Short Items of Interest—U.S. Economy
The Chinese have been cautious as regards what they have taken aim at. There are significant parts of the U.S. economy that are closely connected to the Chinese economy. Also, there are certainly areas that would hurt the U.S. far more than tariffs on pork, fruits and nuts. The U.S. would most definitely feel an impact if soybeans were to be targeted; the Chinese hint broadly that this might be next. There are many service sector offerings that would matter even more to the U.S. Right now, the Chinese seem to be firing shots across the bow. If pork is denied a market in China, the U.S. will have an abundance of pork flooding its own market. That soon drives the costs of other meats down—people will react to the less expensive pork by substituting. It sends a wave through the farm community on the eve of an election.
Banks Expect Oil Prices to Rise
Banks pay a lot of attention to the price of commodities. None figure more prominently than oil. The expectation as far as the bank forecasts are concerned is for higher prices, and sooner than later. The factors that have prompted this outlook include a diminished store of oil as producers in OPEC and Russia have been reducing output in an attempt to get prices back up. There have also been worries about geopolitical issues (as usual). The projection now is that prices will be back in the $60-$70 range soon. On the other hand, bank projections are often the most pessimistic. There are others who assert the U.S. and Canada stand willing to make up any supply shortage created by Russia and OPEC.
Home Ownership in the U.S.
The U.S. has long had a very strong bias in favor of home ownership. This has been deliberate as it was determined that owners were better for a community than renters—more responsible and more invested in the life of that community. The tax code favors owning and so does the financial system. Some of that support now seems to be waning. At the same time, homes have become ever costlier. The majority of renters still dream of owning, however a large percentage seem happy with what they have now. This has boosted the demand for higher-priced rentals and has diminished the enthusiasm for building affordable homes for purchase.
Short Items of Interest—Global Economy
It's Springtime in France
One can always tell this by the flowers and the strikers. That season has begun and the protests have been as predicted. The transportation sector shuts down at almost every opportunity and the students walk out regularly as well. The protests are aimed at the plans to reduce budgets and change work rules. For most of the French business community, the bigger of the two issues is work rules as they are some of the most ossified and complex in Europe. The system makes it hard to hire and next to impossible to fire. This has been a primary goal for Macron. Changing this work culture will be his greatest test.
Growth With Little Inflation
The Europeans seem to have been able to grow without triggering the level of inflation feared. The expectation had been that growth would trigger that price surge and this made the European Central Bank very cautious. Now it seems the inflation risk is not as imminent as originally thought. This may propel a more stimulative approach than expected.
Losing Money Can Kill You
It has been said that money can't buy happiness, but apparently it can keep you alive. A new study shows that people who lose a substantial amount of their personal wealth also lose a great deal of their health. This is the case even if the wealth they still have pays the bills. It seems the stress of this loss is enough to shorten life spans considerably. The maladies that strike people down have largely been stress related—heart disease, strokes and the like.
Will Brexit Be a Bust for the EU?
By now, it has become patently obvious that all those desperate rescue attempts designed to keep the U.K. in the EU have failed; the Brexit mess is a real thing. Most of the analysis has been directed at the British and how much damage to their economy can be expected, but it is not clear whether the EU is going to come out of this unscathed either. It has been assumed that they emerge winners or at least that the EU doesn't lose much in the transition. That has gone some way towards explaining their lack of cooperation with the U.K. and their apparent smugness. It has been a matter of "don't let the door hit you on the way out" from the start, but it is not quite that simple. There are at least five ways the Brexit will need to be measured to determine whether this was a bad or good thing for the Europeans.
Analysis: The first revolves around France and the ability of Emmanuel Macron to deliver on his promises. Germany is not in a position to carry the entirety of Europe on its economic back and needs a partner. More times than not, it has turned to the U.K. for that partnership, but on occasion, there have been governments in France that could play that role. However, none of the following have been partners to Germany in the past: Chirac period from 1995 to 2007, Sarkozy from 2007 to 2013 and Hollande from 2012 to 2017. Only now is there some hope that Macron can put forward the kind of reforms needed, but there is also an expectation he will face a lot of concerted opposition from within France that will severely test his ability to control his own supporters.
The second test will be Italy. Laws were specifically passed to limit the success of the populist parties, but they won the election anyway and now struggle to find common cause upon which to build a functioning government. The Northern Alliance and the Five Star Movement can't even figure out who will lead them—much less where they expect to lead the country. Italy is already one of the weakest nations in the EU. By some accounts, it is now inches from the precipice as far as the economy is concerned. The shock of a complete Italian collapse will be more than Europe can deal with right now. Then there is the fact that populism is far from dead.
Test number three is perhaps the most serious as it involves the 94-billion-euro budget hole over three years that has been left behind by a withdrawing U.K. That gap has to be closed somehow and at a time when every other nation is already strapped. These budget talks will be the most contentious in years and they will be agonizingly slow. The EU really needs to look at its whole system of raising revenue and spending. It is not clear there is any stomach for this right now.
The fourth test revolves around the aggressive populism that has been manifesting in parts of Central and Eastern Europe. The open hostility directed at the EU by governments in Poland, Hungary and others has forced the EU to start imposing penalties when this behavior starts to violate the rules and regulations of the EU. The unity of Europe was shaken by the British pullout, but the real challenge to the EU may be coming from some of these newest members and would-be members as they do not seem to share the same positions on many crucial areas. The EU is not at all sure how to handle this kind of opposition.
Finally, there is the issue that sparked the popular revolt in the U.K. in the first place—migration. The average voter who supported the Brexit move in the U.K. was reacting to the influx of migrants from Europe and resented them. The Europeans have been highly sensitive to the issue as well and migration has come close to toppling governments. It has certainly been at the top of the populist agenda and continues to be the focus for opposition parties like the National Front in France and the AfD in Germany. The divisions are as deep as any Europe has faced in decades—a path out is not in sight.
Slight Decline in ISM Index
The latest manufacturing index numbers are a bit lower than they were last month, but this has not caused a great deal of concern as yet. Last month, these stood at 60.8. This month the index rested at 59.3. The point is that both numbers are still quite high, as anything over 50 indicates expansion. The more important piece of data that comes from the survey this month is that expenses are going up with the costs of commodities. The steel tariffs have already played a role despite the fact that most of the countries that ship steel to the U.S. have been given exemptions to the tariff—at least for now.
Analysis: As expected, the domestic steel producers have hiked the price of steel to just below the price of imported steel with the tariff imposed. Even as nations are getting exemptions, there is a period of time before these kick in. During that period, the prices have gone up. This is akin to the rapid hike in fuel surcharges that are imposed as soon as oil prices go up. There is a very profitable window between the point that prices rise and the commodity itself rises—companies take advantage of that window.
Battle for the Hearts and Minds of the Consumer
There are some things we know. Not many, mind you, but there are some. Economists know that consumers drive the U.S. economy in a way that no other economy in the world is driven. It is not that consumption is not important in these other nations; it is simply that we are oriented to the act of consumption more intimately than any other place in the world. This is also not saying that other economic activity is unimportant as we are also a manufacturing and a technology state and we are an agricultural country and so on. It is basically that consumers are of paramount importance and much is done to cater to their needs and wants. This is the land that invented the shopping mall and consumer credit and drove the internet as a platform for sales. As is repeated often enough, consumption accounts for 85% of the overall GDP and a like percentage of the jobs held by American workers. Change is constant when it comes to consumers. There has rarely been a period where consumer activity has been even close to static. Another of these tectonic shifts is occurring that will change the retail landscape once again.
Analysis: In the mind of the consumer, there is always an epic battle. What motivates people to buy? Is it price or quality, convenience or the level of service? Is it a real need or is the consumer subject to the entreaties of the marketer and advertiser? Does their income really matter when deciding what to buy or is credit sufficient to allow people to respond only to their desires? In fact, all of these factors tumble all over themselves.
One of the most well-established sets of retail infrastructure for many decades has been the shopping center. Every community in the country staked its growth and progress on the institution. The shopping center was the replacement for Main Street—a place where the community converged to buy. It was convenient and offered much of what the shopper seemed to covet. There was "endless variety" if you were prepared to wander the length and breadth of the mall. It got bigger and bigger in an attempt to capture everything anybody would ever hope to want. The first big challenge to the shopping center was the Big Box Store—the Wal-Marts and Targets as well as the other big warehouse concepts, but even these were specialists as compared to the mega shopping center. For the most part, the mall withstood the challenge or managed to co-opt the interlopers. Over the last 10 years, the real challenge has emerged—the online store.
The attraction of the shopping center was initially convenience. One could go to one of these malls and have most every store one needed in the same general location. As a bonus, the shopping center was comfortable year around and very often featured entertainment and other distractions. Still, selection was the driver. Along comes the likes of Amazon and the staggering assortment of other online options and choice is unlimited from the comfort of one's home. No shopping center can compete with this array of merchandise or convenience. Most of the time, there is no competing with the price either.
The long and the short of it is that shopping centers are in serious trouble. That should come as no shock to anyone who has been observing the retail landscape of late. There is hardly a community that is not ringed with moribund malls. Those that have not yet succumbed are a shadow of their former selves. The online onslaught shows no signs of tapering off even as factors such as online security hit the news every day. Once upon a time, that was seen as a major hurdle, but nobody seems to care these days. The only defense available to the mall seems to be entertainment and its role as a city gathering point. The isolation of the online community continues to be a big concern and social interaction is not something offered by the Amazons of the world. The mall is still a place to "hang out" and meet friends, but if it is not also a place to shop, the stores within will not last long. Occupancy is at a six-year low and showing little sign of improvement. This poses a problem for the community as well as retailers as these malls have long been counted upon for their contribution to the tax base.
Uncertainty Under Trump
If one looks at the economic data that has been developing over the last year or so, it is hard not to appreciate the gains. It is true there are always the proverbial clouds on the horizon, but aren't there always? The fact is unemployment is near record lows, GDP growth is high, manufacturing is expanding and the markets are certainly alive. Here's the problem. Nobody quite knows why.
Analysis: Uncertainty is the factor most despised by a business community that lives and dies by the strategic plan. It is vital to understand what motivates any pattern in business and it is hard to figure out what is doing that motivating right now. There have been policy moves that encourage growth such as the tax cuts and a move to loosen regulation in some key sectors. But there have been policy decisions that are having a negative impact as well—tariffs on steel and aluminum and the threats of a trade war. Moves are made that can be broadly characterized as pro-business such as repealing parts of the Bank Reform Act, but at the same time, there are interventions in the way that Amazon does business. The most common description of Trump economic policy among the heads of the corporate community is unpredictable. Not that a policy developed for the benefit of the Fortune 500 is necessarily what is good for the U.S., but clarity on strategy is always preferable to the murky situation the business community finds itself in. At some point, this creates a sense of paralysis as everyone waits to see what the "real" policy will become.
The Afternoon Edition
I must apologize for the tardiness of the newsletter today, but it gives me an opportunity to talk a bit about the whole process. As most of my alert readers know, this daily publication is written in its entirety by me. That means it must succumb to the whims of my schedule. The usual pattern is that I start writing every morning at 5:00 or earlier. Generally, I can complete this by around 8:00 and send it on its way. But there are days that don't lend themselves to this pattern—as for example today. I have been somewhat out of sync these last few months and have been trying to catch up with meetings. I needed to meet with my colleagues this morning at about 7:15. We wrapped thing up by about 9:00 and I headed back to my home office.
As I am still in recovery mode, I needed to grab a short rest before diving back in. Then, there were several calls and emails demanding immediate response. Following that was the monthly Manufacturing Talk Radio show. By this time, it was afternoon and I was still writing. I don't like being this late, but as they say—"life happens when one is making other plans." I only point this out so that you know I am not testing your patience deliberately. I appreciate the fact I have such loyal readers and enjoy the correspondence I often get from that readership. I promise I will not test you tomorrow!