14 minutes reading time (2868 words)

Strategic Global Intelligence Brief for March 18, 2019

Short Items of Interest—U.S. Economy

Manufacturing Decline
The slowdown in the manufacturing sector has extended to two months according to the data released by the Fed. The level of output at U.S. factories fell by another 0.4%. That is on top of the decline from the month before. This is hardly a crash, but it means that most of the manufacturing data is consistent and trending in a direction that would hardly be preferred. The last Purchasing Manager's Index was down from what it has been, but remains in the expansion zone. There has been a dip in capacity utilization and capital investment as well. Thus far, this doesn't signal a retreat or a panic, but there is far more caution manifested these days and there seems to have been a drop in resiliency.

Consumer Sentiment Ticks Up
The level of consumer confidence has been fairly high for the last few years, but had been showing some signs of erosion during the first few weeks of the year. The sense is some of the factors that had people feeling upbeat about their situation had started to get a little shakier. In the end, the most important factors have been gaining a little strength and attitudes have firmed a little. The jobless rate is still very solid despite the smaller number of new hires last month. The important thing is there have been few layoffs of any size and that reassures the population. The factors that dragged the numbers down in the last few months have faded—most notably the impact of the government shutdown. On the other hand, there are similar issues starting to appear on the horizon.

More Job Openings than Ever
The number of job openings in the U.S. continues to rise and the labor shortage keeps getting worse. The number of people looking for work is insufficient to meet the needs of companies that want to hire—even if every one of those looking had the right skills and were willing to take the jobs on offer. Those jobs going unfilled range tremendously from very low-paid in difficult industries to very highly paid jobs that require specific education and training. The jobs are more often than not in a place where there are too few available workers. In addition, it has become harder for people to move to them than in the past.

Short Items of Interest—Global Economy

China Slowdown Slows Everybody
The world grew accustomed to the old adage that when the U.S. sneezed the rest of the world caught a cold. The economy of the U.S. has been the engine of global trade for decades and in most respects it still is. The difference now is that the U.S. is no longer alone in playing that role. Now China is every bit the economic growth engine the U.S. is. As the Chinse start to experience their own economic issues, it is affecting every nation that either imports from China or exports to them. This latter group includes most of the other Asian states.

The 'Tropical Trump' Comes to the White House
As Jair Bolsonaro ran for the presidency in Brazil, he was often compared to Trump in terms of his more right-leaning populism and his semi-outsider status. He has been embraced by Trump and other nationalist leaders and will be seeking to establish new relations between the U.S. and Brazil. This could prove challenging as Brazil really wants to export more to the U.S., but much of what Brazil sells competes with what the U.S. sells—soybeans, ethanal, aircraft, cars. Will Trump refuse the entreaties of his Brazilian counterpart or will be make exceptions to the America First strategy.

Boeing and China
One of the agreed moves by China was to get more from the U.S. in terms of imports. High on that list of new imports was the acquisition of hundreds of Boeing airplanes—specifically the 737 Max. What happens to this purchase plan now?

Crisis Continues to Spread in France
President Emmanuel Macron has been trying to regain some of the initiative he once commanded, but this has proven very hard to do. It has become clear that his mandate was weak from the very start and he has made mistakes that have further complicated the situation. His victory was less about his real appeal and more about the fact that many in France could not bring themselves to accept a government led by National Front candidate Marine Le Pen. His reform ideas were not well developed until after the election was over. Once the French looked at them closely, there was intense opposition from a variety of groups. The labor unions had not been pleased to see the former Rothschild's banker become president in the first place and have been ardent opponents from the start. He has not been able to capture the conservatives either. That leaves a rather fractured group in the National Assembly as his main support.

For the last several months, he has been trying to regain control over the protests and demonstrations that broke out when he suggested a hefty hike in the tax on fuel. This was supposed to advance the French in their quest to be more sensitive to climate change issues and was a nod to the left, but the gesture was utterly rejected by the unions and the left as they complained that the tax would be paid by the poor and working class. The protests have taken on a life of their own. Those that have hit the streets are demanding dozens of concessions and some are just interested in destruction for its own sake.

Analysis: At the same time that Macron has been fighting to gain some traction in his own nation, he has been trying to position himself and France as the hero of Europe by pushing back on the populists and their anti-EU rhetoric. His calls for a stronger EU have not been embraced by the Germans and others, but many of these nations that have been affected by economic crisis in the past have long held that only the EU can protect them from the vagaries of the global economy. Macron has almost completely reversed course when it comes to the U.S. and Trump. Once upon a time, there was an assumption by Macron that he had some kind of connection to Trump given that they were both essentially outsiders with a business background. It had seemed in early meetings between the two that Trump was willing to take some guidance from Macron, but the summit between the U.S. and France was a complete bust, and it made Macron look weak. That was the end of that relationship. Since then, the French leader has been very critical of the U.S. and is now attacking the proposed trade deal as far too one-sided in favor of Trump.

It is not clear what Macron can do to manage the violence. He has already made several concessions to the unions and the left in general, but it has not quelled the anger that keeps spilling into the street. He agreed to raise pensions, add various benefits to the workday and has tried to expand public services without altering the tax situation appreciably. This has been welcomed by some, but rejected by others as too little. The dilemma is the same as has faced every government in the EU and the world in general. The public wants more and more in the way of services, but is not willing to pay anything more in the way of taxes.

Slovakia Picking Reformer?
A year ago, Slovakia was rocked by the killing of a journalist and his fiancé by men who were linked to the right-wing populists in the county. This murder prompted weeks and weeks of protests. An investigation into corruption and right-wing activity eventually caused the resignation of Prime Minister Zuzana Caputova. She was behind much of the anti-corruption effort and elected to run for the presidency despite never trying for political office before. She has now come in first in the first round of the elections. She will be in a runoff against Maros Sefcovic. He is currently the EU Commissioner for Slovakia and from the largest party in the country—SMER.

Analysis: As Slovakians make their decision between the two, they will have a choice of two people who are supportive of the EU and Slovakian engagement with the rest of Europe. Caputova has come to symbolize opposition to the hardliners. With her electoral support, they were forced into third. Those voters will likely not vote at all as they no longer have a candidate that supports much of their platform, but some may attack Caputova by voting for Sefcovic as he is pro-Europe, but not as aggressive when it comes to trying to root out corruption and nationalism. It will be a contest between experience and passion. The Slovakians have tended to opt for the latter in past campaigns and she won over 40% of the first-round vote. She only needs to gain the support of 10% more and she will have the percentage needed to form a government.

Look at Housing This Week and More From the Fed
There is not a huge general release of data this week, but there will be quite a lot that relates to the housing market and that can serve as something of a proxy for the greater economy given the role of housing in the U.S. Not that housing data is less important in other nations, but there are a number of factors that make it more indicative of the health of the overall economy in the U.S. This is a nation that has deliberately and actively promoted home ownership for decades through a wide variety of techniques. The tax break on mortgage payments stands as a major incentive, but there are other supports that can be used by lenders (such as the use of Fannie Mae and Freddie Mac to underwrite mortgages) and the many federal programs designed to help get people into homes (FHA, VA loans, etc.).

The push to get people into their own homes had been a deliberate choice based on the assumption that home ownership creates more stable neighborhoods and therefore less social unrest and crime. Despite all these breaks and attempts to encourage ownership, the U.S. lags far behind a great many nations. The percentage of the U.S. population that owns their own home is currently 64.2%. Many of the former Warsaw Pact nations sport ownership rates over 80%. That is due to the fact that after the fall of communism people were simply given the homes in which they lived, the vast majority of which are in multi-family units. Many of the European nations have higher rates of ownership than in the U.S. (Scandinavia states, Spain, Italy, Greece, Netherlands and more). Even Brazil (74.4%) and Mexico (80%) have a higher rate. Some of this has to do with the percentage of the population that lives in the rural areas and the fact that much of the private housing is in some form of multi-family arrangement.

Analysis: The role of housing in the U.S. economy goes beyond the rate of ownership as the sector is a major economic engine all by itself. The mortgage business is the most important single sector to most banks and there are legions of people that work in support roles for housing—from real estate selling to the processing of all the paperwork. Then there are the people that actually build the homes and those that supply the building materials and those that supply the appliances and furniture and carpet and everything else that goes into the home. Let us not forget the fact that the vast majority of Americans have the majority if their wealth in the value of their home. That has profound implications for the economy as a whole. If the value of homes rises, the homeowner feels wealthier and has access to more money. That can propel other aspects of consumption.

By the end of this week, there will be a couple of data releases that will provide a better look at the current housing situation in the U.S. The first will come from the National Association of Home Builders as they will be revealing their latest assessment of builder confidence. For the last two months this gauge has risen as the builders have been encouraged by the recent drop in the mortgage rate. The assumption is that there will be more potential buyers as the rate falls, but there has been some contradictory data as the home buyer is not swayed by the mortgage rate alone. The single-most important factor other than the mortgage rate is whether or not the prospective home buyer has a job and feels secure about their future employment prospects. After that, the cost of the housing itself becomes a major factor. One of these has been encouraging of late (job data), while the other is not as benign as there have been house price hikes in a great many communities where there is more demand for homes than supply.

Later in the week, there will be more housing data coming out as the National Association of Realtors releases the latest numbers on new home sales. The last release was for existing home sales, and there was a decline again. This measure has been in decline for months and all eyes will be on the new home data to see whether the lower mortgage rates are having any impact at all. The sense is that numbers should improve given that some regions of the country have indeed seen some price deceleration. That might combine nicely with those lower rates and the continued upbeat data on employment and consumer confidence. As is always the case with housing data, there will be wide differences between parts of the country as the housing stock varies along with the prices that dominate in a given location.

The other data point of note this week will involve the Fed as they will be meeting again this week. Nothing dramatic is expected this time as there has been no sense that rates will be hiked, but a lot of attention will be focused on what the members of the Federal Open Market Committee (FOMC) say. Are they still sounding very dove-like as far as rate hikes go or will they throw out some caveats regarding inflation as they remind people that a rate hike will be in order if there is a real or potential threat from something like wage inflation or higher commodity prices?

Tracking Fed Opinion
Over the years, there has been a lot of attention focused on what the Fed is doing or likely to do. Today, the tools to measure this are more reliable. One of them is the dot matrix that plots the opinions of the various Fed members and their statements regarding the interest rates. The current assessment is that most of the members are urging caution with perhaps one more hike this year.

Analysis: There is an important aspect of this assessment that is missing, however. There is no way to plot the kinds of things that might change the opinion of the given Fed member. There is no way to measure what an increase in the rate of wage inflation or commodity inflation might have. It basically means that the dot matrix lacks much in the way of prediction.

It Really Is a Minority
Each and every time there is a tragedy like that in New Zealand, there is a very predictable range of reactions. There is shock and a desperate desire to understand what happened and what can be done to stop it from happening again. The tragic reality is that atrocities like this will never be stopped entirely. They are indeed carried out by small groups of people. Short of jailing everyone who might be suspicious, there is a desperate and unpopular need to accept a certain amount of this tragedy in defense of other basic civil rights of free speech and privacy.

So, what really can be done if these acts are being carried out by individuals and if it is true that the vast majority of the global population is not engaged in any way with this kind of horrific behavior? There has to be a reaction that goes beyond condemning an atrocity after the fact. The bottom line is that hatred and bigotry have to be confronted constantly and aggressively. This means speaking out against this kind of mindset at every opportunity.

U.S. Housing Market Conditions
There is a consensus view emerging that there will be a distinct buyer's market developing by the year 2020— almost half of those surveyed expect a big jump in activity as there will be a shift in the current patterns. The expectation is that housing will be in a surplus position in many markets, which will serve to drive down prices in most cities. Mortgage rates are expected to be relatively low and the overall state of the economy should be supportive enough for people to buy. At the same time, there will be a lot of sellers who will be eager to sell their existing homes and builders eager to reduce their inventories.

Grounding Boeing’s 737 Max to Have Little Impact o...
Gains in Construction Input Prices Unlikely in Com...
 

Comments

No comments made yet. Be the first to submit a comment
Already Registered? Login Here
Guest
Friday, 29 March 2024

Captcha Image