By Chris Kuehl, Ph.D., NACM Economist—
Short Items of Interest—U.S. Economy—
Revisions to the Oil Data
There is little doubt the oil world has been flipped by the development of oil resources in the U.S. Each month, there is more data that reinforces that observation. The Energy Information Agency has announced the U.S. will set a new record for oil production this year—13.2 million barrels per day. This is taking place at the same time that world demand for oil is falling and is expected to fall for the next few years. There is therefore no reason to expect a hike in oil prices anytime in the near-to-medium future. Many of the oil majors are now adjusting to a world where oil prices could fall to under $40 a barrel and stay there. This assessment can change if there is a crisis in the oil world, but that crisis would need to impact North Dakota and Texas to matter much.
Restless Labor Becomes Bigger Issue
The expanded economy and the very low rate of unemployment has been having an impact on the attitudes of the workforce. There have been more union actions and work stoppages in the past year than has been seen in more than a decade. The perception is companies are doing very well given the strength of the stock market and the workers have more confidence in their leverage as they know that finding replacements for them will not be easy. The demands made have been traditional ones at this point—higher wages and better benefits, but there has been more attention paid to working conditions and plans to take care of their future training and longevity.
Fed Worries More About Lack of Inflation
It has been the goal of the Fed to keep a lid on inflation. That remains the task for which it is best suited. The problem now is that the U.S. is not facing any real threat of inflation as long as wages stay down and commodity costs are under control. The Fed has been unable to get the inflation rate up to the desired 2% level. It now worries that it may not be able to do so. The U.S. is far from deflation, but it is a concern now for the first time in years. This slump in pricing makes it hard on producers to raise their prices; it ensures wages will not rise much either.
Short Items of Interest—Global Economy
NATO Considers Expanded Role in Iraq
Trump has been demanding that NATO forces get more engaged in the Middle East and especially in Iraq as he wants to reduce the U.S. engagement. Given his overt hostility to NATO, the leaders of the alliance are considering the request as a way to mollify the U.S. The problem with this strategy is support for NATO is crumbling in Europe already. Taking an action to please a very unpopular U.S. president is not going to improve the public's perception of the alliance. Several nations are considering withdrawal if the U.S. keeps making such demands.
Support for Macron All but Gone
When Emmanuel Macron became the president of France, there was a sense he was an unknown quantity and few people really understood his positions. It was enough that he was not Marine Le Pen and part of the far right. Since taking office he has tried to tackle major issues, but has never had solid support—even from his own party. The challenge last year was the imposition of a fuel tax that provoked the "yellow vest riots." This year, it has been his attempt to bring order to the chaotic French pension system. The strikes have crippled the economy and his popularity keeps falling.
Recovery in Greece?
Don't look now but Greece is no longer the basket case of Europe. It still has immense problems with its fiscal situation as well as economic problems such as very high unemployment, but the 10-year bond is now carrying a yield that is under 1%. That has not happened in a very long time. There is faith in the reform effort on the part of the investment community, which means Greece can borrow again without incurring major debt service issues.
Coronavirus Serious Threat to Global Economic Growth
It has become patently obvious that global growth has stalled over the last few years. The U.S. economy has been the only real bright spot, but growth of just over 2% is not exactly something to provoke dancing in the streets. The European economies are teetering on the edge of recession, Japan has been mired in deflation for over a decade and China has been wholly unable to get its growth numbers back to respectability. There have been many reasons cited for the slowdown—everything from trade and tariff wars to the uncertainty of emerging populism. These motivators for the slowdown are starting to pale in comparison to the outbreak of the coronavirus in China and Asia.
Analysis: There are three parts as far as the economic impact is concerned. The most immediate is the cost of treating the current victims of the disease. It has been reported that over a 1,000 people have died and another 40,000 are infected. These numbers could well be far lower than is really the case as China has not been very forthcoming with data. The estimates run to perhaps twice what has been reported. As serious as this death toll is, the flu killed 30,000 people last year. The additional cost of treating this outbreak stems from the fact that very little is known about this virus as opposed to what is known about the flu. It is not yet clear how it is transmitted. It is also not clear how to treat it and who is the most vulnerable. Very few of the victims have been children, which has been perplexing given that kids are almost half the population affected by the flu. The treatment options are largely unknown. The same can be said about efforts to control the spread.
The second economic issue is that the only way to deal with the virus has been to isolate people who are thought to have been exposed and to limit movement of populations thought to be at risk. This has resulted in a virtual shutdown of the Chinese industrial economy as people are not reporting to work and internal travel has been strictly curtailed. The estimate is there will be a decline of perhaps half a point in GDP growth in the first quarter. That could become a full point of decline by the end of the year. The Chinese economy has already suffered from the trade and tariff war with the U.S. as well as the general slowdown in the global community. It has been teetering right on the edge of recession. This is the kind of development that can push the country over the edge.
The third impact on the economy occurs if the disease spreads far beyond the borders of China. Obviously, it already has to a degree, but these cases have been somewhat isolated and confined to people who have been in China and the affected areas. When these outbreaks start to evolve in new regions, the disease will have reached pandemic status. Countries all over the world will be spending their energy and resources the way China is now. The fear at this point is that a spread of the virus will propel the entire global economy into near recession.
Pakistan Faces Locust Devastation
The locust infestation affecting much of South Asia as well as parts of Africa has been hitting Pakistan especially hard and threatens to devastate the entire farm sector. The richest agricultural areas have already been badly damaged. The country will need to import considerable amounts of food if it is to avoid famine. The biggest challenge is distributing the food that is produced as well as the food that will be imported. The impact of the infestation goes beyond the purely economic as the areas that have been affected are the same ones that have been experiencing political unrest.
Analysis: The situation has been made far worse by the arrival of rampant inflation. Much of this has been attributed to very poor decisions by government officials. There were supposed to be limits on the amount of wheat exported as the impact of the insect invasion became obvious, but the local officials were often highly corrupt and the ban was not enforced. The majority of the wheat produced was sold out of the country. That left severe shortages that triggered very sharp price hikes. The inflation has ripped through the region and most of the population has been unable to keep pace.
Prime Minister Imran Khan was seen as a leader who could unite the nation, but his party has been struggling to gain control. That has led to widespread disillusionment. It has not helped his cause that India's Prime Minister Narendra Modi has reverted to his past patterns of Hindu nationalism and has been forcing Khan to engage in more military activity than he had intended. The Kashmir region is once again a hotspot that threatens to explode at any moment.
Meaningful Deficit Reduction in the Future?
The latest budget plan from the White House strikes a very optimistic tone as far as the deficit and debt are concerned. The assertion is the federal deficit will be cut by half by 2024 and again by half in 2029. The assumptions that underlie this assessment have been attacked by the majority of economists as unrealistic at best and pure fantasy at worst. The reduction of the deficit has not been an obvious priority of the Trump administration since taking office. It has not been of importance to either the GOP members of Congress nor the Democrats. The patterns of the past four years have been based on borrowing more and more money to pay for the programs the political leadership desires. That has left the U.S. with a projected deficit of over $1 trillion by the end of this year as well as a national debt that is 110% of the GDP. The deficit has climbed every year since Trump took office despite promises to deal with the red ink.
Analysis: The plan, as outlined, depends on four major developments; all considered unlikely by the majority of analysts. The first and most controversial is the assumption the economy will grow at over 3% for the next three-to-five years—quarter after quarter. There is no independent assessment of the economy that optimistic—most have growth between 1.8% and 2.2%. This is not bad growth at all; it is the envy of many other industrial nations. It is not fast enough to deal with a deficit all by itself, however. The plan also assumes the tax cuts instituted in 2018 and earlier will not be renewed, but there is very little support in Congress for hiking taxes in the next few years. That means the Trump budget is assuming increased revenue of over $1.4 trillion. Third, the budget relies heavily on very deep cuts to the current federal budget, but to get to the proposed numbers will mean attacking Medicare, Medicaid and Social Security. This has been considered politically disastrous for decades. There is very little support in Congress for these deep cuts—even among Republicans.
The fourth assumption is that government outlays will be reduced in the next few years, but the demographic reality argues against this. The peak retirement years for the Boomer generation have now arrived. That will add substantially to Medicare and Social Security costs. If there is any sort of economic slowdown, the strain on the federal budget will increase.
Is There Anything That Might Work as Far as Deficit Reduction?
The critics of the Trump plan are coming from all political persuasions—fiscal conservatives who have been warning about these mounting debts for years and liberals who are protective of the social programs that always seem to be on the chopping block. Is there anything that could be done to move towards a reduced deficit and reduced debt? The answer is yes, but none of the options are especially pleasant and all would be challenging politically.
Analysis: At this stage, it is unrealistic to assume growth fast enough to address the issue as the U.S. is a mature economy that rarely maintains a fast pace of growth for more than a quarter or two. The rate of growth over the last 20 years has been right around 2.5% at best. That leaves spending cuts and tax hikes—significant ones at that. It is going to require very different strategies for each. Taxing income is a disincentive to growth. That will mean more reliance on user fees or sales taxes even though these are generally regressive. Many nations have turned to high taxes on luxury goods on the assumption the wealthy will keep buying these items even as they are taxed. Taxes would have to rise on products and services that people can't avoid—such as fuel. When it comes to spending cuts, the social safety net will be targeted, but there will have to be sharp reductions in defense spending as well. The spending done by government will have to orient toward growth—putting more money toward export development and workforce training. There is no magic bullet of any kind when it comes to a deficit and debt this large.
What Would Boost Workforce Development?
By this time, it has become apparent to everyone there is a crisis in terms of the labor force. There are too few people with the skills needed for the jobs that are on offer. Everyone wrings their hands and demands an emphasis on training, but that is where agreement stops. Some assert training is the responsibility of the government and others assert it should be the employer's duty. In truth, it will take both, but one major inhibition to training is rarely addressed.
Analysis: How does a person train or retrain when they are already dealing with the responsibilities of adulthood. We still have a training model based on assuming it is a young person unencumbered by responsibility and free to focus on their education, but what is needed is training for people already working. They can't just quit to learn a new skill or trade. They are also raising children and taking care of other family members plus paying mortgages and other debts.
In many other nations, there are systems in place to assist companies in training their people. The person remains employed, but is allowed to focus on the training and education while the company gets financial assistance to keep an unproductive employee on the books until they can start contributing again with their new skill. There are also systems that assist with issues of child care and elder care, so people can pursue training and remain employed.
Back on the Road
A quick glance at the upcoming speaking schedule indicates the slow period is about to end—March, April, May and June are conference months. This means there will be plenty of opportunity for me to comment (gripe and complain) about the vicissitudes of travel. In truth, the experiences are not all that bad and I count myself pretty fortunate to make a living doing what I do. I actually can't decide whether having all these opportunities to eavesdrop and interact with my fellow man is a good thing or bad. Probably a little of both.
There was the conversation between two women who apparently didn't know one another, but struck up a conversation as they were eating dinner. It was like listening to a tennis match as they lobbed statements designed to one up the other. There were exchanges on where they lived, the schools of their progeny, their vacation homes, their cars, their wardrobes and so on. It was actually getting sharp towards the end. Finally, one just demanded her check and left. Earlier in the day, I overheard three college students earnestly debating whether they should major in paranormal investigation—wondering if they could get a six-figure job with that. My head still hurts from that one. The previous day featured a lively discussion regarding the persistence of a pimple that was defying its "owner." The man and woman discussing this were loud and animated. We all ended up with a serious case of TMI. These conversations are the reason that noise canceling earphones were created.
Locust Attack in Pakistan
The locust attack has reached critical levels in parts of South Asia and the Middle East. The worst hit regions have been in Pakistan and India as well as the horn of Africa. These nations are generally the least equipped to handle the scourge. The prediction is famine will be a major threat this year and into next.