THE TICKER

A key measure of U.S. manufacturing strength just slipped to its lowest level in two-and-a-half years, as pressures from President Trump weighed on the sector. 

Add that to a pile of recent worrisome signals that the economy is headed for a slowdown, if not an outright recession, just as the 2020 presidential race starts to kick into higher gear. Trump is counting on the so-far rosy economic picture to boost his reelection chances even as warning signs grow that all is not as good as it appears.

Federal Reserve Bank of St. Louis President James Bullard put a finer point on it in a Monday presentation opening the possibility of an interest rate cut later this year to jumpstart stalling growth. The central bank “faces an economy that is expected to grow more slowly going forward, with some risk that the slowdown could be sharper than expected due to ongoing global trade regime uncertainty,” he said. 

Morgan Stanley economists predict the United States could tip into a recession within three quarters if the Trump administration makes good on threats to tax all incoming Chinese goods, and the Chinese retaliate. “My recent conversations with investors have reinforced the sense that markets are underestimating the impact of trade tensions,” Chetan Ahya, the bank’s chief economist, wrote in a Sunday note. “Investors are generally of the view that the trade dispute could drag on for longer, but they appear to be overlooking its potential impact on the global macro outlook.”

And JPMorgan Chase pegs the probability of a recession hitting in the second half of this year at 40 percent, up from 25 percent just a month ago. 

Amid otherwise strong economic fundamentals, there are other troubling signs the decade-long economic expansion may be losing momentum. Business investment, which the Trump tax cuts were supposed to turbocharge, has been slowing; the yield curve inversion, a sign investors anticipate a looming recession, keeps getting worse; second-quarter GDP growth is expected to slow significantly, to 1.3 percent, according to the Atlanta Fed’s forecast. 

Manufacturers could be canaries in the coal mine. The manufacturing survey, a monthly look by the Institute for Supply Management at manufacturers’ plans to expand, dropped to 52.1 for May. That was well under expectations for a reading of 53, but any number above 50 means the sector is still expanding. Another study of the sector's strength, the U.S. Manufacturing Purchasing Managers’ Index, just fell to its lowest level since 2009:

“It’s important to look at where we’ve come from: We’ve been softening for several months,” says Chad Moutray, chief economist for the National Association of Manufacturers. “There’s been a real weakening in the global environment,” not just in China but in Europe as well. “Combine that with tariffs, and that’s why sentiment has softened so significantly in recent months.”

The drag on the sector from tariffs is primed to get worse, if Trump follows through with threats to levy import duties on Mexican goods and escalate with China. The moves would impose “tremendous costs on manufacturers, consumers, and the economy,” Moutray says, adding the ISM report “puts an exclamation point” on the need to work out deals with China and Mexico that avoid further escalations. 

Pantheon Macroeconomics chief economist Ian Shepherdson says manufacturing is actually doing a little better than the headline result from the ISM survey suggests. New orders, for example, actually picked up steam. But, he said in a Monday research note, “the trend will remain soft, and likely will weaken further as the full hit from the latest tariffs work through. The sector can’t thrive when it’s being hit by new taxes at random every few weeks.”

ISM survey respondents reinforced that theme in comments about the outlook for their businesses. “Newly increased tariffs on Chinese imports pose an issue on a number of chemicals and materials that are solely produced in China. We are expecting increases in raw materials starting June 1,” said a plastics and rubber products maker. 

A chemical products maker, weighing in before Trump announced his surprise plan to tax Mexican imports, mentioned plans to move production from China to Mexico, underlining the high uncertainty manufacturers face from rapidly shifting trade policy: “The threat of additional tariffs has forced a change in our supply chain strategy,” this manufacturer said. “We are shifting business from China to Mexico, which will not increase the number of U.S. jobs.”

MARKET MOVERS

Tech stocks take a beating. CNBC's Fred Imbert: "Tech stocks fell on Monday, June’s first day of trading, amid reports that the U.S. government is planning to target a host of big companies in the industry with antitrust and business practice probes. Shares of Alphabet, Amazon, Facebook and Apple all weighed on the market during Monday’s session. The Nasdaq Composite dropped 1.6% to enter correction territory, closing more than 10% below its record high set in late April at 7,333.02. The S&P 500 slid 0.3% to 2,744.45 while the Dow Jones Industrial Average ended the day just above breakeven at 24,819.78.

"Alphabet shares pulled back 6.1% after reports said the Justice Department is preparing to launch an antitrust probe on Google. Meanwhile, Facebook dropped 7.5% after The Wall Street Journal reported the Federal Trade Commission would be able to look into Facebook’s practices and how they impact digital competition." 

Here's why: "House lawmakers plan a sweeping review of Facebook, Google and other technology giants to determine if they’ve become so large and powerful that they stifle competition and harm consumers, marking a new, unprecedented antitrust threat for an industry that’s increasingly under siege by Congress, the White House and 2020 presidential candidates," Tony Romm and Elizabeth Dwoskin report for The Post. "The probe, announced Monday by Rep. David Cicilline (R.I.), the leader of the House’s top anti-trust subcommittee, is expected to be far reaching and comes at a moment when Democrats and Republicans find themselves in rare alignment on the idea that the tech industry has been too unregulated for too long."

— Meanwhile, the DOJ is considering probing Apple: “The U.S. Justice Department has jurisdiction for a potential probe of Apple Inc as part of a broader review of whether technology giants are using their size to act in an anti-competitive manner, two sources told Reuters,” Reuters’ Diane Bartz reports.

“The Justice Department’s Antitrust Division and the Federal Trade Commission (FTC) met in recent weeks and agreed to give the Justice Department the jurisdiction to undertake potential antitrust probes of Apple and Google, owned by Alphabet Inc, the sources said.”

All eyes on Powell. Bloomberg's Katherine Greifield, James Hirai, and Chris Anstey: "Investors’ growing conviction that the Federal Reserve will lower interest rates in coming months is putting policy makers under scrutiny when they attend what’s billed as a listening event Tuesday.

"With financial markets discounting at least two quarter-point Fed interest-rate cuts by year-end -- one more than the case just days ago -- the Fed’s conference on policy strategy, tools and communication in Chicago will be closely watched. If Fed Chairman Jerome Powell, who gives opening remarks Tuesday, wanted to counter the quickly emerging consensus about easing, he has a platform to do so."

TRUMP TRACKER

TRADE FLY-AROUND:

Senate Republicans consider blocking Mexican tariffs. The Post's Erica Werner, Seung Min Kim and Damian Paletta: "Congressional Republicans have begun discussing whether they may have to vote to block [Trump’s] planned new tariffs on Mexico, potentially igniting a second standoff this year over Trump’s use of executive powers to circumvent Congress, people familiar with the talks said.

"The vote, which would be the GOP’s most dramatic act of defiance since Trump took office, could also have the effect of blocking billions of dollars in border wall funding that the president had announced in February when he declared a national emergency at the southern border... Trump’s plans to impose tariffs on Mexico — with which the United States has a free-trade agreement — rely on the president’s declaration of a national emergency at the border. But the law gives Congress the right to override the national emergency determination by passing a resolution of disapproval."

Mexico warns of retaliation: “Mexico is weighing its options to respond to the threat of U.S. tariffs on all of its exports, including possible retaliation, but would rather convince the Trump administration that a negotiated solution is in the best interest of both countries, senior officials said Monday,” the Wall Street Journal’s Anthony Harrup reports.

“A high-level Mexican delegation led by Foreign Minister Marcelo Ebrard is in Washington this week for meetings with U.S. officials to discuss ways of reaching an agreement after [Trump] threatened a 5% tariff on all Mexican imports starting June 10 unless Mexico does more to stem the flow of Central American migrants crossing its territory to reach the U.S. The tariffs would rise each month to reach 25% by October, Mr. Trump said.”

Goldman: These companies would lose the most in U.S-Mexican tariffs. “Goldman screened Russell 1000 index stocks by their assets explicitly reported in Mexico, revealing that chipmaker Skyworks Solutions, railroad company Kansas City Southern and sensor and electrical protection products manufacturer Sensata Technologies are among the companies most sensitive to the newly-proposed tariffs on Mexico imports,” CNBC’s Yun Li reports.

“‘Escalation of the trade war poses a risk to both corporate profit margins and the health of the US consumer, who will likely absorb the majority of the tariffs via higher prices,’ Ben Snider, an equity strategist at the bank, said in a note Friday.”

— Why China’s rare earths threat might be empty: “China’s threat to stop exporting rare earth minerals to the United States may not give Beijing much leverage in the ongoing trade war between the world’s two biggest economies,” CNBC’s Tom DiChristopher reports.

“While China is the world’s leading producer of rare earths — minerals found in a wide range of everyday consumer electronics — Beijing’s ability to use them as a weapon is fairly limited, according to several analysts. It remains to be seen how China would structure a ban on rare earths, but some corners of Wall Street say the move wouldn’t be a game changer for Beijing’s trade negotiators.”

— Trump's AT&T boycott is without historical precedent: "[Trump] took his long-running attacks against CNN to a new level on Monday by suggesting in a series of tweets that a consumer boycott of its parent company, AT&T, could force 'big changes' at the news organization,” my colleagues Craig Timberg, Taylor Telford and Josh Dawsey report. “The comment, which Trump tweeted in response to seeing CNN coverage while traveling in London during a European tour, fueled criticisms that the president was using his power inappropriately to intimidate critics.”

“Historians struggled to cite an equivalent threat even from presidents such as Richard Nixon renowned for their hostility toward the press. Less democratic nations with more tenuous press freedoms often use government regulatory power, criminal investigations or tax audits to punish news organizations seen as providing unflattering coverage, but past U.S. presidents rarely have taken such public shots at the businesses of the owners of major American news organizations, historians said.”

Investors shrug. The company's stock climbed 1.67 percent on Monday, beating the wider market. 

POCKET CHANGE

— Tesla’s secret transactions are revealed: “For years, Tesla Inc. has hauled in revenue by selling credits to other carmakers that needed to offset sales of polluting vehicles to U.S. consumers. These sorts of transactions have largely been shrouded in secrecy — until now,” Bloomberg’s Miles Weiss and David Welch report.

“General Motors Co. and Fiat Chrysler Automobiles NV disclosed to the state of Delaware earlier this year that they reached agreements to buy federal greenhouse gas credits from Tesla. While the filings are light on detail, they haven’t been reported on previously. They also represent the first acknowledgments from carmakers that they’re turning to Tesla for help to comply with intensifying U.S. environmental regulations.”

— Jay-Z becomes hip-hop’s first billionaire: “... It’s clear that Jay-Z has accumulated a fortune that conservatively totals $1 billion, making him one of only a handful of entertainers to become a billionaire — and the first hip-hop artist to do so. Jay-Z's steadily growing kingdom is expansive, encompassing liquor, art, real estate (homes in Los Angeles, the Hamptons, Tribeca) and stakes in companies like Uber,” Forbes’ Zack O'Malley Greenburg reports.

“His journey is all the more impressive given its start: Brooklyn’s notorious Marcy housing projects. He was a drug dealer before becoming a musician, starting his own label, Roc-A-Fella Records, to release his 1996 debut, Reasonable Doubt. Since then he’s amassed 14 No. 1 albums, 22 Grammy awards and over $500 million in pretax earnings in a decade.”

Justin Sun, founder and CEO of two cryptocurrency companies, is paying $4.6 million to have lunch with Warren Buffett.
CNBC
MONEY ON THE HILL

— Why the carried interest tax break just won’t die: “One of private-equity and hedge-fund managers’ most prized tax breaks is again in politicians’ cross hairs, but Democrats would need to sweep the 2020 election if they want to pull the trigger to end the option,” Bloomberg’s Joe Light reports. “[Trump] said in May that he wanted to increase taxes on carried interest, a major form of compensation for hedge-fund and private-equity managers. Several leading Democratic presidential candidates — including former Vice President Joe Biden, and senators Bernie Sanders and Elizabeth Warren — also have said they want to end the break.”

“Yet there are a couple of reasons the carried-interest tax break, despite bipartisan opposition, isn’t dead yet. Most Republicans, and even some Democrats, oppose killing a tax option that investment firms have successfully argued creates jobs. And eliminating the break wouldn’t actually raise all that much money.”

DAYBOOK

Today:

  • The House Financial Services Committee holds a hearing on reauthorizing the Export-Import Bank.
  • The Senate Banking, Housing and Urban Affairs Committee holds a hearing on confronting threats from China.
  • The House Financial Services subcommittee on consumer protection and financial institutions holds a hearing on the “systemic risk of leveraged lending.”
  • The Wilson Center holds an event on “Trump, Tariffs, and U.S.-Mexico Relations.”
  • GameStop, Salesforce.com and Tiffany & Co. are among the notable companies reporting their earnings, per Kiplinger.

Upcoming:

  • The American Enterprise Institute holds an event with International Monetary Funding Managing Director Christine Lagarde on Wednesday.
  • Five Below and Vera Bradley are among the notable companies reporting their earnings Wednesday, per Kiplinger.
  • AEI holds an event on high school credit recovery programs Thursday.
  • The National Economists Club holds an event with the Center for American Progress’ Lawrence Korb on Thursday.
THE FUNNIES

From Politico's Matt Wuerker: 

BULL SESSION

What is a run to remember?