Strategic Global Intelligence Brief for March 9, 2018
Short Items of Interest—U.S. Economy
Household Wealth Hits New Records
One thing that can be said about the rising values of the stock market and the increase of home prices throughout the country is that it has made the U.S. household far wealthier than it has ever been. The level of household wealth sets new records every month and this one is no exception. The computation of household debt is assets minus liabilities. One adds up the value of the stocks and homes and other possessions and deducts the mortgages and credit card debts. In the last quarter, the level of wealth rose by over $2 trillion to a new record of $98.7 trillion. This status is obviously dependent on factors that can and have been known to change pretty quickly. The stock market can fall fast and we have all seen what can happen with home prices in a recession. For now, we are as rich as we have ever been—at least on paper.
Beige Book Reveals Wage Hikes
One of the more consistent stories to come from this issue of the Fed's Beige Book is wage hikes. There has been a slight decline in the pace of wage growth, but that is the national average. Many parts of the country have been seeing wage spikes in a variety of sectors. The initial assessment holds that wages are going up fast in the health sector as well as those that are tech based. The wages paid in high-level service sectors are climbing fast as well as skilled workers in manufacturing, construction and transportation.
Are Robots Taking Your Pay Raise?
The assumption has been that automation and robotics are responsible for taking lots of jobs away from people. There is some truth to this as robots are designed to replace people when it comes to a variety of tasks. What is not quite so obvious is that robots may be limiting the level of compensation. Technology has improved productivity, but that advance is often used to buy more machines as opposed to paying more or hiring. The job growth since the recession has been at the upper level and the lower level, with very little change in the middle. The jobs that are most at risk from technology are those in the middle—semi-skilled and subject to some measure of routine.
Short Items of Interest—Global Economy
Kenya Seeks a Way Out
Kenya was once the nation thought most likely to succeed and it managed to avoid some of the pitfalls that have been so common in Africa. Those days seemed over as the two most important political leaders have been locked in a vicious war. The decline in the economy has been swift and the political environment has become violent and unpredictable. The two leaders—Uhuru Kenyatta and Raila Odinga—have now declared that they wish to find a way to work together for the good of the country, but to be frank, very few believe them. Instead, it is fully expected that the contest will get nasty again soon.
U.S. Cautions Africa Regarding China
The first high-level meeting between a member of the Trump team and the leaders of Africa has taken place and it is full of warnings about Chinese intent. U.S. Secretary of State Rex Tillerson was there to offer U.S. aid and assistance, but the offer was paltry and fell far short of what has been pouring in from China. The U.S. warns that Africa is getting too dependent on China, but the Africans just look back at the U.S. and point out that there has been no alternative offered by the U.S. or Europe for that matter. The U.S. has never really paid attention to Africa except in moments of crisis. That disinterest has been extreme under Trump.
The Really Amazing Olympics
The Paralympics are in many ways more interesting and true to the supposed Olympic spirit. There is far less attention and media hype, which is somewhat confusing given the stories that abound. Most of us have no clue what is going on in these winter games, but everybody can understand the sheer determination of athlete Millie Knight from the U.K. She is blind and competes in the downhill and slalom skiing events with the help of a guide on the radio telling her what is ahead.
More Adjustments Likely on Tariff Issue
As is often the case, there is a long way between a bold statement and reality. In less than a week, the declaration that steel imports would be subject to a 25% tariff and aluminum imports to a 10% tariff has been altered considerably. Neither Canada nor Mexico will be subject to the tariffs—at least for the time being—as this has now been tied to the NAFTA negotiations. Canada supplies roughly 18% of the total of imported steel and Mexico is No. 4 at almost 9%. The biggest exporter of steel to the U.S. is the European Union and much of that comes from Germany. The Chinese account for about 4% of imported steel and already face barriers and tariffs that amount to an almost total ban.
Analysis: The latest statement suggests that Europe, Japan, South Korea and others will have means by which to avoid the tariffs. Given these exemptions, what real good does this do for the steel industry in the U.S.? In truth, not very much. Their real issue is that demand for steel is way off what it once was due to a variety of decisions by the government. Fuel efficiency standards for cars meant lighter cars and that means less steel. Stalled or canceled infrastructure projects meant less structural steel is needed. Inhibitions in the energy sector meant less pipeline construction and so on.
The sense now is that the tariffs are being used as a negotiating tactic. If Canada and Mexico want to keep selling steel to the U.S., they have to be more accommodating on the NAFTA issue. If the Europeans want exemptions, the U.S. wants something in return. The same process is underway as far as Japan, South Korea and others are concerned. The stick is the steel tariff and the carrot is an exemption from the tariff that may improve their market share position.
Good Jobs Report Expected—What Does This Mean?
By the time you read this, the Labor Department will have released the latest jobs report and, by all accounts, it will be a good one. The unemployment rate may fall a little further to an even 4% and the expectation is that 200,000 new jobs will have been added. This is a very solid report—or at least it is expected to be. The first quarter of this year has been far more robust than first quarters have been in the last few years. Now, the attention of analysts will shift to parsing the numbers to see what is and what is not significant about this latest data. The issue now is whether there are future problems starting to manifest.
Analysis: If the unemployment rate is as low as 4%, it will be the first time this has occurred since December 2000. This is, indeed, good news, but there is a caveat or two (what a shock!). The U-3 rate is the one expected to fall to new lows, but this is not the most inclusive of measures. The U-6 reading captures those who are termed "discouraged workers" as well as those who are involuntarily part-time. The so-called "discouraged worker" has generally abandoned the formal search for a job as they have not had much success in the past. In the majority of cases, this worker either lacks the skills needed to compete or they are in the wrong place at the wrong time. Unemployment is not evenly distributed throughout the country and there are many pockets of extreme distress where jobs are especially scarce. If people can't leave that area, they are unlikely to find employment. Those who are working part-time gigs but would rather have a full-time position are generally earning far less than they would prefer. The U-6 rate has not fallen as far or as fast as the U-3 rate and has actually started to tick back up lately.
The most persistent concern over the last few years has been wage growth. According to the traditions of economic analysis, there should have been substantial wage inflation by now. The Phillips Curve has stated for years that lower levels of unemployment will lead to higher wages for the most basic of reasons. If there are fewer people available to hire, those who are doing the hiring are going to have to pay more to get the people they want. Something has been throwing this pattern off. The unemployment rate is very low and there have been only very minor increases in the wage rate. The most basic reason seems to be that a business is simply unwilling to overpay for people who lack the needed skills. There is evidence that many companies are doing a lot of poaching of one another's workers and that has generally meant higher wages being paid to lure people to switch. But, the people who are just starting or are coming off the unemployment rolls are not commanding much in the way of wages and the threat of wage inflation has been receding a little.
The labor force participation rate continues to be a concern. It remains at the lowest level seen since the 1970s when women started to become active in the workplace. The rate is now 62.7% and prior to the recession was at 66.9%. There are several reasons for the decline in the size of the workforce and some are more worrisome than others. The biggest percentage of people out of the workforce are those who have retired. The surge in retirees has been expected for years. The Baby Boomers are reaching that "certain age" and leaving the workforce at a rate of 10,000 a day. The more vexing part of the participation rate is the number of people who have opted out for one reason or another. There are those who are raising children or taking care of elderly parents and can't be in the workforce as a result. There are those who have rendered themselves unacceptable for the workforce because they have drug addiction issues or other inhibitions. The opioid crisis alone has pulled millions out of the workforce. The system of welfare contributes to the issue of participation to some degree as well. The person getting assistance is often unable to work as this compromises the aid they receive, so they drop out altogether.
Risks and Rewards in North Korea
The decision by Trump to accept the invitation by North Korea's Kim Jong-un can only be described as stunning in the extreme. The commentary suggests that analysts were wholly unprepared for something like this. Only a few months ago, the two leaders were trading shots like bullies on a playground and threatened to engage in an all-out war. The enmity between the two men seemed to be genuine and intense. Now, North Korea has just gotten what it has sought for decades. It is now being recognized as a nation of note and Jong-un is a world player meeting with the president of the United States. This assumes that all of this comes off and right now, that is a pretty big assumption. Why would the U.S. or Trump want to do this? It is not obviously in the U.S. interest to work with North Korea unless they make major concessions and those are not yet on the table. A breakdown in these talks could escalate tension beyond anybody's control. Why?
Analysis: Conjecture is rife at the moment and many suggestions are being offered that range from well-thought out strategy to the assumption that Trump reacts to the whims of the moment and may believe he can either bully or cajole Jong-un into something. One suggestion as to motive revolves around the U.S. and China. This relationship is deteriorating fast and China is now clearly enemy No. 1 for the U.S. Some analysts are referring to the proposed summit with Jong-un as Trump's "Nixon to China" gambit.
The Nixon overture to China in the 1970s was all about the USSR and trying to break up the alliance between the two largest communist countries in the world. The gambit worked in no small part because the Chinese resented the way the Soviets treated them. Jong-un similarly resents the Chinese. He knows that under current circumstances, he is nothing more than a vassal state and that China has the ability to crush his country at any moment. His greatest worry has been losing power. He watched the U.S. get rid of Saddam Hussein and Muammar Gaddafi and others. His dependence on China is galling and he would like to wiggle away from some of that. By reaching some kind of arrangement with the U.S., he pokes his Chinese minders in the eye.
For the U.S., this would be a major push at China and its ambitions in the Pacific. If the U.S. manages to weaken the relationship they have with a country like North Korea, the implication is that the U.S. can weaken any other relationship. It would be a humiliation for China to lose control over Jong-un and it also reduces the leverage China has used against the U.S. in the past. It has long been asserted that the U.S. has been reluctant to really target China on trade and economic issues for fear the Chinese would make things worse in regards to North Korea. In fact, the Chinese have been of very little help with Pyongyang, but if the U.S. and North Korea are talking at all, the Chinese role is much diminished. That would seem to free the U.S. to be far more aggressive with China on trade issues.
All of this comes with a great deal of risk. If Trump does try to bully and intimidate Jong-un, the response could be ferocious and could force military response. If China elects to fight back against this move, the tensions between the U.S. and China mount. The fear on the part of most analysts is that Trump's move has not been planned or thought out and that leaves too many scenarios in place. The ranking expert on North Korea in the U.S. just resigned and the U.S. has yet to appoint a new ambassador to South Korea. It would not appear the U.S. team is all that ready for this, as opposed to the Nixon gambit in China, which was led and carefully constructed by Henry Kissinger over the course of almost two years.
EU Seeks Clarification
The immediate response from the European Union was to promise what amounts to an all-out trade war. It would not be an overstatement to assert that most of the European leadership distrusts and even dislikes Trump. They expect the worst and jump at every statement and provocation. In the week that has passed, the EU's response has tempered a bit as the details of the tariff move are revealed. Now, the EU has declared that it will not immediately respond to the threat of tariffs with import restrictions of its own until they have had a chance to review.
Analysis: The bottom line is that Trump's tariff threat has a whole host of workarounds contained within. Canada and Mexico were exempted from the start and the suggestion is that others can get the same deal. European nations now want to know what that would look like. The sense is that there will be demands from the U.S. on issues ranging from intellectual property to farm imports and this will force the EU to consider whether these trade-offs are worth it.
I suppose most of my readers have had the same kind of upbringing to an extent. Our parents were likely pretty "normal," at least for the time and place. We all knew kids whose parents might have been more counterculture than our own. Then, there were the kids whose parents were from the "old country" and manifested some different approaches. It is, therefore, always interesting to see a set of parents that clearly come from a unique place.
The little girl, perhaps 8 or 9 years old, was completely decked out in her best fairy outfit. There was a lot of glitter and gossamer wings, a fetching tiara, face paint and elf ears carefully attached. Her adult companion was in a very conservative business suit with her hair in a tight bun; every inch, the corporate lawyer. I overheard her comment that she was escorting her sister's daughter back home and that went some way toward explaining the contrasting outfits. The fun part occurred when we landed.
As she left the gate, her parents were there to meet her and it was not hard to spot them. Mom was in a matching fairy outfit with the wings, ears and sparkles to accompany the face paint. She had a slightly bigger tiara and a wand. There was an elaborate ritual of greeting in a language I think I recognized from the Hobbit movies. Dad was not to be outdone as he also possessed elf ears and was in a green unitard that was struggling to deal with some middle-aged spread. It was the elf king and queen greeting their princess. The lawyer sister was apparently used to this and just laughed.
I can only imagine what life in that family looks like. Given the smiles on their faces and the sheer delight manifested by the little girl it, struck me that a good fantasy may be the best way to deal with reality these days.