans who say they are seeing higher prices due to tariffs stalled in December.

  • The majority of U.S. adults say they haven't noticed a difference, according to the latest survey from CivicScience.

Of note: CivicScience also found that the number of U.S. respondents who said they were concerned about the impact of recent trade policies and tariffs on their household expenses declined for the second month in a row, while the number who said they were not at all concerned increased slightly.

4. European banks could continue to disappoint investors

In contrast to the blowout returns of their U.S. counterparts last year, European banks delivered uninspired returns to investors.

What happened: U.S. banks like Citigroup and JPMorgan drove a 32% return for the S&P financial sector, slightly edging the S&P 500's 31% rise.

  • Europe’s bank stocks index ended 2019 up 8%, but trailed the broader European Stoxx 600, which rose 23%.
  • Investors had lofty expectations to begin the year, WSJ notes, as the European Central Bank was expected to raise interest rates. But those quickly fizzled, and the ECB not only cut interest rates but restarted its TLTRO and quantitative easing stimulus programs.
  • Some lenders have started charging to hold big cash deposits to reduce the sting of negative interest rates.

Why it happened: The ECB's shift didn't help, but banks' troubles weren't all a result of monetary policy, experts say.

  • "It's also lack luster prospects for economic growth," Tom Essaye, president of Sevens Report Research, tells Axios. "The EU economy isn’t doing as well as the U.S. economy and as such, loan growth potential isn’t as good."
  • "In general loan demand is weak in Europe as are the economies in general," Joseph Trevisani, senior analyst at FXStreet, adds in an email. "Cheap funds are not enough if no one wants the money."

By the numbers: The eurozone grew at 0.2% in both the second and third quarters of 2019, and EU policymakers expect the bloc grew by just over 1% last year.

The bottom line: "Europe’s banks worked through the dreariness of 2019, in some cases admirably," WSJ's Rochelle Toplensky writes. "That is about the best investors can hope for in 2020 as well."

5. Eurozone producer prices sink again
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Data: FactSet; Chart: Andrew Witherspoon/Axios

The continued decline in prices paid by manufacturers could be a major impediment to European policymakers' desire for higher inflation in the eurozone, and data released Monday shows things are not improving.

What happened: The producer price index for the eurozone fell for the fourth straight month in November.

  • The decline was less than economists expected, but still showed a more than 1% drop after a nearly 2% fall in October.

Why it matters: The ECB has cited lagging inflation as a major risk to growth and stability in the region and inflation's inability to rise to the central bank's 2% target as a reason for increasing its bond-buying program and cutting interest rates late last year.

  • Headline inflation moderately improved to 1% in November and economists expect it rose further to 1.3% in December, but the consistent drag from producer prices may inhibit that.

What's next: Eurostat will release its preliminary PPI estimate for December today.

6. Shadow banking sector may have grown to $1.2T

"The U.S. shadow banking sector is alive and well, growing at a fast pace and remains opaque," MarketWatch's Greg Robb writes, citing top economists at the University of Chicago, Harvard and the Fed.

Why it matters: The sector might not cause the next downturn, but Dallas Fed president Robert Kaplan says he's worried it could be “an accelerant” to a recession that does come.

What's happening: "The shadow banking sector, now called by the more polite term 'private debt market’ has roughly tripled in size over the past few years and one estimate puts the size around $1.2 trillion," Robb writes from the American Economics Association conference in San Diego.

  • One big risk of the shadow banking sector is that investors can demand their money at any time. That could lead to a run on their assets, according to Jeremy Stein, a former Federal Reserve governor and a finance expert at Harvard.
Dion Rabouin

Kenny Loggins, the man who took us on the highway to the "Danger Zone," was born on Jan. 7, 1948.