Strategic Global Intelligence Brief for June 6, 2018

Short Items of Interest—U.S. Economy
Labor Shortages Starting to Pinch One of the sectors fighting the labor shortage situation the longest has been transportation. Today, there are many sectors chronically short of the workers needed—everything from construction to manufacturing to even health care, but it was the transportation sector that was in trouble first. There has been a growing deficit in terms of available truck drivers—some estimates are as high as 80,000. There are not enough engineers for trains and the looming pilot shortage is going to wreak havoc on airlines soon. There is now a serious backlog developing across the supply chain as there is no way to move product. These are not easy jobs and they are not jobs that can be done forever. The average age of a long haul driver is now in the 60s. That means many more will be retiring soon.
Social Security Will Have to Access Reserves This will become more common in the years to come as the Boomer generation retires en masse. The last time the Social Security system had to dip into its reserves to pay benefits was in 1982, but we are reaching a time that will see fewer people paying in and more people taking out. The U.S. has not really come to grips with the fragility of this system, and given the politics involved, it is unlikely it ever will. The plain fact is that people often retire too early. The system made sense when people lived only a few years past retirement, but now people can expect to live 20 to 30 years after they stop working.
Rapid Deterioration of U.S.-Mexican Relations Only a few months ago, there were those who asserted that somehow the NAFTA impasse would be breached and the U.S. would find a way to work effectively with Mexico. That optimism is gone. NAFTA looks to be abandoned, the U.S. is imposing tariffs on Mexican goods and Mexico is retaliating with tariffs of its own. The immigration fight has become nasty and has infuriated Mexican leaders. In just a few weeks, the new president of Mexico will probably be Andrés Manuel López Obrador (AMLO). That would bring a left-leaning leader to power—one that dislikes President Trump as intensely as Trump dislikes him. The relationship between the U.S. and Mexico is headed for some very dangerous places.
Short Items of Interest—Global Economy
Tariff Attacks on U.S. The rest of the world has been warning the U.S. that if it continued to press ahead with its aggressive "America First" approach, there would be retaliation. That has now gotten underway. There are generally two motivations for imposing a tariff or some other trade restriction. The most common is to somehow protect a domestic industry from foreign competition. It can be argued that this has been the rationale the U.S. has used to impose these metal tariffs. The second motivation is to punish another nation for what are considered unfair trade practices. This is what the U.S. is confronting as the states that are imposing tariffs are aiming at products that will hurt the U.S. most. The targets are those things the U.S. sells most successfully. Estimates hold that exports could fall by over a third if all these are imposed.
Mexican Peso Drops to 16-Month Low The news has not been kind to Mexico—the peso is taking hit after hit. It has now dropped to a 16-month low and shows no signs of slowing. The NAFTA fight, the imminent election of AMLO and the ongoing immigration crisis are affecting the value of the currency. The lower it goes, the more pressure will be applied to people in Mexico—triggering even more attempts to get into the U.S.
European Economic Issues Transitory? There has been some real concern regarding the state of the European economy this year. It has started to affect global markets beyond those in Europe. It is not that Europe has tumbled off a cliff or even that the numbers are all that awful. It is more a matter of pace and expectations. It had been assumed that the growth that was showing up last year would continue into this year. Many were expecting far more impressive numbers for the first half of the year. In truth, the U.S. has been experiencing the same kind of letdown as growth has been under 2.5% after cresting over 3% in the second and third quarters of last year. The European Central Bank (ECB) has been watching all this carefully as it has been signaling its willingness to start backing away from its various stimulus efforts and shifting its attention to inflation. If this growth dip was to continue and even get worse, the ECB would likely have to start thinking about its policy intent again. For those who are seeking clues as to potential ECB activity, there has been a rash of speeches and statements from members of the Board of Governors providing some clues.
Analysis: Over the last few months, there have been two schools of thought regarding the state of the eurozone economy. There are those who assert that the growth manifested last year was not real—more a reaction to what was taking place in the U.S. and Asia than anything motivated by internal progress in Europe. They assert the current slowdown is just returning to norm and expectations for a recovery should be tempered. The other approach holds that the slowdown is the transitory element as they point to some problems that may have dragged the economy down for now, but are likely to be resolved sooner than later. It all seems to come down to expectations.
The pessimists point to the emerging trade war between the U.S. and Europe and the generally bad relationship Europe now has with the U.S. A month or so ago, it was asserted that French President Emmanuel Macron had a "special" relationship with President Trump, but that was before the state visit by Macron. He has been unable to get Trump to budge on any issue. The hope had been that Macron would charm Trump into staying connected to the Iran nuclear deal, extend exemptions on steel and aluminum tariffs on a permanent basis and even start real conversations about a new trade agreement with Europe. None of that happened and Macron went home completely empty handed. This cost him in terms of his domestic standing in France. He is now quite hostile to Trump, joining Chancellor Angela Merkel who has disliked him from the moment she met him. Both sides are getting highly emotional over these trade issues. That means decisions will be made that seriously damage business interests and the overall economy of Europe and the U.S.
The optimists counter with the latest set of readings on inflation, consumer behavior and industrial activity. Not that all of these numbers are really good, but they are better than some have assumed. There has been quite a bit to boost inflation, which has been enough to trigger the Germans, Dutch and others to express concern. Consumer prices rose by 1.9% in May after a 1.2% reading in April. That is a significant jump, but it has been pointed out that much of this has been due to hikes in the costs of energy. More importantly, there has been a boost in wages by 1.9% in the first quarter as compared to a 1.2% increase in the last quarter of 2017. Much of this has been attributed to the gains that unions have made in Germany and some of the other northern states. The majority of the industrial workforce is unionized in much of Europe. An agreement on wages will reverberate through the region pretty quickly.
SWIFT Tries to Resist Weaponizing The Society for Worldwide Interbank Financial Telecommunication is better known as the SWIFT system. Despite the hint that it is an organization, it is a private company—one that is deeply concerned about the implications of the U.S. withdrawal from the Iran nuclear deal and the decision to impose sanctions on Iran and anybody who does business with them. The European nations are furious with the U.S. over this broken agreement and have vowed to continue dealing with Iran. That puts SWIFT in a very dangerous position. If it continues to facilitate cross-border payments that involve Iran, it will be violating the U.S. sanction policy and could be subject to asset freezes, travel restrictions and even its ability to function in the U.S. If it gives in to U.S. demands, it will be violating EU rules and requirements and could be fined and subject to punishment in Europe.
Analysis: It has always been the aim of SWIFT to be the neutral party—simply a tool that can be used to facilitate payments in a digital world. It is now being forced to take sides as the U.S. and Europe seek to "weaponize" the process. There is little hope that SWIFT can find middle ground as the U.S. and Europe come ever closer to outright hostility toward one another.
How Is It That There Are More Openings than Unemployed People? This is the kind of observation that can trigger some fierce and emotional debates over people's attitudes and behaviors. There is the assertion that there are too many lazy people living on the government dole. They should be forced to go out that and get those jobs. Or there are those lazy and pampered teens who are sitting in their basements playing video games instead of taking that summer job. Then, there are the assertions that too many of these jobs pay so miserably that nobody would be able to live on that income and therefore the job is shunned. There may indeed be people who would fit some of these categories or descriptions, but the reality is that there are some very pressing reasons this situation exists. Solving the problem will not be easy.
Analysis: This issue has been building for several years and has only now managed to reach its crescendo. There are four major factors that have been building for the last 10 years and longer. They are not all factors in all parts of the country and they tend to impact people at different ages.
The most common issue is being in the wrong place at the wrong time. There are communities that have seen severe economic distress—many people are subsequently thrown out of work by plant closures or shifts in economic demand. This could be the result of a company moving operations overseas or to another part of the U.S. or it could be replacing people with machines and technology. It could be due to bigger shifts—department stores losing market share to online sellers, coal being replaced by natural gas for utility use. That puts coal miners out of work and it puts store employees out of work as well. In an ideal world, these workers would simply migrate to the parts of the country where jobs are being offered. The problem is that many people are not in a position to make that move. The inhibitions are many and complicated. They may not be able to sell their home if they are living in a depressed community. The issue may be that one member of the family is unemployed, but the spouse has a good job and they can't afford to risk losing it. There are families that must take care of elderly parents. Then, there are the families that are divided such that moving would mean losing custody or visiting rights. The ease of movement the U.S. once enjoyed has largely evaporated.
The second most common rationale is lack of an appropriate skill. The vast majority of the available jobs have been on offer for many months and in some cases for years. The employer is seeking a specific set of skills and abilities and will not offer these jobs to those that lack the training. This crisis has been building for years as there has been a chronic shortage of trained people in sectors as diverse as manufacturing, construction, transportation and even health care. The schools have not kept pace with the changing demands of the workforce and too few people are exploring these avocations and careers. The worst case is the person who has been doing a specific job for decades and suddenly that job is done by robots or done away with altogether. These are people who are often in their 40s, 50s and 60s. Getting new skills can be a very difficult undertaking.
A third issue is quality of the job. Many of the jobs that are going unclaimed are low paid and temporary. The workers looking for a career that enables them to raise a family simply can't take a job that pays them less than they need to handle their expenses. It is estimated that almost 20% of the available jobs are low paid and promise no advancement. In the last few years, there has been intense pressure on the migrant worker; the numbers of legal and illegal immigrants have declined dramatically. Now these jobs are being listed by employers that would have simply hired these migrant workers in the past. These are jobs that few Americans want anything to do with, such as farm labor, food service or maintenance.
A fourth issue involves the quite deliberate decision on the part of a person to stay out of the workforce for a certain period. This is often somebody who has decided to attend school rather than take a specific offered job. It may also be someone who looks at what they would be paid and what child care costs. They decide it makes more sense to not work and take care of one's own children or elderly relatives. These are just a few of those financially motivated rationales.
Is the Gig Economy Playing a Role in This Job Data? There is a growing issue as far as tracking jobs and employment. How does the data collector handle the gig economy? Is an Uber driver an employee? Not according to the majority of the court opinions thus far. If somebody is driving for Uber and taking the occasional odd job—are they really unemployed since they do not have a formal employer? This has always been a tricky issue, but the gig economy is huge as compared to where it was just a few years ago. It is estimated there are between 1.5 and two million people working in the ride-share space—the concept is spreading fast.
Analysis: There are apps for people who want all manner of short-term jobs and employers that want the ability to hire as needed. There are also many people who have made careers from collecting and selling on eBay and other platforms. It has been estimated that fully half of those buying at garage sales are going to subsequently offer that item on an auction site. There are millions of people now working out of their homes offering a wide variety of services that do not actually register as a job per se. It is nearly impossible to determine, but there is an assertion that almost a quarter of those now classified as unemployed are actually working in that gig economy and devoting as many hours per week as a "normal" employee. This will complicate any effort to draw people back to the formal workforce.
People Can Sure Be Odd As many of my alert readers know, I have a grandson who is a large animal veterinarian. I am immensely proud of what that young man has accomplished. The fact that he has chosen this line of work has altered my TV habits. I am now a regular viewer of shows like Adventures of Buckeye Bottoms, The Incredible Dr. Pol, Dr. K's Exotic Animal ER and the like. I now know many things that I am not sure I wanted to know. For one thing, I know that I would not trade places with my vet grandson after watching countless episodes that involve placing one's arm inside a cow.
There is something else that strikes me as I watch these shows. The humans that belong to these animals can be among the weirdest people on the planet. This seems to especially be true of those who own exotic pets. I am a huge fan of animals in general (cats in particular), but I am not sure I can mount the kind of enthusiasm these folks show for lizards and guinea pigs and even rabbits. They don't seem all that interactive to me, but I am sure I am missing something. Again, it is the people that fascinate. The same observation is made when looking at the clients that Buckeye Bottoms has in Hawaii. These are some folks living way off the grid. Eccentric doesn't even begin to describe them. I have heard enough stories from my own grandson to know this behavior is not confined to Florida or Hawaii (or even Michigan). People get nutty when animals are involved. I am certainly no exception.
As with other health-related fields, I am astonished at what can be done these days and have come to believe we live in miraculous times for man and beast. Not that many years ago, I might not have survived that cancer or would have lost my ability to speak. I might have lost an eye and more than a few of my feline buddies would not be around today. That might be the saddest thought of all.