Short Items of Interest—U.S. Economy
Good but Not Great News on Jobs
Nothing was wrong with the latest job numbers. There was a gain of 156,000 and the unemployment rate has fallen back down to 3.9% after having risen back to 4% the previous month. The criticism is that these numbers are a little lower than they were the month before. Over the past year, there has been a 1.6% gain in jobs, slightly slower than the pace of gain last year. The pace of hiring has also been slowing a little since 2015, but some of that may reference the shortage of workers in many fields. There has been a somewhat slower pace as far as wage gains are concerned as there was a 2.7% rise compared to the 2.9% notched earlier this year. The bulk of the hiring has been in manufacturing, retail, health care and government.
Differences in How Employment Gets Measured
The rate of unemployment that is most quoted and reacted to in the press is the U-3 measure as collected by the Labor Department. It is also referred to as the headline rate. The other rates are not all as good as this one, but they have all been in growth mode. The highest rate of joblessness is 7.5% when one includes those that are part time for economic reasons. They would rather be in a full-time job, but can't find one. This group is stuck where they are for one reason or the other and find it very difficult to relocate and find better job opportunities. They may have elderly relatives to take care of or their spouse has a good job and is reluctant to leave.
What Worries the Investors
There have been a number of factors that have combined to unnerve the global investment community. Thus far, these are still somewhat benign in the sense that these will not trigger an immediate response in the global economy. On the other hand, it is pretty easy to take some precautionary actions should these worries about trade and tariffs continue alongside the concerns over rising interest rates, labor shortages and the potential for serious legislative gridlock after the November elections are complete.
Short Items of Interest—Global Economy
Will Germany Go Nuclear?
A year or two ago that would be considered utterly out of the question. The Germans do not like spending a lot on defense and the military. They have been very unhappy about the spread of nuclear capability, but there have been some major changes that worry the Germans. There is a sense that Germany will not be able to rely on the U.S. should pressure be applied by Russia or any other nation. President Trump seems to have more anathema towards Germany than Russia. That has sparked a debate over whether Germany should be prepared to take care of all of its own defense needs. This is still not a popular position within the electorate, but Germans are convinced the U.S. has turned its back on Germany for good and may yet try to dismantle NATO.
Sanctions Battle Opens Up
There is going to be a showdown over Iran, and sooner than later. The U.S. is still committed to imposing the sanctions on Iran that had been lifted under Obama. Some of that change is due this week. The U.S. has warned Europe that they should not be helping Iran thwart the sanctions, but that is exactly what the majority of the Europeans are going to do. The confrontation will likely stay verbal, but the U.S. has not been slow to use economic pressure as witness to all the trade policy confusion. The Iranians are trying to act fast and get as much material as possible before the sanctions start to affect them.
Earthquake and Tsunami Hits Indonesia Again
This latest storm to hit Indonesia is thankfully missing most of the damage inflicted by the one several years ago, but there has been a death toll and it will keep rising. The government is now balancing development with security again and has precious little money for either.
Can Chinese Trade Model Be Reconciled?
The administration's approach to Chinese trade surplus with the U.S. has been roundly criticized as ham-handed and ultimately ineffective. The president has been taken to task for asserting that a trade war can be won when there is already ample evidence that many parts of the U.S. economy have been damaged by that war. Some sectors have taken permanent blows and will be hard pressed to ever recover. This approach based on confrontation may not have been very effective, but the fact remains that China is a country that has been playing by its own rules and has strained the current attitudes towards globalization. It is not altogether clear that China can really function within the current system as defined by those international organizations the U.S. was so key to set up. Part of the crisis for the U.S. is these organizations were set up to define the way the world does business and thus to control the way that nations like China did business. Trump has attacked the likes of the World Trade Organization (WTO), World Bank and International Monetary Fund (IMF) for being unfair to the U.S. That has not been the case. It is, however, obvious that none of these groups have been able to really grasp how to deal with the Chinese.
Analysis: Analysts have been asserting that somehow China has to be brought into the fold. Through this engagement, they will be compelled to be more like the rest of the world as far as being a trading partner. The question has been how to integrate a country with a state-owned enterprise model with nations that are dominated by private enterprise. China is the nation that has made the state-run company work, while the USSR was the example of how not to do this. China has adapted the precepts of capitalism to state control. This has created a whole new model for economic success; one that appeals to many other nations more than unfettered free markets.
The short version of this advantage is that China can direct resources to support anything it chooses and at the same time has the power to halt activity wherever it wants. The U.S. and Europe and other parts of the world remain mostly market driven and at the mercy of consumer attitudes and preferences to some degree. They are also subject to pressure from those private enterprises and their goals are not society's goals. The purpose of a company in the U.S., Europe and elsewhere is to make profits for those that own the company—shareholders. Taking care of consumers and employees is important only to the extent it makes the company profitable. If the community is benefited that is a nice bonus, but it plays no real strategic role. The Chinese company is also interested in profits, but the government controls it and therefore pushes strategies that advance government goals. It may be more profitable to reduce the size of the workforce, but it conflicts with the national goal of full employment. People in China may demand cleaner air, but they have no way to enforce that demand. China is nearly 100% directed by some kind of industrial policy. The western states only engage in this overtly on an occasional basis.
Somewhere along the way, the mandate of the WTO changed and became highly intrusive and complex. It was once fairly simple with emphasis on not applying taxes on each other's goods. Now, the discussion involves how nations treat their workers, how they protect intellectual property, how they deal with environmental issues and the like. These requirements come very close to outright manipulation of internal policies. Many nations deeply resent this intrusion (especially the U.S. and China). Finding a "level playing field" with every nation is simply not possible. The U.S. would be better served by trying to protect its global edge where it can and accepting that not every sector of the U.S. economy can be insulated and isolated.
Venezuelan Leader Blames Colombian Leader for Attack
As Nicolas Maduro presided over yet another military parade, he was apparently the target of a drone attack. The two drones packed with explosives detonated in front of his reviewing stand. They did not do any damage to Maduro or the people in the stands, but seven soldiers were hit and sustained non-life-threatening injuries. Within seconds of the attack, Maduro blamed the attack on Colombia and various "right wing" elements in the country. Within hours, there were arrests and various formal protests lodged against his supposed aggressor.
Analysis: Observers in Venezuela assert that his reaction was too swift and too targeted for this attack to have been a shock. He was either very prepared to react to any such assault or the whole thing was staged. The drones never came close to Maduro. The explosions were aimed up and not down towards potential targets. In a part of the world where conspiracy threats thrive and build daily, many have already concluded that Maduro faked the attack to shove attention away from the utter collapse in his country.
A Week to Gauge Inflation
There will be a variety of data releases this week in the U.S. and in other nations. By the end, there will be a bit more definitive information regarding the impact of inflation. Both the Consumer Price Index (CPI) and the Producer Price Index (PPI) will be coming out by Friday. These will be added to the other reports that have been providing some signals regarding prices. For the last year, there has been a consistent assumption that inflation is right around the corner, but every month it seems the rise has been more tepid than expected. There have been several reasons for the slow rise of the inflation threat, but there are now several reasons to think these factors may start to fade and pretty quickly.
Analysis: To start with, we should have been seeing a lot more inflation by this time—both at the core rate and at the headline rate. The economists drive people nuts with the definition of core inflation as this measure excludes two major parts of an average family's budget—food and fuel. The reason for this exclusion is that both of these categories can be very volatile. That wreaks havoc on the ability of analysts to compare one year to another or even one month to another. The comparisons can be radically different according to the day of the week one picks to make that observation. The assumption is that higher or lower prices for oil and food will manifest in other ways later—such as the costs of freight or restaurant meals. Real or headline inflation accepts the volatility of these two categories, but with that comes the sometimes violent swings in price that occur with these commodities and goods.
Obviously, there are many factors that go into determining inflation. The two indices due to be released this week use essentially the same technique. A basket of goods is created by those that are preparing the CPI as well as the PPI. The prices of things in that basket are compared to what they were the month or quarter or year ago. It is important to get the composition of that basket right. There are modifications fairly frequently to reflect what consumers and business people are buying. The Producer Price Index is modified less often than the consumer version as buying habits don't change as quickly with business.
There are some items or categories that have an outsized impact on inflation. For the business community, it is the cost of commodities and raw materials as well as labor. Both of these had been slow to rise despite the fact that conditions were considered ideal for such a hike. This began to change with the rise in the per barrel price for oil at the start of the year and accelerated recently with the rise in the costs of industrial metals such as steel and aluminum. The tariff wars have affected softwood lumber prices from Canada as well as cement from Mexico and dozens of other commodity categories involved in the U.S. industrial and manufacturing communities. The factor that had not been moving up was wages despite the very low rate of unemployment, a development that is supposed to boost wage growth. The level of wages has finally started to show some movement as employers are starting to abandon hope of finding the skilled people they need. They are trying to hire attitude rather than aptitude and do the training themselves. This has also led to some slightly higher rates of pay and a general increase in the costs of labor.
The consumer has been watching inflation become a bigger factor over course of the year with prices driven by health care, housing and entertainment as well as by the old standards (gas and food). The retail sector may engage in the usual frenzy of deep discounts and sales this year, but there will also be considerable pressure to focus more on profits and less on pure revenue. This may lead to lower inventory levels at the start of the season followed by price hikes later as shortages occur and shoppers are willing to pay more.
At the moment, there remain some good reasons for inflation to stay under control as the consumer Has not become extremely active and neither has business. There have been some wage hikes, but nothing aggressive at this point. At the same time, there are obvious pressures mounting on prices. This will push a sharper inflationary atmosphere. This is one reason this week's data on the CPI and PPI will be watched so closely to see if there is a trend in one direction or another.
Hiring in Retail and Manufacturing
There had been some consistent issues as far as hiring was concerned; most of them remain problems. There is still a labor shortage in many sectors and there are too many people trapped in a low-growth area. But one issue that seems to be easing is the lack of jobs in manufacturing and retail.
Analysis: Manufacturers have been hit hardest by the skill shortage. Now, they are shifting tactics a little. They have introduced robotics and automation as fast as they can, but they are also now changing the way they hire by looking for people they can train more than those already trained. The fact is there are thousands of job openings in the manufacturing sector. Perhaps some of these will be filled now.
The retail jobs are important for another reason. This is the classic entry-level job traditionally held by younger people just starting to make their way in the work world. That starting job was getting rare. Now, it seems that retailers are expecting a decent holiday season and want people in place. The retail job is also going to the people who are seeking part-time work. That pulls people into the overall workforce. Some will stay part time or just work a few months and quit, but others will shift to a full-time position and add to the employment rolls on a more permanent basis.
Escaping
Of late, I have been finding a good bit of solace and no end to entertainment in animated movies. I am more likely to take in one of these than other genres. This weekend it was The Incredibles 2. I am still laughing at the superb way they captured the many moods of a toddler. In past weeks, I have been well entertained by the latest adventures of Shawn the Sheep and other creationS from Aardman productions (the place where Wallace and Gromit was created). I have enjoyed the Train Your Dragon flicks and many of old Disney efforts that have been reissued. It seems that these characters are even more human than the humans. I have thoroughly enjoyed the social commentary and life lessons.
Animation and fantasy have long been favorites of mine—the chance to just wallow in somebody's vision. It isn't just that it distracts from the real mess we face every day—there are all the commentaries and nuances. Even the villainess of the latest Incredible movie had a very good point as far as what ails the world. All this cartoon identification also relates to my boundless enthusiasm for Rocky and Bullwinkle and other stories of that era.