Strategic Global Intelligence Brief for January 24, 2020
Short Items of Interest—U.S. Economy
Improving Business Conditions
As 2019 came to an end, there was some difference of opinion as far as what to expect in the coming year. There have been some headwinds and concerns, but it was not clear whether these would really inhibit growth plans. It now appears that most of these concerns seem manageable and most business leaders seem to be anticipating growth at a modest pace. The trade wars have entered a truce state for now, although the threats are still there for a breakdown in the U.S.-China agreement. Consumers remain in a good mood and continue to spend on everything from housing to travel and entertainment.
Shift in Warehouse Demand
It seems that all good things must come to an end, which is always true for trends in the business community. A few years ago, the pundits were declaring demand for warehouse space had come to a shuddering halt. In the age of JIT, there was no longer a need to store anything. Then came the tsunami in Japan that utterly destroyed supply chains all over the world and now, everybody wanted inventory on hand. The regional distribution model provoked a major demand for these once shunned warehouses. The response was to build as fast as possible and sure enough, there is now an issue of overbuilding. In a year or so, there will be far more warehouse space than is needed—even in those areas that are seeing major demand for warehouse facilities devoted to the marijuana trade.
Retailers Close for Good
There are many businesses where bankruptcy is a step towards an eventual rebound or recovery, but that is rarely the case in the retail sector. When a retailer is forced into bankruptcy, they do not tend to recover. Fully, 45% of those that file for bankruptcy end up closed and liquidated as compared to around 15% of companies, in general. There are many reasons a business may opt for bankruptcy, but for the majority of the closed retailers, the issue is their market has been destroyed and there is little they can do to get it back. The most consistent challenge has been the rise of the online alternative for consumers, but there are also issues of changing tastes and demographics. The retailer aimed at the Boomer is in trouble and the retailer that can't keep pace with the rapid change in the Millennial market is also under threat.
Short Items of Interest—Global Economy
Links Between Brazil and India
Since the election of Jair Bolsonaro, there has been a sense of global isolation in Brazil. The most important factor in this sense of global ostracism has been his reaction to fires in the Amazon. His cavalier approach and denial of climate change has made him unpopular in Europe and in other parts of the world. One place where his popularity has been on the rise has been India, where Narendra Modi has been facing a similar sense of ostracism over his increasingly strident Hindu nationalism. The very fact they are unpopular in much of the world has started to create a coalition of sorts—the outsiders and nationalists. This would include Trump, Johnson, Erdogan, Salvini as well as Modi and Bolsonaro.
An End Around for the WTO
The Trump attempt to sideline the WTO has irritated the Europeans to no end. He has refused to appoint judges to the Appellate court, prohibiting any sort of dispute resolution. European states have forged a temporary coalition to carry out these dispute hearings without the U.S., including China, India and Brazil as well as Europe. This isolates the U.S. and does not bode well for future disputes.
Latest Virus Data
The latest word on the coronavirus indicates there are now two confirmed cases in the U.S. The estimate is this will likely spread faster than the SARS virus did a few years ago.
Which Nation is at Fault?
When the U.S. and China agreed to a "phase one" deal on trade, there were a few persistent optimists that thought this might finally signal that both Trump and Xi were ready to return to a pragmatic position, while abandoning all the inflammatory rhetoric. For most in the business and investment community, it has been very hard to understand the nature of this confrontation. The options on the table seemed to be 1) a negotiating ploy to extract concessions, 2) a position designed to appeal to a domestic political base and 3) a strategy designed to push a bigger agenda of Asian influence. The settlement seemed to fit any of these three scenarios to some degree. There have been concessions on both sides, although it isn't yet clear either nation will live up to their promises. The domestic rationale has been addressed as Trump has looked tough on China and Xi has looked tough on the U.S. The third rationale was based on getting Chinese cooperation on issues such as North Korea and threats against Taiwan, but so far, there has been minimal progress. As Trump continues his diatribes at the Davos meeting, there is a fourth rationale emerging as far as the relationship with China is concerned.
Analysis: In the simplest of terms, Trump despises the Chinese and it is increasingly obvious there is similar animosity towards Trump in China. The long and rambling speech at Davos outlined a position not backed up by reality and one that holds China responsible for almost every problem in the world economy over the past 20 years. Trump blasted everything from their trade practices to currency policy to their export support to the very nature of their economic system and he asserted it has only been the U.S. that has been able to stand up to them. China's response was just as pointed and angry, as all agree this exchange does not bode well for the future of "phase one," much less any future phase.
The challenge is there are elements of truth in both positions. China does, indeed, engage in predatory trade practices and always has. They have always manipulated their currency value to support exporting, supported their exporters with subsidies, and definitely have a command style economy, albeit with significant elements of a market economy as well. The problem is every other nation in the world, including the U.S., engages in the same activity to some degree. This is why institutions such as the WTO were created in the first place—a mechanism by which nations would be curtailed from using these tactics to promote their economy at the direct expense of the other. The bottom line is success for "phase one" is unlikely and many are betting the whole deal falls apart within weeks or months at best.
Union Influence Continues to Decline in US
The share of the workforce in the U.S. that is represented by a union has fallen again to another record low. It is now just over 10%, with 14.6 million union members out of a workforce of over 141 million. The reasons for the decline are varied, but one significant factor is there has been little job growth in areas such as manufacturing, construction and transportation—the sectors that have traditionally had the largest union membership. The service sector is the fastest growing part of the economy and unions are not common in these sectors. The only place where unions have seen gains have been in the public sector and, to some degree, in education and healthcare, but the gains have been limited.
Analysis: Another significant reason for the decline in union membership has been the spread of "right to work" regulations. A consistent issue for unions is that of the free rider. A worker in a company or institution that has a union will benefit from negotiations whether or not they are a member of the union. In many states, the workers are no longer required to join the union or pay dues, so the majority of the workers choose not to. The union may be the entity that convinced the employer to offer wage increases or added benefits that all employees will receive, but they will be supported by only a fraction of that workforce. On the other hand, requiring union membership as a condition of employment seems a violation of a worker's rights and essentially appears as an employment tax. This battle continues to rage.
Home Sales Are Up—The Problem is Supply
The rate of new and existing home sales has rebounded and 2020 looks to be a solid year for housing demand. The combination of low mortgage rates and high rates of employment continue to propel gains in the sector and these conditions should persist through the bulk of the year. There is just one significant inhibition and it will not be easy to address.
Analysis: There is a serious shortage of available homes—at least in the areas where they are needed. The lack of new homes is attributed to issues of labor shortage as well as the reluctance on the part of lenders to engage in any sort of speculative activity. The shortage of existing homes is more complex as there are plenty of homes on the market, but they are either in the wrong city or neighborhood. Or they are not competitive in terms of what is on offer to the prospective homeowner. There has been a wave of existing homes on the market as Boomers retire, but these are not the homes that either Millennial buyers or upgrading buyers want. Traditionally, these have appealed to the immigrant buyer, but that population has been radically reduced in the last few years.
Virus Outbreak Affects Markets
The coronavirus that has now spread to over a dozen nations has threatened an already slow pace of global growth. The worst of the outbreak is still in China where some 36 million people are thought to be at risk, but it has been popping up in a variety of nations as the virus is transmitted easily from person to person. The Chinese have already reported 26 deaths, and analysts expect that number to keep climbing as there are many that are currently in treatment and more that have yet to be identified. This is an especially hard time for China to enforce a travel ban as this is the Chinese New Year and the period when people are expected to return to their home villages and communities. This is a period of low productivity under normal circumstances due to all this travel, but this outbreak has added additional stress. The gloomiest of assessments have growth in China dipping by as much as half a percentage point due to the outbreak.
Analysis: China has had to come to grips with infections like this in the past—most notably the SARS epidemic of a few years ago. That was especially dangerous as the authorities tried to cover it up for months as it spread. This time the government has been reasonably forthcoming although there are still worries over whether the full story has been released. This has been a very bad couple of years for China where disease outbreaks are concerned. Last year the country was forced to destroy almost half of the hog population in order to halt the spread of swine flu, and there continues to be an issue of bird flu and the poultry population. The plain fact is that China is too crowded, and now that travel is so much easier, that has become a nationwide threat. In years past, these outbreaks would be contained to some degree by the isolation of these rural communities, but today there is very little of that isolation left. The entire nation is on the move this time of year, but even when there is not a New Year's migration underway, the Chinese population is active. There are more people in the air in China on a given day than in all of North America, and there are more people on trains than in the entire world.
The global economy has been affected already and this is just the start. The initial response has been to radically curtail travel to China, and that will affect export and import activity right away. The level of investment in China had been dwindling in the last few years due to the trade war, and this just adds to the concerns. Beyond this, there will be millions spent on dealing with the potential outbreak in other parts of the world. Travel in general will be affected as people will not want to risk exposure. The medical community will have to address the issue, and for the most, part there has been a lack of preparation for a virus that few are familiar with.
In the greater context, this is yet another reminder of how swiftly disease travels in the modern world. The outbreaks are common now, and there are still few mechanisms to handle them. The Chinese have started to board planes as they land to assess the health of passengers, and those that are running any sort of fever or are judged to be ill, are immediately quarantined. Nations—including the U.S.—are looking at screening incoming passengers similarly, and suddenly flying becomes even more of an ordeal than it already was. That changes people's behaviors very quickly, and much of that will have an economic impact.
Few Smiles in Davos
The whole idea behind the World Economic Forum was to promote cooperation between nations for the good of the entire global community. It was thought that bringing together a wide variety of political leaders, business leaders, thought leaders, academics and others would provide an opportunity to seek solutions to common problems. That mission has been challenged in recent years, and this year's iteration has been the most contentious yet. The attendees have spent the majority of their time swiping at one another and pontificating on whatever issue they choose. The business leaders that have been in attendance have appeared to be the most depressed and distressed as they had hoped to hear some conversation focused on what they perceive to be the key issues for the coming year and beyond.
Analysis: There have been a number of issues that stand out for the business community and many of them are specific to a given sector but some common themes emerge. At the top of the list is the ongoing trade war and growth of isolationism. The business community in general has embraced globalization fully—their consumers are global; production is global and their strategies are global. This now runs counter to the growing nationalism and populism that manifests in leaders such as Trump, Johnson, Modi, Bolsonaro and many others. The second major fear is connected to this trade issue, and that is the general attack on capitalism and the free market. It is part and parcel of the isolationist trend. The issue of climate change ranks number three as the business leaders have grown weary of the attempts to deny it has happened. They want to focus on what to do about it and how changes can be made that preserve growth.
This is not to say that my friends are old—but somehow, I have managed to age and thus they have as well. Their age is not the issue—I am referring to the fact we have been friends a long time, and that has some special meaning. I don't get an opportunity to see many of these people all that often these days as our paths have diverged in one way or the other. I had an opportunity to catch up with one of those long-time friends over dinner last night. Pat Lee is in many ways responsible for the life I have been leading the last decade as she was the woman who anointed me as the economist for the Fabricators and Manufacturers. That set me on a course of speaking and working in that capacity for many other organizations. She is now living the retired life in Florida after many years in Rockford, Illinois, and she gloats when I talk about snow and ice in KC.
The best part of a long friendship is that time stands still to a large degree. It was if we had seen each other only a few days ago as we talked about the things we always talk about—cats, politics, art and nature and just about everything else. Over the years, I met and became friends with her husband, and he was part of this little reunion as well. He and I share our love-hate relationship with home repair, and that was another topic. It may be another long while before we meet up again but it will be as if we never parted at all.