Short Items of Interest—U.S. Economy
Changes in Business Motivation
For decades, the motivation for business was fairly simple. The ideal location for an operation was one where costs would be minimized. This meant locating where wage rates would be lower, taxes would be minimal and raw materials would be accessible and cheap. If there was cheap energy and transportation and other encouragements that was a bonus. In the last several years, the motivations have started to shift and new priorities have emerged. The demand now is for a ready population of educated workers, access to capital, access to the latest in technology and close proximity to the target consumer. This means that urban areas are highly sought after while rural and less developed areas are less desirable. That has affected global expansion to developing nations, but it has also slowed investment into the rural areas of the U.S.
Reactions to Labor Shortages
The chronic shortage of skilled labor has been a major issue for the better part of the last decade. There have been a number of reactions and strategies rolled out to deal with it. Most of these are long term, however. It will take a while to shift the priorities of the education system, so in the meantime, there have been experiments with loosening rules that were created when the labor market was not nearly this tight. Rules that required people to get certification in each state were designed to protect the residents of that state, but now there are many states that have elected to waive these requirements so that people can come in from other locations. Thus far, these waivers have been designed as temporary responses.
Inflation Still Subdued
Later this week, the newest inflation data will be released; few are expecting much of significance to change. The headline rate will likely move very little and core will shift only slightly. The primary motivators for inflation have traditionally been wages and commodities. There has been almost no movement on either front. This will further convince the Fed that rates can be left where they are and maybe even that a rate cut would not boost inflation—at least in the short term.
Short Items of Interest—Global Economy
Massive Protests in Hong Kong
Several weeks ago, the pro-Chinese leadership in Hong Kong rammed a change through the local legislature that would allow the People's Republic of China (PRC) to force the extradition of people in Hong Kong that fall afoul of laws that exist only in the PRC. This will mean that political protestors can and will be arrested. The reports suggest that a million or more people hit the streets to object, but it is not likely to discourage the Chinese from going forward with this change. Hong Kong was supposed to be semi-autonomous, but that status has been steadily eroded over the years.
When longtime dictator Omar al-Bashir was forced from power by a mass uprising in Sudan, there was a moment of hope even as the new leadership was made up of the military. It indicated it was only staying in power until a civilian government was named, but after several weeks, it has become apparent that the junta is not going anywhere. The protests are now under attack from a violent military group called the Rapid Support Forces. They have been killing protestors and arresting others to the point that a civil war is considered imminent.
Hardliners in India Despise Mahatma Gandhi
To the rest of the world Mahatma Gandhi is in the pantheon of great world leaders such as Nelson Mandela and Mustafa Gamal Ataturk. To Hindu nationalists, Gandhi is the embodiment of betrayal and evil. His assassin is now revered in some of the more radical segments of the Hindu community. The position justifies a thorough hatred of Muslims in India and a desire to expel all of them while building a pure Hindu society.
Where Does U.S.-Mexico Relationship Go From Here?
To note that the ties between the U.S. and Mexico are strained at the moment would be the understatement of the year. There has always been an awkward relationship given the uneven balance between these economies, but in past years, there seemed a willingness to work together—especially in the years when the pro-business PAN party held the presidency in Mexico. Vicente Fox and Felipe Calderon were relatively close to their U.S. counterparts—Bill Clinton, George Bush, Jr. and Barack Obama. The regime of Enrique Pena Nieto was not quite as cooperative but made efforts. The election of Andres Manuel Lopez Obrador brought a left-leaning government to power at the same time that Trump and his populism won in the U.S. and relations have swiftly deteriorated.
Analysis: The U.S. needs significant assistance from Mexico if there is to be a solution to illegal immigration and Mexico needs the U.S. to help deal with the drug gangs. Both nations need the other from an economic point of view. Right now, there is almost no cooperation given the enmity that has developed. The Mexican people blame the U.S. for the flood of Central American refugees as well as for the drug wars. The U.S. blames Mexico for that immigration and the drugs. In truth, there is plenty of blame to spread around. In past years, however, there were efforts to coordinate policy.
The critical change that has taken place in the last 10 to 20 years has been Mexico's development as a manufacturing platform. Many of the companies that supply the U.S. from Mexico were once in China and other parts of Asia. The U.S. lost manufacturing to Mexico in the 1980s and 1990s, but since then, the countries losing that capacity have been elsewhere. Mexico is now well integrated into the U.S. system—providing an opportunity to cooperate if politics will allow.
G-20 Concerns Build
The G-20 is a semi-formal organization that is notorious for its diversity of opinion on most major issues. After all, the 20 members are from all over the world and sport a very wide variety of economic and political systems. It is made up of the 20-largest economies in the world, accounting for 90% of global GDP and 80% of global trade. Members include Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, United Kingdom, United States and the European Union as a whole. The group meetings vary as far as attendance, but regularly feature involvement by finance ministers and central bankers. The heads of the 20 nations also attend from time to time. The next set of meetings will be taking place at the end of this month. In most cases, the agenda ends up looking like a litany of complaints aimed at various members. This time the agenda is unified and most of the ire is directed at the U.S.
Analysis: Trade is the topic du jour. Global growth has been anemic over the last several months. For some of these nations, the slump has been measured in years. The reasons for this slowdown are complex to a degree, but there has been one factor that has attracted the most attention—U.S. trade policy. Nearly every nation in the G-20 group has been subject to some kind of U.S. trade restriction or tariff under the Trump administration. This has slowed growth dramatically for some and has affected all of the member nations to one degree or another.
The top of this list of concerns has been the ongoing rift between the two-largest economies in the world. It is not much of an exaggeration to note that the U.S. and China are the real engines of global growth as the rest of the world is either selling to or buying from these two. The fact that some kind of deal has seemed tantalizingly close over the last several months has just added to the angst. The perception is that neither nation has been negotiating on the basis of economics. It would seem obvious that both nations need the economic engagement of the other and that should be the basis of an agreement. The U.S. needs the Chinese output and the Chinese certainly need the consumers in the U.S. Politics has played a more prominent role than in the past as both Presidents Trump and Xi have domestic constituents that must be mollified and are hostile to the idea of giving ground to their rival.
The old adage seems highly appropriate when discussing the reaction of the G-20: "When elephants fight, it is the mice that suffer." The slowdown in global trade has been profound. It appears there will be further revisions downward as the year progresses. China has been affected by the trade war and has seen growth slow to around 6%—near recession in Chinese terms. The U.S. had been somewhat immune to all this or so it seemed. Now, there is mounting evidence that exports are dropping quickly. That has affected the manufacturing sector as well as agriculture. The expectation is the U.S. economy will be lucky to grow at 2% for the rest of the year. That pace does little for the world as a whole.
EU Sends Sharp Message to U.K.
The collapse of the May government has seemingly set the course for Brexit and Europe is warning British business that it will be on its own. The projection at the moment is that Boris Johnson will emerge as the next Tory leader and thus the next prime minister. The hardline position on Brexit is in the ascendance as far as the Conservatives are concerned. That has hardened the European attitude in response. A year ago, there seemed some willingness to ease the transition for the U.K. business community as well as for the large expatriate community of Britons in Europe. That willingness has vanished and the EU has bluntly stated that no concessions of any kind will be made to Britain. The break will be total and complete.
Analysis: Until the resignation of PM Theresa May, there was an assumption that some kind of deal would be worked out as it made no sense from a business perspective to cut ties this thoroughly. Now it is assumed that leaders in the U.K. are willing to risk economic crisis over the issue and Europe has decided to leave the British to their own devices. There is still time to work something out as the deadline was extended until the end of October, but the European position is that it has done all it intends to. If the talks are to start up again, it will be up to the new British government. This will not be in place until mid-summer. Right now, the positions taken are hardline ones. It may be that it will take an ardent Brexit supporter to work out a compromise, but on the other hand, it will be very hard for someone like Boris Johnson to change positions after all the rhetoric that has gone before.
National Security, Economic Leveler or Political Football?
There are many reasons nations choose to impose tariffs on imported goods. Even those that generally favor free trade acknowledge that tariffs placed to protect national security can be legitimate. There has always been some support for tariffs designed to counter unfair trading practices. Japan has long placed high tariffs on imported rice as it does not want to be vulnerable from a food supply point of view. Their rice farmers can't compete against the likes of China or even the U.S. for that matter. No nation wants to be dependent on another for critical military supplies either. It is also obvious that some nations play less than fair when it comes to trade—subsidizing certain industries, exploiting their workforce to keep prices low, deliberately selling at prices less than production cost in order to grab market share. These rationales for imposing a tariff make a certain amount of sense, but the impact on trade can still be disruptive. There is another rationale that has become far more common of late and is not seen as anything but disruptive to global business. These are tariffs imposed for strictly political purposes—as leverage in some other conflict. The proposed 5% to 25% tariff on all goods coming from Mexico to the U.S. was just such an overtly political tariff.
Analysis: After a week of, "Will he, or won't he?" the decision was made not to go ahead with the tariffs that were supposed to be placed on everything that Mexico supplies to the U.S. The "agreement" was in every respect a farce. The deal was struck several weeks ago—this was acknowledged by both the Mexican and U.S. negotiators. The Mexican government had already agreed to the demands for more border security and has actually deployed the additional police and national guard troops on their southern border. Assertions made that indicated additional buying by Mexico are false as there has been no such agreement. The entire process has been described as "political theater" designed to appeal to those among Trump supporters who have been demanding a tougher stance regarding immigration.
There is no doubt that illegal immigration from Central America has been at a crisis level for months. The numbers of illegal migrants have been staggering and unprecedented. The U.S. is not in a position to accommodate the influx and Mexico certainly is not. The current solution is clearly not working as there is simply no way to stop these people from crossing into Mexico and then heading towards the U.S. Millions of dollars have been spent already on manpower and barriers, but this has not stemmed the tide. The U.S. is facing the same issue that has plagued the European Union as tens of thousands of refugees have flooded into nations like Greece, Italy and Spain as they seek escape from the civil war and violence in their home countries. The Europeans tried to stop the migrants as they reached their borders, but this proved as ineffective as it has in the U.S. The effort now focuses on getting people to stay in their own nations. This has included assisting the local authorities. It has also meant financing refugee camps in these nations. In some cases, it has meant putting pressure on local governments so they stop attacking their own people.
The bottom line is that U.S. business was placed in limbo for the better part of a month wondering if this set of tariffs would be imposed. They had no choice but to assume they would. That necessitated the development of contingency plans. Companies loaded up on inventory in case they would be facing higher prices. Now, they have to worry about selling it. The disruption was wholly unnecessary and worse yet, it makes the next tariff threat even less effective as most will just assume that it is another feint and will not be followed through. This has been the case with the steel and aluminum tariffs, the tariffs on European cars and car parts, Mexican goods, Canadian goods, Japanese goods and even several categories of Chinese goods. The issues that prompted the tariff threats are very real and important and the Trump administration needs to deal with them, but this tactic has proved ineffective. It has clearly caused more damage than is justified by the outcomes.
Two Kinds of People in the World
I am sure there are really more, but one of the divisions is between those that have soft spots in their hearts for animals and those that don't. Over the last week or so, there have been stories that have both brightened my day and those that made my blood boil. I will highlight a few that restored my faith in humanity.
The floods ravaging the middle of the country have taken their toll on people, but animals have been caught in this disaster as well. One story was of a guy who saw a fawn trapped on a piece of land that was about ready to be inundated. He rescued the terrified animal and got it to a shelter. He then went on to rescue a guy's dog which had been left behind when the owner was forced to evacuate. He expected to be able to go back and get his animal, but the water rose too fast. A crew repairing a power line found a raccoon family clinging to the top of the pole and managed to get them down to safety—no mean feat with racoons! Another guy woke up in his suburban neighborhood to find 10 cows in his back yard—fleeing the floods. He managed to herd them into the fenced area and set about finding their owner. Cats and dogs have been plucked from rivers and streams that became torrents and wild animals have been likewise rescued—seemingly aware that this human was trying to help them. Each time there is a disaster, it is heartening to note that people are willing to help these creatures just as they are willing to help the people caught in these crisis situations.
How Brexit Will Affect U.K. Growth
The doomsday scenario looks more likely by the day. For the bulk of the year, there as an assumption that somehow the deal that Prime Minister Theresa May struck with the EU would prevail. Although even that one would have meant a decline in the British economy. The most optimistic assessment has been that growth would stumble by around 2.5% over the next decade or so. If the hardline position prevails, the decline would be near catastrophic—close to 10%. This would plummet the U.K. to the level of Portugal or Greece and perhaps lower.