Strategic Global Intelligence Brief for June 7, 2018

Insights From the Non-Manufacturing ISM Report
The Institute for Supply Management released its May non-manufacturing (services) Report on Business June 5, and it was a strong report. Diving into the report, here are the top takeaway themes.
Composite NMI: 58.6 vs. 56.8 in April This made the 100th consecutive month that the NMI (non-manufacturing index) composite figure was above 100—indicating expansion. The services sector accounts for about 70% of the U.S. economy. A diffusion index of 58.6 is very strong.
New Orders: 60.5 vs. 60.0 in April Although new orders were only stronger by .5 points, there was an underlying reason why they weren't stronger. As mentioned in the survey report, companies had a difficult time finding enough workers to meet production and output demand. In addition, suppliers were having a difficult time meeting demand, which also slowed down output. Therefore, we wouldn't read anything into the flat new orders component at this time.
Employment: 54.1 vs. 53.6 in April Employment would have also been impacted by available workers. The report from the ISM coincides with the industries that were creating jobs in May. The bottom line is that job creation is strong and worker shortages are real. There was a report today that this is the first time ever that the United States has more jobs available than people out of work (i.e., people who want to work but can't). The problem is one that many of us have stated in-depth: available jobs are those that are likely requiring comprehensive skills and training; those that nobody wants (because of the pay or type of work); and those that are in markets where it's difficult to find people willing to relocate (expensive cost of living metropolitan areas or isolated, rural regions).
Prices: 64.3 vs. 61.8 in April If this is any indication, we should begin to see more inflation in the coming months. The prices index for both the non-manufacturing and manufacturing surveys in May were elevated. They came in at 64.3 and 79.5 respectively, both of which are historically very high. Hiring, supply chain and raw material costs are going up across the board. It's interesting that we don't see it at a macro level just yet in national wage metrics or broader inflation measures.
Items up in price (in order): 1.Air freight services 2.Aluminum 3.Corrugated boxes 4.Diesel 5.Freight charges 6.Fuel 7.Gasoline 8.Construction labor 9.Paper 10.Plastic products 11.Poly products 12.Steel 13.Steel products 14.Transportation costs
Commodities listed in short supply (in order) : 1.Construction subcontractors 2.Construction labor
Four Things to Watch for at the G-7 Meeting If ever there was a time to be the proverbial "fly on the wall," it would be now. The G-7 meetings of the past have generally been pretty staid affairs with a minimum of drama. The members are among the richest nations in the world (U.S., Canada, U.K., France, Germany, Japan and Italy). The past meetings were generally designed to coordinate activity and only occasionally to work through issues. This is not the case this time. The mood is already tense and icy. Some of the leaders in attendance are angry and intend to make that clear to the object of their anger—Donald Trump.
Analysis: It will not be easy to discern from a distance, but try to make a distinction between the public and the private. All of these leaders are in a fishbowl during these meetings. They will have to play to their domestic audiences while they are there. The public statements will be by necessity tough and angry. The real activity takes place in those more private moments in the halls and over dinner. This will be more the case this time as this is where Trump prefers to work. He will be trying to get deals done with the attendees on a one-on-one basis. This will test the resolve of the other members—especially those from Europe. They are asserting a united front at this point, but there will be temptations to do something that gets President Trump to give them concessions.
The second thing to look for will be statements relating to trade and tariffs, generally. The fact is that all nations have been competing with one another for years. They have all used tariffs and non-tariff barriers extensively. The U.S. is painted as the bad guy right now, but that is an unfair accusation given the barriers that have been erected by the EU, Japan and even Canada at times. The U.S. has long objected to these practices. There have been more than few victories for the U.S. in organizations like the WTO. Will there be willingness to end any of these practices in reaction to Trump?
The third thing to watch for is any crack in the attitude towards the U.S. Despite the animosity that has been evident between Trump and Chancellor Angela Merkel, the Germans have been the ones sounding the note of caution as regards retaliation against the U.S. Frankly, Germany has the most to lose from a trade war with the U.S. It appears to be trying to be the careful one. The Japanese leader has also been trying to cultivate a personal relationship with Trump and so has the French president. The Canadian prime minister has been sounding the most aggrieved as he has resented the national security invocation that surrounds the tariffs.
The fourth issue to watch is how all of this plays in the home nations. There is real animosity towards the U.S. and Trump in all of these nations—the local press has been aggressive. If concessions are made to Trump and the U.S., there will be angry reaction from the press and perhaps the voters as well. This could well interfere with any of the big plans and compromises that might be on the table.
Europe's Immigration Crisis The U.S. is hardly the only nation trying to come to grips with the immigration issue. This has obviously been at a crisis level in Europe for years and there has been no sign of real progress. The latest amplification of that crisis is the resignation of the head of the agency charged with dealing with issues of asylum. He has been accused of fraud and corruption in the procurement area and there have been many issues with how he worked with staff and others. This is just the latest episode as far as immigration is concerned. The rise of the populist right has been fed by the immigration debacle. The issue is now at the very top of concerns in almost every state.
Analysis: The crisis has dozens of dimensions. There are the economic concerns that stem from having to take care of the millions of refugees that have poured into Europe. The problem is made worse by the fact that most of the arrivals are showing up in the poorest of the EU states—Greece, Italy and Spain. They are also coming through the Eastern European states and are struggling financially. The politics are likewise intense as there are inevitable culture clashes as the refugees end up in the poorer communities. There is deep resentment over the resources devoted to what is seen as an outside group. The countries of the EU are deeply split on what should be done with many asserting that no more should be allowed and those who have already arrived should be sent home.
The power of the populists has waxed and waned over the years, but resistance to immigration is now the glue that holds these disparate groups together. The Italians now have a populist government and are taking a very hard line on immigrants. The Austrians will hold the presidency for the rest of the year. Their government is also taking a very hostile approach to the migrants—the new ones and those that are already in Europe.
The Shifting World of Trade At first blush, it seems that the idea of trade deficits and/or surplus would be pretty simple. If a nation buys more than it sells in the global market, it will run a deficit. If it sells more than it buys, you get a surplus. It would also seem pretty easy to determine which of these one would like to have—isn't it always better to sell more and buy less? Unfortunately, simple is not usually accurate. There is a lot more to the issue of trade deficit and surplus than meets the eye. This is especially true when looking at a very complex economy like that of the U.S. Just in the last few years, there have been several developments as far as trade is concerned that have altered the way the U.S. interacts with the global market.
Analysis: One of the most important changes has been the mix of what the U.S. buys and sells. For decades, the U.S. imported a significant amount of the crude oil needed to run the economy. As recently as 15 years ago, the U.S. had to import 60% of the oil needed. This had been the case since the 1970s. Remember when every politician running for any office felt compelled to mention the need for energy independence? The latest trade numbers show that the U.S. has seen a reduction in its overall deficit for the second-straight month. The main reason the U.S. is starting to chip away at that deficit is that oil is now something the U.S. exports. Last month saw a record amount of crude sold overseas as well as refined fuel. It was just a few years ago that oil exports were not allowed as the U.S. was carefully guarding the oil it had. Now, the U.S. is exporting four times the oil per month than was the case 10 years ago. This last month saw almost $20 billion worth of oil and fuel exported. Not only is the U.S. now energy independent, but it can make significant amounts of money from that commodity.
The trade deficit is still high at $46 billion; it has gotten more expansive in the last year. This should give people a clue as to what can drive the deficit from one year to the next. What about the last year would make the deficit bigger despite all those threats of trade wars and tariffs? The simple answer is that the U.S. economy is growing and the majority of that growth can be attributed to the actions of the consumer. With unemployment at record lows and consumer confidence up, there are many more consumers feeling good about their financial position. When that happens, there is more spending—we are, after all, the most dedicated consumers in the world. What is it that consumers want? That is pretty simple as well. They want value for their money. That attracts them to goods that are imported as these are often less expensive. It is a pretty simple equation. The period when the U.S. trade deficit was at its lowest ebb was during the recession as people had less money to spend and were more concerned about the future. For all the bombast and threat that revolves around trade wars and tariffs, the fastest way to reduce imports is to have an economic downturn. It is also the fastest way to reduce levels of immigration. The number of people trying to enter the U.S. legally and illegally fell to their lowest levels in decades during the recession. If one is risking it all to enter the U.S. for work—it helps if there is work available. During the recession, this was not the case.
A third point to make regarding trade deficits is that governments and companies do not approach things from the same perspective. The majority of the business community looks at a global market—global consumers, global supply chains. They sell all over the world and they pull parts and commodities from all over the world. Countries still pay attention to borders and nationalities. A car company just wants to build a vehicle that is priced at a point the consumer can afford. That means watching costs carefully and sourcing from anywhere a quality part can be obtained at a good price. Over the last 50 plus years, the carmakers have created a true North American market with operations distributed between Canada, U.S. and Mexico. The U.S. looks at every part that comes from Mexico or Canada as an import, but the carmaker just sees this as part of a seamless system pulling from all over the world to deliver a quality product at a price that consumers can afford. Not that it is wrong for governments to worry about the jobs for their own citizens, but there also has to be a recognition that business competes globally.
Why Is Trump so Upset With Trade Deals? The reality is that much of what motivates the Trump administration is the desire to play to the base; not so different for any politician. The "red state" voters respond to these anti-trade messages as they are frequently the losers when these deals are made. There is another factor to consider. The U.S. has had the luxury of being able to cut deals that were more motivated by politics than economics. That era may have come to an end.
Analysis: The U.S. has very often offered deep concessions on issues such as trade in order to gain political support. Nations that joined the war in Iraq and Afghanistan were rewarded with market access. Nations that back the U.S. position on other global issues have received the same kind of consideration. If they back the U.S. in support of Taiwan, they get market access. If they back the embargo on Cuba, they get market access. If they back the U.S. against Nicolas Maduro or some tinpot dictator in Africa, they get market access. The politics may be worth it, but the economic rationale is weaker. This kind of trade was even more common during the height of the Cold War when all a nation had to do was oppose the USSR and it would win trade concessions. Today, the U.S. seems to be losing some of that political motivation and wants trade deals that focus on economic issues instead. This is a new stance for the U.S. and it has taken some in the world by surprise.
Working Conditions I have worked on this newsletter and other projects in some odd places over the years. Many hotels and airports have become temporary offices. Then, there are all those coffee shops. Lately, I have added another whole category of unique working environment. Earlier in the year, I wrote from a hospital bed. Now, I am using a lot of waiting rooms. Today, I am camped in another cancer treatment center as I need to hit the road to an assigned presentation and decided to just work from their lobby.
What strikes me is how often I am not alone in doing this. There are two other guys doing what I am. One is a medical supplies salesman, which makes a certain amount of sense. The other is an attorney who is here for some treatment. He arrived way early and elected to do his prep here. We have our own little mini office in the corner. We live a very unique life these days—able to do what we need to do from almost anywhere. Very productive and all, but I have to confess that I miss the opportunity to catch up on Time magazines from 1988. I also miss the Weekly Reader and Boy's Life. It's just part of my misspent youth.