By Chris Kuehl, Ph.D., NACM Economist—
Short Items of Interest—U.S. Economy—
Trade War Winners and Losers
The confrontation between the U.S. and China has been altering the global economy for the last two years. As with any reorganization of the status quo there are changes that benefit some and changes that damage others. The pace of global growth has slowed to levels not seen in decades. That has severely damaged economies that depend on exports (Japan and Germany). On the other hand, there have been major gains in nations that have taken the place of China in terms of U.S. trade. Vietnam has seen a gain of over 65% in terms of business with the U.S. There has also been some improvement in the U.S. as far as increased demand for U.S. goods, but that has been offset by loss of export markets. The shift has been complex. It may take years to figure out the winners and losers.
Markets React to Democratic Race
It is very early in the process, but the markets are unlikely to wait to the bitter end to react. The strong showing by Bernie Sanders in Iowa and the poll numbers in New Hampshire have convinced some he is now the candidate most likely to win the nomination. That has many investors upping their risk premiums in areas such as health care. The logic is that Trump is unpopular with roughly 50% of the voters, so Sanders could win. If he then pushes the Medicare for All agenda, the health care industry will be altered dramatically. Therefore, now might be a good time to jump ship.
Does OPEC Retain Any Power?
The price per barrel of oil has been stagnant and falling rather than rising. This is not something anyone would have predicted only a few years ago. There have been plenty of events that should have created a spike. There was the drone attack on Saudi Arabia (it has only rebuilt about half of the damaged capacity). There is a civil war in Libya which has cut production and the threat of a war between the U.S. and Iran. Yet oil prices remain low. Is OPEC impotent? It has tried everything and still prices fall. The bottom line is that demand is down. Until that changes, there is not much producers can do.
Short Items of Interest—Global Economy
U.S. and U.K. Falling Out
When Prime Minister Boris Johnson won the election (or rather his party did), the assumption was there would soon be a lovefest between Trump and the British PM. They have been praising each other for years. That assumption is not playing out as Trump has been attacking Johnson for having the audacity to disagree with him. The latest issue revolves around Huawei and the U.K.'s decision to ignore Trump's demands to cut ties. The invective directed against Johnson infuriated the British and Johnson in particular. He has an immense ego of his own after all. This is making the possibility of a trade deal between the two nations more remote every day.
Britain Appoints Experienced Diplomat to U.S.
A few months ago, the U.K. Ambassador Kim Darroch to the U.S. was revealed to be an ardent critic of Trump through leaked cables and reports that asserted Trump was mentally unbalanced and impossible to work with. He was removed and there was speculation regarding who would replace him. Many thought Britain would choose somebody close to Trump to soothe him. The decision made was to appoint a very seasoned diplomat in Karen Pierce. She has been the U.K. representative to the UN and the Balkans. She is also very high profile in the U.S. media and reportedly close to Director of the U.S. Economic Council Lawrence Kudlow and others on the economic team.
NATO Losing Support in Europe
The fact that Trump doesn't like NATO has been obvious for the last several years. Now, the average European is not thrilled with it either. The sense in Europe is that NATO is there for the U.S. and that Europe gets dragged into conflicts in Afghanistan and the Middle East because of it. If the U.S. doesn't want it—why should the Europeans?
Political Turmoil in Germany
It is not an overstatement to declare that as Germany goes so goes the whole of the European Union. The German economy is clearly the economic engine for the region and the German political leadership has been crucial to every decision in the organization. The EU has been able to essentially let Angela Merkel take the lead for the better part of two decades, but she resigned as head of her party and indicated the end of her career as Chancellor. A year ago, she anointed a successor in Annegret Kramp-Karrenbauer (AKK). It was assumed the race to be the next Chancellor was over. AKK has just announced his resignation as the head of the Christian Democrats (CDU) and thus has left the race to become Chancellor. Suddenly, the leadership of Germany is up for grabs and nobody has a clear sense of who is now in the lead. AKK had been watching her approval ratings plummet as she made mistake after mistake and was unable to reverse the trend.
Analysis: The core issue for the CDU is what it plans to do to counter the rise of the Alternative for Germany (AfD). The group has grown from its early days as a right-wing fringe group to a party that has been defeating candidates from the CDU. The German voter has been growing more and more populist in its orientation and the AfD has been able to exploit that trend. The existing CDU leadership has been flailing back and forth between the centrist position adopted by Merkel and the far-right position of the AfD. The issues that matter most to Germans have shifted. The assessment of the CDU is that Kramp-Karrenbauer was not addressing the shift.
Two issues stand out in Germany now—immigration and the state of the economy. The immigration issue has been laid squarely in the lap of Merkel. It was her decision to accept Syrian refugees that triggered a massive influx of migrants from the Middle East and North Africa. The German population has become enraged enough to switch political allegiance. The more vexing issue for many has been the slowdown in the economy and the stagnation that has affected employment. There has been a sense of desperation and resentment as the voter blames German hostility towards the U.K. and its economic engagement with the southern states (Italy, Greece, Spain, etc.).
The race is now on to be the next leader of the CDU. At least three names keep popping up. There is the man that Kramp-Karrenbauer defeated to win the contest a couple of years ago—Friedrich Merz. He has been a critic of Merkel's for years and is far more conservative than Merkel. He has also indicated a willingness to ally with the AfD on many issues. His conservative rival will be Jens Spahn—the current health minister. He is more personally popular and campaigns better than Merz, but has fewer hard-core supporters and is not as well liked by the AfD leaders. Then there is Armin Laschet, the current head of Germany's largest and most populous state. He has a built-in base to work from. Some also suggest that Markus Soder, the head of the CDU's sister party—the Christian Social Union—could make a run at it if the others cancel each other out. However, he is not as well known outside Bavaria.
China's Economy Reeling from Virus Outbreak
The number of deaths from the coronavirus outbreak has now exceeded the number that died from the SARS outbreak in 2003-2004 and is expected to keep rising. As severe as this has been, the fatalities are nowhere near those that occur every year from the flu, but the impact of a new virus like this one is more complex. The flu outbreaks are "known" threats and there is a response that can be planned. There are vaccines and procedures. It is also known that certain populations are at the greatest risk (elderly, already sick and the very young). Thus far, there are no vaccines for this new virus and it has killed people who should have been healthy enough to fight it off. It is not even clear how the virus has been transmitted.
Analysis: The impact on China's economy has already been severe with people unable to get to work, travel restricted and production curtailed. The estimate is that growth may be reduced by as much as a percentage point. The Chinese GDP is already at a record low point. The Beijing leadership has all but vanished from public view as they look overwhelmed and ineffectual. The U.S. has been expecting China to start buying more from the U.S. as part of that "phase one" deal, but that is not happening in the midst of this crisis. The nations that sell to China and then buy from the U.S. are in increasing economic distress. That is contributing to further global slowdown. The virus has been spreading, which creates issues for anyone trying to do business in China. It has also led to fear over anyone from Asia. Suddenly, there is widespread rejection of anyone of Asian descent that catches a cold. There is real fear of panic all over the world if the outbreak becomes a pandemic. This fear has been amplified by the usual idiocy that appears in social media. Far-right outlets are feeding the paranoia with assertions this is a deliberate attack on the world by China.
A Look at Possible Futures
This week, there will be some data describing the current state of the economy, but the big news will be the reports that suggest some potential futures. The Trump budget is released today and there will be statements from the Fed chair as he testifies before Congress for two days. Both of these events will provoke a lot of analysis from economists and analysts who will be trying to determine what ultimately plays out and what this would mean for the economy. The president's budget is rarely intact by the time it clears Congress—it is more of a wish list and a declaration of intent—especially in an election year. The budget for the U.S. is not set by the White House but by Congress. There are obviously some extremely deep divides between the Democrats and Republicans on almost every single issue that would be affected by the budget. The expectation at this point is that nothing will be passed until the very last minute. That will be after the elections in November are over. The budget that has been submitted is purely political at this stage.
Analysis: Along with the budget, there will be statements regarding what the administration expects as far as the economy's future performance. That will be the subject of Fed Chairman Jerome Powell's testimony as well. There will be a lot of second guessing on Fed policy and positioning by those in Congress that will be leading the process, but along the way, there will be discussions regarding what the Fed thinks will happen in the coming year and into next.
By the end of the week, there will be some actual data to look at. Both of these releases should shed some light on the current state of the economy. On Thursday, the Consumer Price Index will be released. The forecast is for a rise of 0.2% in the last month as well as a 2.5% rise in the annual rate. If this plays out as expected, it will mean a very slight increase over the annual rate set in December when it was 2.3%. The most important point is there has been very little inflation and no movement in the factors that usually drive inflation—wages and commodities.
On Friday, there will be information regarding retail sales. The expectation is there will be some slowdown from the pace in December. This is to be expected given the holiday spending season has ended, so the question will be a matter of degree. Will the pace slow at a normal pace or was there a really abrupt fall? The expectation is that retail cooled, but didn't collapse altogether.
Another data point that will likely inform policy as the year progresses will come from the European Union. The expectation is that there was a wider trade deficit with Europe in the last several months. The U.S. has been buying more from the EU and selling less, and for the most obvious of reasons. The dollar has been stronger than the euro. That makes buying from Europe easier—especially with the limitations that have been placed on trade with China and other nations. At the same time, the economies in the EU have been weaker and have been spending less on imports in general. Given the Trump position on Europe, these numbers could trigger more calls for trade restrictions and tariffs directed at European sellers.
Trump Budget—So Far
The only way to look at the proposed budget from the White House is as a political statement as it will certainly not emerge from Congress intact. In many previous election years, these budgets have been careful not to upset key constituents that would be needed in the coming contest, but the Trump budget seems to be bucking that tradition to a degree. The Trump years have seen dramatic increases in both the deficit and the national debt. There has been pressure from fiscal conservatives to reduce both. The $4.8 trillion budget proposal calls for some deep cuts in social programs such as Medicare and Medicaid as well as many of the other "safety net" programs. There are plans to increase spending on the military and some of Trump's pet projects.
Analysis: The most politically controversial cuts are those proposed for Medicare and Medicaid. This will instantly become an electoral issue given the voting patterns of those that receive Medicare. The third rail of politics is generally seen to be Medicare and Social Security as these are crucial programs for the elderly and they have high voter turnouts.
Labor Shortage Acute in Small Companies
The shortage of workers has been a growing problem for the U.S. economy for several years and has affected sectors such as manufacturing, construction and transportation (among others). The companies that have been most impacted tend to be the small- and mid-sized as they lack the ability to recruit and retain the workers they need. It is a very simple issue. The workers with needed skills are in a good bargaining position and can demand (and get) higher wages and more benefits. The larger companies are in a position to grant these additional perks.
Analysis: The smaller companies end up being training centers. They hire those who do not have the needed skills; these employees learn on the job. By the time they are trained and able to contribute to the company, they are in a position to move on to a larger company that pays them more. The small companies then have to start over with another untrained and unskilled worker. In other nations, it is possible to require an employee to remain with the company that trained them for a specified period of time, but that is generally not allowed in the U.S.
My office is cluttered with collections of stuff. I know there are those experts out there who suggest that we all simplify our lives by owning one book, one pair of socks and one washcloth that we use as a towel. These people would fall into a dead faint if they saw my office space. There are floor-to-ceiling bookcases (with a library ladder) containing several thousand volumes. Every shelf has some collection of stuff—lighthouses, wolves, owls, dragons, Dr. Who paraphernalia, travel mementos and so on. I collect stuff, I admit it. The fact is that I enjoy all this stuff (until I have to dust it!). Every piece evokes a memory for me.
I remember who gave me these things and I remember where I purchased other items. It reminds me of that person who thought enough of me to buy the addition to my collection. I remember the country or city or place where I bought that item and looking at it takes me back there. Sometimes, I just look around the room and let my memories flow. It is indeed clutter, but I have no desire to live in what appears to be some sterile waiting room. I also have more than one pair of socks and a multitude of towels. I realize that at some point, one of my grandchildren or great grandchildren will have to deal with all this. This is not MY problem and after all—bonfires are still legal in the area where I live.
Coronavirus in China
The coronavirus remains a Chinese issue for the time being, but it is clearly spreading to other nations. The origins are in the Wuhan region, but it is not clear why this is the epicenter. It is a virus that was once thought to be confined to animals, but seems to have jumped from bats to snakes and then to people. That is a very off sequence that has not been seen before.