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Strategic Global Intelligence Brief for May 4, 2018

Short Items of Interest—U.S. Economy
Long Fight Ahead All of the commentary that is coming from both the Chinese and American trade negotiators is suggesting that this will be a long and arduous process. This is both good and bad news for those that do business with China or count on Chinese products. The good news is that it now seems that threats to start immediate action against Chinese products may be delayed for a long period of time. There is no guarantee of this, as there may be actions from time to time to push talks in a specific direction. The bad news is there will be no short-term solution that will allow both countries to resume normal relations. The business community in both nations will simply have to wait to see what transpires. This will inhibit many investment plans and supply arrangements.
ISM Service Index Slips Both the manufacturing and service sectors have slowed a bit, according to the latest surveys from the Institute of Supply Management (ISM). The good news is that both of the indices are still firmly in positive territory with the service index now at 56.8 after a 58.8 reading the month before. The decline is not yet all that concerning as readings in the mid-50s are still very strong. The growth is generally coming from sectors such as health care, retail, construction and finance, but for the last three months, there has been some concern over issues like materials costs, labor costs and the potential disruption of a trade war.
Sharp Fall in Trade Deficit There are many factors that affect trade and it is useful to note the volatility before getting too worked up by these numbers. The 15% decline in the trade deficit was one of the largest drops in years and the major reason for the dip was recovery from hurricanes. As odd as that sounds, consider the key sector as far as trade is concerned. Without working ports, there is no export activity and no import activity. The hurricanes last year wrecked some of the most important export-oriented ports. Now that these have been rebuilt and repaired, the export levels are rising at a rapid clip.
Short Items of Interest—Global Economy
Argentina Scrambles to Protect Peso For the second time in two weeks, the Argentine central bank has pushed interest rates up and pumped almost $5 billion in an effort to support the faltering peso. The exporters are not upset because this fall is making everything in Argentina cheaper. But, this is a nation that relies heavily on imports and they are getting very costly. It is not just Argentina that faces this issue since all the emerging market currencies are feeling the pressure. Investors are convinced the U.S. will be hiking rates and most are equally convinced the European Central Bank will follow suit. Watching the 10-year treasury yield hit 3% has also unnerved the markets, which has the emerging sectors in trouble.
Japan Not Ready for "Me Too" Movement Studies conducted in Japan revealed that almost 60% of women in the workforce have been subjected to sexual harassment that often goes far beyond the kind of behavior that has been attracting attention in the U.S. Those who have tried to bring the issue to the forefront have not seen the support shown in the U.S. and most have been subjected to extreme criticism for their accusations. The vast majority of those who assert they have been harassed indicate that they made no effort to report it because they did not want to endure the attacks and criticism.
Iran Missile Deal The critical issue for the Trump team as far as Iran is concerned has been their missile program. This is really the major concern for Israel and the U.S. has taken up the cause. Reports suggest that Europe has agreed to impose very strict sanctions against Iran if they continue to develop long-range missiles and that throws the ball in their court. If these projects are resumed, the Europeans will join the U.S. in abandoning the deal and those crippling economic sanctions will be imposed anew. The Trump team has not stated it will continue with the agreement, but this seems to have met the demands made.
Jobs Report: What Stands Out By the time you read this, the jobs report will have been released and there will be answers to some questions. The jobs data has been very solid for months and nobody is expecting anything like a reversal of this pattern. The overall rate of unemployment will stay close to the 4% level it has been hitting for the last several months. If anything, it may even creep up a little because some of those who have been defined as "discouraged" workers are coming back to the official fold and seeking work. The interesting stuff will likely be in the subtle details.
Analysis: One of the important questions will be whether unemployment numbers will continue to trend lower or whether they will start to head up to levels more consistent with long-term trends. The Fed (and other analysts) have asserted that a more normal rate of unemployment would be between 4.3% and 5%. They look at the current rates as somewhat anomalous. The Fed also asserts that this anomaly is likely not over and that rates of unemployment could dip as low as 3.8% before they head back up. The reason for this trend is that there has been a surge of retirement due to aging Baby Boomers. That will, at some point, start to ease off as the last of the Boomers reach age 65 and the millennial generation fully enters the workforce—the millennial generation is now larger than the active Boomer generation in the workforce. Down the road, there is an expectation that chronic labor shortages will cause different policy positions as far as immigration. The opposition to illegal migration will remain, but there may be far more interest in legal immigration of those with the skills needed.
A close eye will be kept on the number of new jobs offered. Last month was not all that positive, only 103,000 added. This was a marked contrast with the 326,000 that had been added in February. If the April numbers look like the March numbers, there will be more concern, but if there is a rebound back to the February levels, there will be a much more positive reaction. If the total ends up somewhere in the middle, it will be an opportunity for both pessimists and optimists to make their case. The factors that may have led March downward, including the miserable weather in the Northeast that seriously hampered everything from construction to retail as well as the issue of skill shortage. Many companies want to hire, but they simply can't find the people they need; therefore, they stay on the sidelines.
The issue that has been at the forefront for months now has been wages. The Phillips Curve states that when unemployment rates get this low, there will automatically be a reaction as far as wage inflation. This makes intuitive sense and it has played out this way since the 1950s. The rate is low and yet the average annual wage rate increase has been just 2.5% or lower. The latest numbers have that rate up around 2.9%, but that is still paltry given the low rate of overall unemployment. If that trend continues, it will have an impact on the inflation threat the Fed has been paying attention to. There is clearly commodity inflation appearing. Oil prices are now in the mid- to upper-$70 range and industrial metals are climbing due to the imposition of steel and aluminum tariffs. If there is a corresponding rise in wage inflation, the expectation is that the Fed will be more aggressive in regards to interest rates. It is clear that investors are starting to worry more about the inflation issue as the 10-year treasury yield hit that important 3% level.
Another indicator that bears watching is labor force participation. It is still in the low 60s when looking at the entire workforce, but that number includes the people who have reached retirement age and those who are still in school or are just starting to enter their prime work years. The rate for those who are in their prime work years (ages 25 to 54) is now at 82.2%—the highest level in seven years but still short of the 83% that was notched prior to the recession. Then, there is the rate of underemployment. The U-3 rate is at a 17-year low, but the more comprehensive measure, referred to as U-6, has not been quite as impressive. It is at an 11-year low of 8%, but that doesn't equal the level that existed prior to the recession.
Some More Factors to Pay Attention To Not everything that is of interest regarding the labor force will be contained in this report and attention should also be paid to reports like JOLTS (Job Opportunity and Labor Turnover Survey). This will include the quit rate—an important indicator of how willing people are to bolt from their current job and seek other employment. The higher the number, the better the assumption of more confidence in the workforce. Attention should also be geared toward the number of summer jobs available and whether they are being taken by the younger workers or if they are going to long-time job seekers who have not been able to land other work. The preference is for the younger applicant.
Analysis: At the end of the day, employment data has an outsized impact on people's attitudes. It is simply that confidence builds when it seems that jobs are safe enough and that alternatives exist. The person with a job looks around and if they see that others are losing their positions, they naturally start to worry about their own employment longevity. If they see people getting hired, they feel more secure and assume that if they do get laid off, they will be able to land somewhere. All of the consumer confidence surveys that have been trending in a positive direction assert that consumers are more confident about their employment situation than at any time since the recession started.
Italy Likely to Face New Elections Soon In the aftermath of the last election, the traditional parties in Italy seemed to agree on one thing: They did not want to end up asking the electorate to go back to the polls. The fear was and remains that voters would give even more support to the anti-establishment parties, such as the Five Star Movement and the Northern Alliance as well as other unorthodox groups. The once ruling PD (Democratic Party) of the center left took a beating as did the center right party of Silvio Berlusconi. In the immediate aftermath of the vote, it was assumed that some kind of coalition would emerge that would be based on a combination of the Five Star Movement and the Northern Alliance. An additional assumption was that this coalition would not be able to rule without cooperation from the PD or perhaps Forza Italia (Berlusconi's party). This is how they would be kept in check and it was asserted that after a few years of inept and failing government, the voters would go back to their old favorites.
Analysis: This plan has not played out as expected, as these two outsider parties are far apart and have no real grounds to form even a weak coalition. Suddenly, the only option seemed to be a combination of one of the traditional parties and one of the outsiders. The Northern Alliance swiftly took itself out of that equation with its refusal to consider either center left or center right unless they agreed to a policy that essentially granted northern Italy virtual autonomy. That left the Five Star Movement and perhaps the PD. Talks had been underway until the former Prime Minister Matteo Renzi threw cold water on the combination. The fact is that these two parties are simply too far apart. Renzi has all but ended speculation regarding a tie-up with the Five Star Movement, meaning that another election may be the only way to secure a government for the country.
Nervousness remains as far as the dominant parties are concerned. The polls suggest that Italian voters remain in a very bad and anti-establishment mood. They did not trust the center left and the center right in the last election, and there has been little change. If anything, support for the anti-establishment has grown and it is possible that voters might propel the Five Star Movement or even the Northern Alliance to power without the need for a partner. The more likely outcome is that the Five Star Movement either gains or loses leverage. If they do well in the polls, they will be able to push harder for the PD to form a coalition on their terms. But if they slip in the polls, the PD will have the leverage and could demand policy positions that line up better with their positions.
Europe Worries About Growth The latest numbers from the European Union (EU) are not as robust as they were last year. This has many worrying about the longevity of the growth progress that started in late-2016. The major concern among EU members revolves around trade and the impact of the U.S. and its protectionist impulses. The arguments over steel and aluminum tariffs have been unsettling and have many in Europe concerned that their relationship with the U.S. is fraying and could end the growth that has been driving these economies. The trade dependency in Europe is no secret—Germany relies on exports for over 50% of its GDP and France is close to 40%. The eurozone as a whole relies on exports for almost a third of the overall GDP. Much of that trade is essentially internal between other members of the eurozone, but there are countries that also make up a major part of the trade equation. At the top of that list is the U.S. Trade with Europe is 25% of the U.S. export market for both imports and exports.
Analysis: At this point, the Europeans are diligently trying to make the case to the U.S. that wrecking these trade ties would be as bad for the U.S. as it would be for the Europeans. The assumption has been that special ties exist between the U.S. and Europe and that has certainly been the case for the business community. Of those companies in the U.S. that engage in international business, over 96% of them do business in Europe and almost 45% do no international business outside Europe. The leading nations, as far as foreign direct investment in the U.S., are European and there has been a great deal of cross-fertilization among corporate partners.
The threats from the White House have not been realized and remain threats. The tariffs on steel and aluminum were not imposed and the EU states just won another one-month reprieve. The Europeans object to jumping through these hoops given the long-standing alliances with the U.S. The simple message right now is that a slowdown in Europe will trigger a slowdown in the U.S. The U.S. export sector makes up 15% of the total U.S. GDP and losing a market the size of Europe puts a dent in that export contribution. The sense is that differences can be settled and radical changes are unnecessary.
I Did Not Request This!!! This phrase has become my unwilling mantra when it comes to technology these days. Not a day goes by without some automatic addition to my technology. Suddenly, my phone rings on my wife's iPad or my phone decides that it needs me to verify a message deletion two or three more times. I am bugged daily to use fingerprints or secret codes or a system that requires me to contribute blood. The pop-ups are relentless and utterly unwanted. If I desire something, I will tell you, seek you out and agree to it. Lurching in my view like the most aggressive of panhandlers is not going to get my attention—at least not my positive attention.
Having reached the tender age when some contemplate retirement, I am now inundated with dozens of phone calls offering me "help" and Medicare assistance. This is patently illegal and the callers know this because when I ask for their insurance number so that I can report them to the Federal Trade Commission, they hang up, while some have even cursed at me. What I want to know is what kind of nitwit responds to these blatant scams. Somebody must or it would not keep happening.
Over the years, the car dealers seem to have learned that harassment and pestering is counterproductive and today, the experience is far more professional and smooth. At the same time, other sectors have elected to go the other route, concluding that high pressure tactics work. It is my assertion that it does not, but maybe I am alone in this assessment.

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