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Strategic Global Intelligence Brief for July 18, 2018

Short Items of Interest—U.S. Economy

Changing Political Labels
The old descriptions of both the Democrats and Republicans hardly hold true these days, and the transition has been underway for a long time. There have been many instances of social shifts along the way, but the more surprising may be the shifts that have taken place as far as business and economics are concerned. The issue of trade has been at the center of these shifts as the GOP has many more opponents of free trade than used to be the norm and the Democrats have many more supporters. It is a matter of globalists vs. nationalists with the conservative party moving further and further away from what the larger business community favors. You can also see the shift within the GOP as far as business in general is concerned with many politicians from the Republican side sounding like the anti-business left, while Democrats start to praise the efforts of that community.

Hawks Want Accelerated Pace With Rates
There is not that much that separates the doves from the hawks at the Fed these days. For the most part, everybody is on the same page and very supportive of the position taken by Chairman Jerome Powell. This is the time to change the focus of the Fed back to the issue it was designed to deal with in the first place—inflation. Even as most have supported the overall plan, there remain differences as far as pace is concerned. The hawks would like to see these higher rates arrive sooner than they are scheduled as they see inflation becoming an issue soon. They also think that next recession is more imminent than others believe. They want rates to go up while the economy is growing and can handle it. They also want to see rates high enough so they can be lowered again should the next recession require that move.

Housing Starts Down
Are we finally seeing those headwinds make a difference as far as housing is concerned? It is really too early to tell, but the big plunge in starts is enough to make people think. The drop was a precipitous 12.3% and permits were also down. This comes right on top of a robust month prior so this may not be as catastrophic as it appears—more of a correction to the month before. On the other hand, there continues to be higher home prices nationwide, higher mortgage costs and more trepidation among the prospective buyers.

Short Items of Interest—Global Economy

Trump's Walk Back Throws More Confusion
A day after Trump seemed to side with Russia's Vladimir Putin and rejected the work of the U.S. intelligence community, he attempted to walk back the remarks, but the statements rang hollow. He clearly said what he said and now he has changed his mind. What does this mean for Putin and Russia and for the U.S.? None of the conversation about meddling means much to anyone unless there are consequences. If and when Russia is sanctioned or otherwise punished for this infraction, it can be judged what the U.S. really thinks. In those old Cold War days (which we may still be in) the U.S. would have expelled a bunch of diplomats and Russia would expel some of ours, and maybe we would scotch a few business deals.

Does Everyone Meddle?
It all depends on one's definition of meddling. The U.S. is a powerful nation and every other nation on earth wants the U.S. to do some things and not do others. There are thousands of lobbyists working for foreign governments seeking to influence U.S. policy. There are thousands of people in the U.S. who have connections and sympathies with other nations and try to influence what the U.S. does. The mark of true meddling lies in whether it is legal or not. That is a challenge with which Russia has been accused. Is it actually illegal to spread disinformation on the internet? Yes, in some circumstances and no in others. The only real protection against this kind of meddling is having sense enough to know the difference between fact and biased opinion.

China Shuts Down Cooperation
A fifth of the deals that linked foreign schools to Chinese schools have been shut down by order of the Communist Party leadership.

Trade Deficit Will Not Decline Right Away
Those who thought there would be a swift and reliable response to all the tariffs and trade restrictions imposed by the Trump team do not understand the actions and behaviors of the business world. As the day of major trade barriers nears, the importers are racing against time. They anticipate the day that these needed imports will be more expensive or not available at all due to the tariffs. Therefore, they are rushing to acquire as much as they can so they will be ready to meet consumer demand. The rate of containerized freight was up by over 8% last month and is on target to do the same in the next month.

There has been a similar reaction from the exporters as they try beat the potential retaliatory tariffs that have been threatened if the U.S. goes ahead with its aggressive stance. Right now, warehouse space near the ports is at a premium as everybody tries to get around the potential barriers.

Analysis: This may well be the irony of the trade war that Trump has picked with the rest of the world. It may make the problem much more intense—at least in the short term. If the decision is then reversed, there will have been no progress at all, but it will strain the business community as it will have to deal with the inventory overhang created by all this hedging behavior. This is also likely to be the point that alternatives to the U.S. take center stage. It will be hard for the U.S. to recapture these markets once they have shifted to another country. The fact is that many sectors of the U.S. economy can't really thrive without the input of cheaper imports. That could cause a loss of market share that would be very hard to recapture. It is also a little embarrassing that the U.S. is backtracking on trade issues just as the rest of the world expands.

Economic Expectations for 2019
When looking ahead to 2019, there are really three sets of questions to ponder. The first is how well the goals of the new administration were met in 2018. The second is the question of how well the economy really did in 2018. Third, there is the question of how well the economy of 2019 will do and, as an ancillary question, how much of that success (or failure) will be rooted in what happened this year.

There were at least five major goals outlined in the campaign that became policy initiatives when the Trump team took power. There was going to be a total rewrite of the Affordable Care Act, there was going to be a complete rewrite of the tax system, most of the major trade pacts were either going to be abandoned or significantly changed, there was going to be a wholesale movement away from regulation and bureaucracy that had been deemed anti-business and there would be a $1 trillion dollar spend on infrastructure. Only one of these has come to fruition in close to the form anticipated as there were major changes in the tax system. Instead, the fight over trade and tariffs has dominated the last few months.

In the beginning, there was the usual enthusiasm that comes with a new team. It was called the "Trump bump."There was response in the stock market as well as in the overall economy. In truth, much of the improvement in the job market and the overall growth rates had started during the previous year as the economic drivers rarely mesh with the political calendar.

The excitement had mostly worn off by the middle of summer. As the tax bill started its climb, there was a great deal of friction. The end result was not quite what had been advocated by most in the GOP a year or so earlier. Against all odds, the economy started to boom. The second quarter numbers for 2018 are expected to be quite robust and perhaps as high as 4.5%. There were two prime reasons for that growth and they continue to be the motivators going forward. The first and probably the most important was the recovery of the U.S. export market. The second factor leading to growth in 2017 was the emergence of the "old" U.S. consumer—the one that used their credit card loosely, the one with the confidence to make long-term purchases and the one willing to do some less than frugal spending. That didn't really help much in the first quarter of this year and growth fell to just 2%.

The expectation has been that the tax changes will stimulate growth dramatically, but few economists are really expecting it to be that dramatic simply because the economy is pretty healthy now with 4% joblessness and growth over three of the last four quarters. This would have been a much effective piece of legislation two or three years ago when the economy still needed stimulus. Today, the fear is that a big surge would stimulate too much and create an overheating situation.

If the economy does start to heat up, there will be additional pressure on the Fed to hike rates. They have already indicated that there will be three raises (and possibly four) in the coming year, but right now, each of these hikes are slated to be a quarter point. That leaves the rates at around 3% by the end of 2018. If the economy overheats, those quarter-point hikes become half or three-quarter point hikes. The end of the year could see rate of 4% or more.

Unemployment is not expected to change appreciably next year. It is at 4% now and very close to the low levels set prior to the recession. There is nothing to suggest that this will change much. Wages have not gone up—they usually do when there is less labor available. This time, the employers are not finding the people they want to hire and they are not paying them extra.

The issues of trade will likely reach a head this year. NAFTA negotiations have been acrimonious and are expected to remain so. The Mexican elections brought a left-leaning regime to power led by AMLO (Andrés Manuel López Obrador) and the talks could play a role. The U.S. will also try to push China harder, but as long as the U.S. needs the Chinese to keep North Korea from starting World War III, there is a limit to how hard they can be pushed. The trade war has started in earnest, but it remains unclear just what the U.S. wants from its trade partners.

Analysis: By and large the expectation for 2019 is positive, but there was more confidence in that assessment at the start of this year than for the end. As we have been harping on for months, there are the seeds of a reversal planted in any expansion. Growth will almost inevitably lead to some inflation and the expansion of hiring will at some point lead to a job shortage (along with wage inflation). The current situation is further complicated by the policies set forth under President Trump that have compromised the export sector of the U.S. economy. These all conspire to make the end of this year problematic and certainly set up a tougher economic growth situation in 2019 and beyond.

Training Is Key but How?
The argument has gotten very familiar by now—to the point of sounding like a broken record. There is scarcely an analyst of any economic sector in the U.S. that doesn't bring up the challenge of finding appropriate workers. What was once an issue for the manufacturing, construction or transportation sector has now become an issue for sectors as diverse as health care and agriculture. The pat answer is nearly always the same. We need to train people for those jobs and we need enough of these new trainees to form a reliable pipeline of people with the needed skills. Simple enough isn't it? Just order the schools to do a better job, start some new training programs at the community college, get high school and middle school age kids to take an interest and so on. You have heard the same suggestions and arguments for many years. Why is training so hard to execute as a solution to the chronic labor shortage?

Analysis: There are many barriers—some of them minor and others far more significant. Perhaps the biggest inhibition is that current society allows time for education and training only when people are very young. The training and education of the workforce is expected to take place in high school and immediately afterwards in college or a vocational program. By the time a person reaches their mid-20s, they are expected to be settled in and focused on the career they had been training for. The person who seeks training and education later in life will see little that is geared to them although that has started to change dramatically. It remains a major barrier to those who have obligations to their family. They can't very well quit work to start a training program as they might have when they were 20. Programs have to be geared to the older student with mortgages and other bills to pay.

Then there is the challenge of selecting the training that would be of most benefit. All too often a program starts up as there is a demand for 100 welders in the area, but soon enough there are 500 people in the program. Only those who emerge first have a real chance of getting that coveted new job. It is very difficult to accurately anticipate every business need in advance. There will inevitably be those who get the new training credentials and still can't land that new position.

There is a lot to recommend a system that pays people to get that new training, but it also puts an enormous burden on the institution to find people jobs or those that fund the training will become ever more frustrated and impatient. Another challenge is that finding people willing to teach these skills can be tough. They have to be willing to forgo the higher salaries that could be offered them in the private sector. This demand issue affects the students as well, as business begins to recruit them well before they finish their training and get their degrees.

Many wonder why it is the responsibility of the schools and students and the family to get trained in the first place. Why don't companies do the training they want themselves? In fact, most do to one degree or another, but they would like their new employees to be at least part way down the road. What happens if the new hire turns out to be really bad at this job or decides they really do not like the work? All the investment made in this worker has gone to waste and the company has to start over. Having a pipeline of people that at least know the basics makes a major difference.

The litany of issues goes on and on—family obligations, being in the wrong place at the wrong time, existing debts that make getting into further debt prohibitive and so on. There will be issues about aptitude as well and it doesn't pay to ignore these. Not everybody is educable and not everybody has the same set of skills and aptitude. Some will be left behind by a world that is changing very quickly. In the final analysis, there is no single solution to the dilemma. There will have to be training opportunities as diverse as the population that will need to avail itself of these opportunities

Affecting What One Can
It would seem that there is more political passion these days although that may be simply be a case of noticing something because it gets attention from the media. I seem to run across a lot of people who still don't much care what is going on with their politics. Still, there are many who do. Some are passionate in defense of President Trump and others are fed up. Most really save their passion for the issues that really affect them and judge their leaders by whether they seem to share their concern. Many may now wonder what they can do to make something from that passion. It is really not all that hard—not in a nation like this one.

The fact is that we choose our leaders by the vote. I know the system is far from perfect. That we really don't seem to see the choices we would prefer on the ballot, but we have the right to choose anyway. More importantly, we get to choose over and over again so that office holders can't become too complacent unless we let them. The bottom line is that we have to put our money where our mouth is. If you have an issue with someone, vote against them. If you support what they say, then vote for them. In between these opportunities, realize that you are allowed and encouraged to communicate with them and take the time to write them or call or visit. They don't know what you like and dislike or what concerns you unless you communicate it. The future really is in our collective hands. If it doesn't work out the way we like, we have to ask ourselves what we did to make it any different.

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Comments 1

Guest - Fernando on Thursday, 30 August 2018 14:11

Thanks for this is very good

Thanks for this is very good :o
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