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Strategic Global Intelligence Brief for May 6, 2019

Short Items of Interest—U.S. Economy

Trump Throws Wrench into China Trade Talks
For the last few weeks, it has appeared there was real progress being made in terms of U.S.-China trade talks. Even those who have been negotiating for the U.S. have been sounding optimistic. It seemed there were still some tough last-minute details to be worked out, but the fundamentals were there. That all ended this weekend with another flurry of tweets from President Trump as he elected to issue a whole new series of threats regarding tariffs. These would seriously hurt both the U.S. and Chinese economies and have been universally panned by analysts. It also makes it harder for the Chinese to make a deal without seeming weak. Nobody has yet offered a clue as to what prompted this latest tirade from Trump.

Good Minority News from Employment Data
The good news is the unemployment rate for minorities improved in the latest set of numbers to levels not seen in years. The bad news is that unemployment rates for minorities are still higher than for the white population. The rate for black men is now 6.8%; for black women it is 5.3%. The rate for Hispanic males is 4.1% and for Hispanic women it is 3.7%. That compares with a rate of 3% for white men and 2.8% for white women. In general, women have lower rates of unemployment, but they are also being paid less than men. Some of that difference is due to the fact that more women are in low-paid service jobs, but there is also ample evidence that women are not paid the same as men doing the same job.

Some Hints That Rates Might Fall
There is certainly no consensus at this point, but there is talk among some at the Fed that interest rates might be lowered in the not distant future. It all depends on what happens with the inflation rate. Thus far, the rate has fallen far short of the ideal position the Fed has indicated for years—2%. If the core rate stays below that 2% level, there would be room to stimulate. It will all come down to whether there is wage inflation to consider and whether commodity prices start to rise and stay high.

Short Items of Interest—Global Economy

Global Economy Shocked by Trump Tirade
The global markets have been stunned by the latest Trump outburst. Suddenly, it appears that a full-fledged trade war will indeed erupt between the U.S. and China. The word from Beijing is that negotiators are furious and no longer think the U.S. even wants a deal. Analysts in the U.S. are coming to the same conclusion—asserting that Trump never wanted a deal at all as he believes that a full-on fight with China will thrill his base and lead to more support in 2020. The problem is that such a fight could well signal the end of the economic progress the U.S. has enjoyed thus far this year.

Deep Depression in Venezuela
The exodus from Venezuela is in full gear now. The failed coup has made two things clear to the Venezuelan people. The Maduro government is going to be propped up by China, Russia and Cuba to the bitter end. The second point is that Maduro is willing to sacrifice his entire population if that is what it takes to stay in power. The majority of those who are not in his inner circle now assume they have no alternative other than to flee and the waves of refugees has dramatically increased.

Populism and Fiscal Rectitude
There are many factors that have seemed to propel populism in Europe, but at the top of the list has been economic privation. The stagnation of incomes and the attempts at fiscal control have left people uneasy regarding their financial future and angry at those who seem to be unwilling to help.

Global Experiment on Minimum Wage
The U.S. has been locked in a battle over what the minimum wage should be and even over whether there should be a mandated minimum at all. The logic for both positions can be fairly compelling. Those who want a higher minimum point out that people getting the current minimum are not making enough to stay out of poverty—they become the working poor. In many cases, the fact they have a job at all precludes receiving many of the benefits that an unemployed person would be eligible for. That serves as a disincentive to work at all. Those who oppose the higher minimum assert these low-paid jobs were never intended to be career jobs. They are supposed to be for young people just starting out or people choosing part-time work. They also assert many businesses are going to be unable to handle the increased labor costs without reducing the size of their staff. The arguments for and against get immensely complex. The U.S. is far from the only nation grappling with the issue as dozens of countries are now experimenting with different levels of a minimum wage. There are basically four questions that everybody seems interested in answering.

Analysis: The first is how much money is enough. Is a minimum wage of $8 or $10 or $15 or $20 sufficient? The basic rule of thumb is that a minimum should be 60% of the country's median wage level. If the U.S. went to a $15 an hour minimum that would be 70% of the national median wage. Other nations are hewing close to the 60% threshold, but regional differences play an enormous role. A $15 wage in Mississippi will go a lot further than one in San Francisco. Should the minimum be calculated according to the median wage in a given city or state? That would mean that minimum wage in San Francisco would be a little over $58,000 a year (median wage is $97,000), while the $15 minimum would be $31,200 nationally.

What happens to those with limited skills and education when the minimum wage goes up? At what point do employers adjust and find alternatives? There is already abundant evidence that technology is replacing human activity—especially at the lower end of the skill set. It has been suggested that 60% of jobs are vulnerable to technology and robotics. Take the fast food industry as an example. This has been a haven for the starting worker. It has been assumed that the majority of workers are in their teens and just starting their working lives. That assumption is no longer very accurate as there are more adults working than ever—people supplementing their retirement income, immigrants, single parents and so on. They most definitely need that $15-an-hour job, but the restaurant is dealing with low margins as a rule. The tension is between the worker and the machine. More and more places are substituting the automated touch screen for counter help. Now, robots are making inroads into food preparation. There are already places that are fully automated and have perhaps one employee in place to monitor the system. The traditional fast food place employs around 15 people. That is down from nearly 20 just a few years ago.

The other reaction to higher minimum wage demands has been to hire fewer people, but only those with experience and qualifications. They are paid more but replace several of the less qualified. These are also far harder to find and contribute to the overall shortage of labor. The argument over wages also involves consumers. If people are not paid well, they are unlikely to be good consumers. That limits business as well. With all the experiments taking place now, there is a possibility some nation will manage to find the ideal situation.

Some Good and Some Not So Good in the Jobs Report
As usual, there is something for both the "glass half-full" and the "glass half-empty" crowds in the latest jobs data. There is no other measure that gets as much attention from the public despite the fact it is a complicated process to figure out how many people are actually working in a population that exceeds 330 million. It is simply that nothing really matters about the economy more than jobs when it comes to the average person/consumer. The economist is pretty interested in this jobs data as well, but there is generally more attention paid to the little trends and some of the more obscure numbers. The headline stuff continues to be impressive and the numbers continue to be at expectations—a gain of 263,000 jobs when the estimate had been for a gain of maybe 190,000. The overall rate of unemployment has fallen to a near 50-year low with a reading of 3.6%. Numbers such as these are expected to trigger certain economic responses and trends, but thus far they haven't. That continues to be a major puzzle.

Analysis: We have beaten the Phillips Curve to death in this newsletter. It was once one of the most reliable of economic rules and it was also one of the most logical. Developed in the 1950s, the idea was simple enough—when the rate of joblessness fell, there would be an almost automatic rise in wages and salaries—a rise high and rapid enough to trigger wage inflation. That wage inflation, in turn, would provoke the Federal Reserve to start hiking interest rates in order to fend off inflation. It worked like this for decades, but suddenly that connection seems to have vanished. The latest numbers show that even with this record low unemployment rate, the rise in wages has been limited—it fell to a pace of 2.9% year-over-year. That is the first time it has fallen below 3% since the beginning of last year. It is very odd that wages would stop going up at the same time that the rate of unemployment was hitting new record lows. It points to some fundamental weaknesses in the jobs data.

The three factors that are causing a certain amount of long-term angst include the kind of jobs that are being created and filled, the qualifications of those that are being hired and the impact of retirement. The first of these issues revolves around the fact that most of the new jobs being added are not all that good (at least from a pay perspective). They are largely in the service sector and in the lower end of that sector at that—everything from food service to maintenance and entertainment. There has even been a surge in the "gig" jobs such as ride sharing and the like. The addition of low-paid jobs doesn't have the economic impact that adding good jobs would. Many of these new jobs are dead-end jobs that are not going to offer people an opportunity for advancement and raises.

The second issue is hiring people who are less than qualified for the job. The labor shortage has been acute in manufacturing, construction, transportation and even health care. Many companies have simply given up trying to find people with the skills and education required and have instead focused on attitude and willingness to get trained. That means they are hiring with the intent to train or educate formally and informally. Either way, they will be unlikely to pay the wages they would ordinarily pay while these people are in training. That lowers the overall rate of pay hike, but it also sets up a rapid set of pay hikes down the road. As people get the training and experience, they will expect pay hikes. If the company that hired them doesn't adjust, they are very likely to seek employment with somebody else, and at a higher rate of pay.

Finally, there is the impact of retirement. It has been noted many times that some 10,000 Boomers retire every day. Not all of them actually retire, but those that stay in some capacity often get lower salaries as they essentially go part time. The people that leave will be replaced by people with less experience and seniority and will thus be making less money. That pulls down average earnings across the board.

To one degree or another, there are issues of average pay that are different than has been the case in the past. These factors are affecting some core connections between jobs and the overall health of the economy. Beyond all this, there remains the issue of workforce participation. That number remains low as there are more retirees and more people opting not to work as they are faced with the task of caring for elderly relatives and children.

Costs of Care
The point has often been made that many people who would be in the workforce have chosen to stay out because they are taking care of children or elderly relatives. What is that cost anyway? It has been estimated that raising a child from birth to age 18 can cost between $200,000 and $350,000. The majority of that expense is paying for child care. Handling child care by oneself cuts the costs by over half. Caring for an elderly relative can cost between $150,000 and $250,000, spread over only four to six years as opposed to 18 for a child. Almost two-thirds of that cost is comprised of some kind of professional adult care—either nursing home expense or the use of services brought to the home.

Analysis: The plain fact is many people simply do not have the money to pay somebody else to provide even part of the care required by kids or parents. They face a simple equation of determining which is cheaper—having one spouse quitting their job to stay at home to provide that care or finding a way to pay the professionals. The latter option is simply out of reach for many and they have no choice but to drop out of the workforce. The economic impact can be severe as these are people who were in their prime earning years as opposed to younger workers. It may be harder for them to resume their careers once they are able to.

Giving Up on the Gig Economy?
Part of the appeal of the "gig economy" was that fact that unemployment rates were high at the time of the recession. This was the period when the concept started to take off—everything from making a living with ride share to stringing together several part-time jobs to equal a full-time paycheck. Now that the rate of joblessness is at record lows, the appeal of the "gig" has been reduced. For all the advantages of having schedule flexibility, these jobs lacked any sort of security or even long-term stability. That always limited their popularity for some, but that number has expanded.

Analysis: The idea of a gig economy will not vanish altogether as it maintains its appeal for those who really need that schedule control, but there was a point when people expected it to emerge as the dominant means by which people would be paid. That seems very unlikely now or as long as the rate of joblessness remains low. The ride share movement is a good example as the average driver is now truly a part-time worker—students, retired people, people with other part-time jobs and those that may be stay-at-home caretakers taking a break.

April Showers Bring May Muscle Aches
Each year brings the same set of mixed emotions. At first, I am downright giddy with the fact that shoots of green have started to appear and the threat of snow and ice has vanished. I look forward to visiting the garden center and seeing all that gorgeous stuff on display. My head fills with fantasy—of basking in the garden enjoying the sun and gentle breezes. This idyll is soon interrupted by cruel reality—getting to the basking point means hard physical labor—the kind I have avoided like the plague all winter long.

I spent the bulk of the weekend in the yard—mowing, trimming, painting the deck, moving outside stuff to where it belongs and calculating the 600 projects that will now need attention. My muscles are objecting strenuously— demanding to know what was wrong with sitting around watching episodes of the Incredible Dr. Pol. I can safely say I now have aches in places I didn't remember I even had. In time, this will pass and it will be November again. My thoughts will turn to the joy of winter slumber and the beauty of fresh fallen snow. Could it be that I am simply too hard to please?

Employment Rate Gap by Level of Education
The majority of the chart below is about what one would expect. Those with a higher level of education have the best chance of getting and keeping a job. The higher the level of education, the better the job and the better the chances being hired. One thing stands out in all this. There has been a sharp decline in the employment prospects for people who have some college. That rate has fallen below those with less than high school. It seems that employers are not all that comfortable with those who do not finish what they started.


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Sunday, 15 September 2019