Strategic Global Intelligence Brief for May 23, 2018
Short Items of Interest—U.S. Economy
New Home Sales Fall
As expected, the pace of new home sales fell off this month. Analysts expected this slide, many of whom were actually pleasantly surprised the decline was less than anticipated. The headwinds that everybody has been talking about all year are stiffening up and creating an increasingly hostile environment for the new home buyer. Mortgage rates are starting to inch upward, but the real culprit is the price of these new homes. The new average sale price has risen to over $407,000, which is higher than was seen since records started to accumulate in 1963. This means that home prices have now crested above the levels during the big housing boom. If there is good news in this month's data, it is that the drop was only 1.5% when expectations were for a drop of 2.2%.
Student Loan Delinquency Has Reduced
The level of student loan delinquency and default is lower than it has been in years—generally, a good thing. The problem is that some of that reduction is due to programs that could still come back to bite the economy and the borrower. Much of the recent progress stems from the fact that new graduates are having a far easier time finding a decent job than was the case a few years ago. Another factor is that student loan borrowers can access a program that allows them to delay payments for an extended period of time. Another program allows the borrower to index payments to the income they are earning. If one was not able to get that high-paying job, the loan obligation is adjusted to what income is earned.
Fed Minutes
There is not quite the usual suspense that often accompanies the Fed minutes. This last meeting was not especially controversial, as most of the voting members of the FOMC have been making their positions public record. The expectation is that there is consensus around raising rates two more times this year, most likely in June and September. There is less certainty about what happens next. There are some who are advocating for a slow pace and others who think a December hike should be on the table. Most agree that rates will continue to rise into 2019 at roughly the same pace as 2018.
Short Items of Interest—Global Economy
Erdoğan Presides over Lira Collapse
The monetary crisis continues to accelerate in Turkey as the lira has not lost 13% of its value since the start of May. It is trading at a new record low point against the dollar and can easily weaken further. The central bank wants to hike interest rates to defend the currency, but President Recep Tayyip Erdoğan rejects that notion and threatened to strip the bank of its authority if they try. He is solely concerned with his re-election later this summer and wants the money to flow, even as it sets up a brutal period of inflation. The public seems to have forgotten what that feels like and are just enjoying the government largesse now.
Putin Gets Permission to Retaliate
The Russian parliament surprised nobody with its decision to grant new powers to Vladimir Putin as far as sanctions and trade wars. These powers allow him to impose sanctions on specific U.S. goods, companies and even people if he wants. Not that this makes a lot of difference since the western states have more power to wield than Russia regarding trade. However, there will be some high-profile attacks on select U.S. interests in the future.
Disputes over New Italian Government
The proposed slate of cabinet officials has provoked some staunch resistance from the Italian president and many in the business community. More than a few are uncomfortable with the prime minister after it was revealed that he has been less than honest with his resume. They are very upset with the man who was suggested as the next finance minister because Paolo Savona is a deeply committed Eurosceptic who has long advocated the Italian withdrawal from the eurozone and perhaps from the EU as a whole.
After All That, What Did the Steel Tariffs Accomplish?
It is probably useful to spend a little time on what motivated the imposition of these tariffs on imported steel and aluminum in the first place. The truth is the U.S. steel industry has been under assault for a long time. Much of the pressure has been directly attributable to government decisions and non-decisions. The rush to push the automakers to produce fuel-efficient vehicles resulted in a much-reduced steel content—a third of the steel market. The endless stalling as far as infrastructure building reduced the levels of steel consumed in public sector construction. Most of the U.S. steel industry uses scrap as the primary resource and environmental rules preclude the U.S. from scrapping ships, the largest source of scrap in the world. The list of inhibitions and problems for steel is endless and goes back decades. The tariffs can be seen as an attempt to help get the industry healthy, but if one looks at the execution of the plan, one comes away with deep skepticism.
Analysis: What started with maximum fanfare and a promise to impose tariffs on all imported steel soon devolved when nation after nation won exemptions. Now, even China has been granted an exemption. These are ostensibly temporary and contingent on these nations cooperating with the U.S.; however, the renewals have been approved with little hesitation. The initial announcement of the tariff plan allowed the steelmakers to hike their prices in anticipation of having less foreign product to contend with. There was no immediate motivation for the price hike, but the assumption was that steel would be in short supply, prompting price hikes. Now that it is apparent the tariffs will not be imposed as originally designed, there is no longer that threat of a steel shortage and analysts fully expect competitive pressure to force these prices back down as soon as the foreign suppliers elect to start bringing in more product. The higher prices for steel only served to slow down manufacturers and other users but changed nothing for the steel sector on an ongoing basis. Cynically, the conclusion is that these steel and aluminum tariffs were at best a negotiating tool designed to get something from these steel-producing nations and at worst, it was simply pandering to Trump's political base because they thought this would rescue the industry and promote hiring.
If additional hiring in the steel sector is the factor upon which this plan is to be judged, it was an abject failure. Of the top 10 steel-producing cities in the U.S., none saw employment growth that was at the same rate as that of the country as a whole. The national rate of employment in the U.S. has been 1.6% and the top four steel cities saw a decline of 1.35% (Steubenville and Youngstown in Ohio, Huntington, West Virginia and Pueblo, Colorado). The other top 10 saw some growth, but less than the national norm (Pennsylvania, Canton and Mansfield in Ohio, Decatur and Mobile in Alabama and Monroe in Michigan). The bottom line is that the steel industry needs more than some ephemeral tariff relief and beyond all that, the business has changed. Most of these modern plants rely heavily on technology and robotics and don't hire all that many people anymore.
At the same time that steel jobs have been slow to appear, there is the question of how many manufacturing and construction jobs might have been put at risk. It is next to impossible to compute potential job loss due to a single factor like this one. We are left with anecdotal evidence. It seems that manufacturers have been reacting to higher-priced commodities with reduced hiring and some report they have been unable to take on new projects. It must be pointed out that higher-priced logistics have been a factor as well—transportation companies have been hiking their rates and imposing fuel surcharges in response to the higher, per barrel oil prices.
At least at this point, the impact of the steel tariff plan has been minimal to the steel industry. This could change if the U.S. does decide to impose the tariffs down the road, but most analysts are pointing out that this pattern is the same that was noted in 2002 when the Bush administration tried. That effort was abandoned two years later after it became obvious that it had done the steel sector little good and damaged the manufacturers.
Who Got Hit Hardest in Recession?
Recessions are not always shared. Some people do very well during a downturn because they have more or less protected incomes and can take advantage of the lower levels of inflation. Some segments are hit very hard. They are trying to enter the mainstream of the economy at the precise moment that conditions are the least favorable. It has been assumed for years that millennials were hit the hardest. They struggled to find jobs and then generally found they were not paid as well as those in the past. New research shows that they may not have been the ones with the most depressing experience.
Analysis: Those who were born in the 1980s suffered the largest economic reversals. They collectively saw their wealth levels reduced by 34% over what would have been the case without the recession. Those born in the 1970s saw wealth less than 18% of what it should be and those from the 1960s saw wealth reduced by 11%. It seems that the millennial was protected to some degree by the sacrifices of their parents. Many were able to live at home for an extended period of time and, therefore, able to avoid spending on things, such as food and utilities. There were many in the millennial generation who elected to stay in school rather than test the waters of the employment world and their parents often footed the bill for that as well. All in all, the '80s generation seems to have borne the brunt of the downturn. Now, they are facing the prospect of retiring in the years ahead without the nest egg they assumed they would have when they needed it.
High-Priced Oil and the World's Reaction
For the most obvious and understandable of reasons, the arrival of oil prices in the $80 range is a big concern in the U.S. and not much thought has been given to the impact this could have on the rest of the world. That impact will be more profound for many of these nations than for the U.S. and could be a bigger issue for the U.S. down the road. Perhaps 20 or 30 years ago, the U.S. would look at high-priced oil as nothing but a negative, but that was before the U.S. entered the global ranks as one of the largest oil producers and won the right to start selling some of that production. Now, the high prices will bring a gleam to the eyes of those that produce oil in the U.S. It may not thrill the motorist who is watching the price at the pump get closer and closer to that $3 barrier, but I can guarantee that the good people of North Dakota and Texas are pretty happy about this. The countries that are most worried are those that do not have their own exports and production to offset the high prices. Three stand out as extremely troubled already.
Analysis: India may be at the top of the list because they have seen prices hit all-time highs in just the last few months. This is a nation that has no oil resource of its own and depends on imports for everything. It is also a country that has been growing aggressively and would like to grow even faster. Its rate of expansion rivals that of China and it is within the realm of possibility that India would overtake the Chinese as the fastest growing major nation—not if it is felled by the higher and higher costs of fuel. The government of Narendra Modi is being tested by this development. There have been threats of trucker strikes and there is palpable anger in the urban areas where people simply can't afford the fuel they need to run their businesses or even get to work. There is very little the Indian government can do about these prices at this point, but there has been some noise about doing more business with Iran in the event the U.S. is successful in closing off Iranian markets through sanctions. The Indians know this will anger the U.S., but it may be worth the risk.
Another nation that has been affected by the higher price for oil is China, who also lacks much in the way of their own resources. The Chinese government is not nearly as fragile as India's, but that hardly means there is no ferment over these higher costs. China already does a lot of business with Iran in defiance of the sanctions, but that has often put Iran at a disadvantage as far as pricing. As China was the only game in town, the Chinese could and did demand lower prices for their oil—often $20 a barrel under the prevailing global price. That may be a harder play if there is competition from India for that Iranian oil. If China is forced to pay closer to world price, it will put a strain on the budget since China continues to heavily subsidize the oil sector and consumption of that fuel.
The Japanese are perhaps the third nation affected most by the higher prices. Just as with China and India, the Japanese have no oil and energy resources of their own and must buy based on world prices. The Japanese economy has been growing over the last couple of years, but that pace has slowed recently and a higher price for oil will only make that growth harder to achieve. The most immediate impact will be in freight transportation. Japan remains very closely tied to its export sector. The various modes of transport are all looking at far higher costs than before, which tends to compromise the competitiveness of the overall economy. The Japanese have been good at conserving energy, but that doesn't mean they can escape the impact of high crude prices.
Trump Blames China
The mixed messages sent by Trump to various world leaders used to create a great deal of consternation because the old patterns of international interaction seemed to demand a certain level of consistency. Now, it seems that most simply blow him off and ignore the latest rant. China has barely reacted and the Chinese press has almost seemed amused by the whole thing. It seems, according to Trump, that it is the fault of the Chinese that North Korea's leader appears to be getting cold feet regarding the planned summit. Apparently, China has either suggested this was not a good idea or they have not pushed hard enough to make Kim Jong-un follow through.
Analysis: The Chinese press has essentially agreed with many western analysts that Kim never intended to see this meeting through because he has very little to gain. He already launched himself into a more prestigious position by getting a reaction from the U.S. president and if he meets with Trump, he would be expected to make some solid offers regarding the fate of his weapons. In some respects, the U.S. was played, granting Kim global respect and getting nothing in return. The Chinese have been expressing support for the notion of the summit, but they never stopped being skeptical about its success.
Oh Boy, an Airline Rant
Over the last few days and weeks, my usual patterns of behavior have been drastically altered and this has often gotten on my last nerve. Part of the issue has been my voice and the havoc that was caused by all that cancer treatment. There are days when my voice vanishes completely and I am literally rendered mute. The very latest set of drugs seems to have some impact, making me somewhat intelligible if one is patient with a tone deep enough to handle the Grinch holiday song (not as handy in May as it would be in December). As if that wasn't enough, I had to depart from my usual airline routine and trust Delta, even though I know that is a major mistake. It was a horrific collection of canceled flights, delayed flights and mad dashes through an airport, so that I could be the last person to jump on a plane.
I am not really all that unreasonable when it comes to expectations. I know there are many variables in flying and most of them are out of the airline's control. They can't alter the weather and there is nothing to be done about traffic control's demands that planes hold in place. However, there is control over how employees react. That traffic hold reduced my time to get to the next flight from 45 minutes to less than five. I raced as fast as these old legs could go and the gate agent was starting to close the door. I pointed out that I still had two minutes and she reluctantly let me board. The flight attendant greeted me with a cheery, "You need to plan ahead. You are delaying this whole flight." I started to try to explain that my planning has nothing to do with this—it was Delta that assumed 45 minutes would be sufficient for a connection and it was air traffic control that decided to keep the plane on the ground for half an hour. I decided that would take too long. I simply replied, "You are quite right. I need to plan better. I plan never to fly your lousy airline again."
