Short Items of Interest—U.S. Economy
By almost every measure, the Millennial generation is in the worst shape of any demographic cohort as they start to enter early middle age. They have less wealth, less property, fewer children, less longevity and seniority in their jobs and have less set aside for retirement. They have been hit by headwinds of their own making as well as situations over which they have no control. They entered the workforce during a recession and thus started with lower salaries. They have been saddled with debt—everything from student loan obligations to credit card burdens. They have been generally very short-sighted and that leads to bad planning. They do not stay in jobs long enough to be promoted and tend toward immediate satisfaction. This will be a strained generation as it ages.
Plunging Birth Rate
The majority of the developed world faces the same issue as far as its demographics are concerned. The U.S. does not yet have the same level of crisis as Europe or Japan, but it is creeping up. The birth rate has tumbled drastically from what it was in the 50s, 60s and 70s. The birth rate for women in their 20s was at around 260 per thousand in the late 1950s. Today, it is at 73 per thousand. The drop in the number of births coincided with the arrival of women in the workforce. It was assumed that having kids would just come later, but among all ages, the rates fell to less than 100 per thousand. Now the U.S. is worried about where the workforce of the future will come from.
That may be too harsh, but they will at least be able to say, "I told you so." Meat prices are expected to rise between 15% and 20% in the near future. The factors that have contributed to this inflation include the bad weather and flooding that has affected the U.S. farm community this spring and the massive swine flu epidemic that has decimated the Chinese pork producers. They are importing five times as much meat as they did last year as they try to meet demand. The U.S. is not necessarily selling to China at higher levels due to the tariff war, but other nations are and that affects prices here as well.
Short Items of Interest—Global Economy
Trudeau Gets a Break
For much of the past year, the Canadian Prime Minister has been under a political cloud due to miscues and scandals that have involved members of his inner circle. The economy has also not been doing all that well as commodity prices have been uneven. On top of all this, there has been the trade war with the US. Now that Trump has eliminated the tariffs on exported Canadian steel, there is a little less pressure on Trudeau. This is good timing given that he faces elections in five months and is behind in the polls at the moment.
China Settles in for Long Dispute
All signs are now pointing to a long war with the U.S. over trade issues. The fact is that President Xi Jinping is not going to appear to be weak in front of his population. The antagonism toward the U.S. and Trump is at a very high level. The government is now building up popular resentment toward the U.S. and is prepared to funnel money to those entities that may be affected by the dispute. The agreement that seemed imminent is now very, very distant. China will likely suffer the most from the breakdown, but the affected consumers in the U.S. will have the louder voices for the time being.
Scandal Rocks Austrian Far Right
The coalition that put Austria's populists in the government lasted less than 26 hours. A video surfaced that caught the Vice Chancellor engaged in overt graft and corruption as he accepted cash from a Russian contact in return for promising the Russian companies special grants and contracts. It was about as blatant a deal as has been seen. Suddenly, the reputation of the far right is in tatters given all their pious proclamation regarding their aim to root out this very corruption. The coalition is shattering as well and new elections may be next.
Tariffs, Trade and Politics
The Trump administration has been very busy on the trade front of late and it has become a little challenging to keep up. The headline conflict has been with China with the imposition of tariffs and the counter imposition of tariffs on the part of the Chinese. The long and drawn out set of negotiations ended with no deal and an escalation of the conflict. This has created a great deal of consternation within the U.S. business community as well as the global economy. Importers are scrambling and so are exporters as they contend with the Chinese reaction. At the same time these talks are breaking down, there has been sudden progress in other areas of trade. The U.S. is preparing to end the restrictions on imported steel from both Mexico and Canada as part of the effort to get the new U.S. Mexico Trade Agreement off dead center. The threat to impose tariffs on European cars and car parts has been delayed for at least six months and there has been a little bit of renewed interest in some regional trade deals in parts of Latin America, South Asia and even Africa. This leaves the question of Trump trade policy hanging.
Analysis: To be honest, there has always been a high level of political gamesmanship involved with tariffs and trade policy in general. The fact is that any given trade relationship will provide both winners and losers in a given country. That is the very nature of trade theory—comparative advantage. The basic idea is that a country sells what it is best at producing and buys that which it is not good at producing. This equation changes all the time as nations gain new advantages and encounter new disadvantages. It is also important to note that just because comparative advantage is efficient does not mean that everyone in a given nation will be thrilled by the prospect of giving that production up.
There are many reasons a country may want to protect a given industry—even if domestic production is less than efficient and it would technically be better to import that item. The most common rationale is to protect the domestic business so that jobs will be preserved, but there may be other considerations. Many nations want to preserve national security by insulating technical companies and others seek to protect food production or other output. Then, there are the more overtly political motivations. The protected sector or company may have political clout. There are always desires to reward other nations for being good allies and punish nations for political activity that goes counter to preferred strategy.
In order for a tariff or trade restriction to really work, it has to be nearly permanent. The idea is that restricting imports will make it easier for domestic producers to invest and expand as they will be able to count on that market. If the tariff is temporary, there is no motivation to invest as it is assumed that lifting the tariff will make it harder to compete. Nations would likely orient towards total protection were it not for the demands of the consumer. If a company has no fear of foreign competition, there is little incentive to lower prices or even to provide a better product or service and the consumer is at the mercy of the domestic producer. In the U.S., the consumer has been dominant and has demanded access to the global marketplace. That creates inevitable tension between the domestic producer and that consumer.
Trump's tariffs and trade restrictions have been temporary and the policy has been exceedingly mercurial. The tariffs on steel and aluminum have been altered a dozen times in less than a year. The latest announcement indicates that tariffs on steel from Canada and Mexico will be lifted. That means the four-largest importers of steel into the U.S. will now escape tariff restrictions (Canada, Brazil, South Korea and Mexico). Does this protect the U.S. steel and aluminum industry? Not as much as when these nations did not have an exemption. It is assumed that Trump got something from these nations in return, but thus far, that has not been made clear. The reaction to the latest policy move has been predictably varied as there has been enthusiasm from the manufacturing community as they are steel and aluminum users and now have greater access restored. The steel and aluminum producers are less thrilled although they are still receiving some protection from the likes of Russia, China, Turkey and others.
Right now, consumers are the ones losing. They have been denied access to competitive products from overseas, but there has been little incentive for domestic producers to get further engaged as they do not know when the tariffs might be lifted. The fact is companies expect differing trade policies when there are different governments in place, but the constant changing under Trump has been very hard to deal with and most are simply standing pat. This results in higher prices for the consumer.
Imminent War With Iran?
The rhetoric would certainly suggest the U.S. was preparing an all-out effort to destroy the regime in Iran. In the last few weeks, there have been a number of steps taken that could be seen as a prelude to war. The U.S. has moved a large number of military assets to the region (mostly naval at this stage). Non-essential diplomatic personnel have been removed and Americans have been warned to leave Iran. There have been reports that National Security Advisor John Bolton has drawn up plans to send as many as 120,000 troops to invade Iran and overthrow the regime. This has been denied by the White House, but in the same statement Trump asserted that a "hell of a lot more" would be sent if Iran attacked the U.S. in any way. At the moment, the U.S. intent is anything but clear. The comments have been bellicose and seem intended to frighten Iran, but simultaneously there have been statements that indicate the U.S. doesn't want a conflict of any kind. There is suspicion that all the war talk is for U.S. domestic purposes only, but that assessment is challenged by the fact that Bolton has been calling for regime change in Iran for decades and has asserted that the U.S. would be welcomed as liberators by the majority of the Iranian people.
Analysis: One of the challenges for the U.S. is determining what would constitute a provocation worthy of a massive and bloody war. Estimates vary considerably, but even the most optimistic analysis of a campaign like this asserts that tens of thousands of U.S. military personnel will be killed or wounded and the cost of the effort would be in the tens of billions. Iran has the largest population of any Middle Eastern nation. Even after years of economic pressure, it still has a GDP the size of Texas. It has a large and well-equipped army and may even have the ability to develop nuclear weapons of some kind in short order. The U.S. will have absolutely no allied support and Iran will be able to call on both Russia and China for some kind of assistance. An actual war would be a truly miserable undertaking and the chances of success will be low.
What is the real aim of the hostile policy? That is anybody's guess right now, but analysts suggest that it comes down to three demands the U.S. has been making since Trump took office. The first was that Iran cease developing nuclear weapons. That seemed to be something that Iran was willing to do, but on their terms. That was more or less acceptable to the Europeans but not to the U.S. The second issue is more salient as far as the U.S. is concerned. Iran supports any number of radical groups active in the region and globally for that matter. The U.S. wants an end to Iran's support for groups such as the Hezbollah or Hamas as well as Shiite militias in Iraq that challenge the regime. This connects to the third demand which concerns Israel. Iran has been unrelentingly hostile to the Israeli regime and Israel has been hostile in turn toward Iran. The U.S. wants that enmity to end with Iran's recognition of Israel's place in the region. Is the threat of war simply a negotiating tactic designed to scare Iran into complying with the U.S. demands?
The real fear is that Iran either takes the threats seriously and elects to attack first or that Iran decides to test the U.S. by engaging in some smaller action designed to call the U.S. bluff. It seems that most wars these days have been the result of a series of blunders and miscalculations. This has the potential to be another one.
Japan Gets Better Q1 News Than Expected
The majority of the assessments regarding the Japanese economy at the start of the year were bleak. It had been widely expected growth would slow and even that Japan would slide into recession territory. The fact is Japan seems to have dodged several bullets and registered a respectable growth rate of 2.1% in Q1. The headwinds are still there and could well manifest through the rest of the year, but for now, they seem to have been held at bay.
Analysis: There were three prime concerns as far as Japan's growth. The first was that trade wars between China and the U.S. were directly impacting the Japanese economy as China's slowdown meant less importing from Japan. The second issue is that the U.S. has been putting a certain amount of pressure on Japan over trade as well. That also affected the export sector. Japan has been watching its export community dwindle a little, which is problematic for a country whose GDP is 14% dependent on exports. The third issue is that consumers had been expected to become more cautious, but it seems they have not slowed by much. The Japanese government wants to introduce a new consumption tax later this year to deal with revenue shortfalls. This growth has given the Abe regime some breathing room—at least for the time being.
The level of capital investment slowed dramatically in the first quarter. This decline was somewhat hidden by the fact that Q1 growth was so good at 3.2%, but close analysis of that boost shows that nearly all of it was attributable to a more active consumer. The growth in capital expenditure was only 3% from 2018's number, a very far cry from the 20% gain between 2017 and 2018. The motivation for the consumer is always fleeting to one degree or another so the economy really counts on the business community for consistent growth. That is now in some doubt and will determine how the rest of the year progresses.
Analysis: There are many reasons a given company may start to exercise caution. There has been considerable flux in some important sectors such as retail. The dominant reason cited by the executives of major companies has been the trade wars. This obviously centers on what has been happening with China, but it goes beyond that to include the conflicts with Europe and the USMCA partners.
Other People's Disasters
I have not decided whether I have some ghoulish streak that compels me to watch or read about the misfortunes of others or whether I somehow find it cathartic to know that my travails pale in comparison. When on the road, I find myself watching the Weather Channel a lot. I am drawn to those shows depicting massive storms and other events. I watch shows like "Highway Thru Hell" and am so grateful that this is not my job. I read travel narratives that seem to feature people having to endure the most brutal and awful conditions imaginable. This makes suffering at the hands of the TSA palatable and eases the stress of delays and other inconveniences. At least I am not being attacked by insects in a torrential downpour while suffering from dysentery.
I am also impressed with the resiliency of people who are dealing with these events and challenges. I am equally impressed with the willingness of strangers to aid. There was a story of a massive snowstorm that hit Britain a few years ago and stranded hundreds of motorists for the better part of two days. Local residents around the highway braved the storm and went from vehicle to vehicle with food, water, blankets and anything else they could carry. The men from the local pub showed up and spent the whole night pushing cars so that snowplows could get in. One can only assume the pub owner kept them fortified.
Japan's Q1 Growth
The news from Q1 data was better than most expected for Japan as there was 2.1% growth. That is not enough to dispel deep concerns regarding the future of the country, however. The manufacturing sector is very important to the overall economy and it is not performing at all well as it remains very dependent on the export market. The biggest buyers of Japanese machinery have been China and other Asian states. China is slowing down and that hurts Japan in two ways. It means less exports to China of course, but also less to the nations that exported to China. They have seen the volume of that business decline.