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Smokestack Signals

Factories across the U.S., Europe and parts of Asia increased production in July, but the upswing was held back by weak global trade and suggested a long and precarious road ahead for the global economy. Export orders were soft across most of the countries surveyed in July by research firm IHS Markit, and activity contracted in two export powerhouses, Japan and South Korea. With the international outlook uncertain, manufacturers in most countries saved costs in July by cutting jobs. In the U.S., two surveys of purchasing managers showed improved manufacturing activity. But overall data suggest that easing lockdown restrictions may not be enough to get the global economy back on track. Governments, especially those with export-oriented business models, may need to find a way to stimulate domestic demand to offset lingering weaknesses in international demand for foreign-made goods, Tom Fairless, Eun-Young Jeong and Amara Omeokwe report.

WHAT TO WATCH TODAY

U.S. factory orders for June are expected to rise 5% from a month earlier. (10 a.m. ET)

TOP STORIES

Get Ready for the Best Quarter of Economic Growth Ever

U.S. factory numbers are among the first positive signs for economic growth during the third-quarter. Indeed, gross domestic product is expected to post its best quarter on record. Morgan Stanley is tracking a 21.3% annualized gain for the period, IHS Markit 20.1%. The estimates are obviously quite preliminary, but anything close to that would handily beat the previous post-World War II record: +16.7% in 1950.

Unfortunately, a 20% jump won’t be nearly enough to retrace losses from the first and second quarter. IHS Markit sees third-quarter GDP around an annualized $18 trillion, well short of its fourth quarter peak. So even with a big third-quarter bounce, the coronavirus would still have wiped out about three years of gains.

Boom Goes the Deficit

The U.S. expects to borrow an additional $2 trillion in the second half of the year as federal spending ramps up to combat the coronavirus pandemic. The Treasury Department estimated the government would borrow $947 billion from July through September, a record for the quarter, and $1.216 trillion from October through December. Senior Treasury officials said their estimate assumes Congress will eventually pass another round of economic relief. Congress has authorized roughly $3.6 trillion in new spending since March to help mitigate the effects of the pandemic, Kate Davidson reports.

What’s next on the fiscal front? Democratic leaders and White House officials sounded cautiously upbeat after another round of talks Monday on a new coronavirus aid package. The sides are under rising pressure to strike a deal as millions of Americans go without a $600-a-week federal jobless supplement, Siobhan Hughes and Andrew Restuccia report.

Fiscal finder’s fee: President Trump said he was ready to approve a purchase of the U.S. operations of the Chinese video-sharing app TikTok, but only if the government receives “a lot of money” in exchange. The White House had been pushing for a sale to U.S. owners, citing national-security risks that the Chinese government could exploit the personal data the app collects, Bob Davis, Alex Leary and Kate Davidson report.

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The Real World Bank

The Federal Reserve has become the world’s backup lender. During two critical mid-March weeks, it bought a record $450 billion in Treasurys from investors desperate to raise dollars. By April, the Fed had lent another nearly half a trillion dollars to counterparts overseas, representing most of the emergency lending it had extended to fight the coronavirus at the time. The massive commitment was among the Fed’s most significant—and least noticed—expansions of power yet. It eased a global dollar shortage, helped halt a deep market selloff and continues to support global markets today. It established the Fed as global guarantor of dollar funding, cementing the U.S. currency’s role as the global financial system’s underpinning, Serena Ng and Nick Timiraos report.

Get Off of My Cloud

Spending on cloud services is surging, as companies shift more business applications online to cope with extended Covid-19 lockdowns, social distancing and other restrictions. Companies world-wide spent a record $34.6 billion on cloud services in the second quarter, up roughly 11% from the previous quarter and 30% from the same period last year, according to research firm Canalys. Led by Amazon.com’s Amazon Web Services and Microsoft’s Azure cloud unit, the spending gains were fueled by soaring corporate demand for cloud-based collaboration and remote working tools, e-commerce, remote learning, and content streaming, Angus Loten reports.

WHAT ELSE WE’RE READING

Automatic stabilizers beat ad hoc policy responses. “By the time the Cares Act passed on March 27, millions of workers had already been displaced, and tens of thousands of firms had already shuttered. It then took several more weeks to implement the various Cares support provisions. Moreover, when Cares was passed, many anticipated that the economic crisis would be short. The [Federal Pandemic Unemployment Compensation] program (the $600 supplement to UI benefits) was set to expire at the end of July, while [Paycheck Protection Program] loans were meant to support firms for only eight weeks. It now appears that the period of economic weakness will last much longer, particularly as Covid-19 cases have begun rapidly rising again, and that additional support will be needed. Policy responses with built-in triggers tied to economic conditions could adjust flexibly and automatically to the evolving situation,” University of Illinois at Urbana-Champaign’s Alexander Bartik and co-authors write in a new working paper.

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