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Strategic Global Intelligence Brief for November 11, 2019

By Chris Kuehl, Ph.D., NACM Economist

Short Items of Interest—U.S. Economy

Going Underwater on Vehicles
The homeowner was once the greatest risk as far as going underwater on a loan. It was not uncommon for people to buy a house at a price that was not maintained. By the time they decided to sell that home, it was worth less than when they bought it. Once one has fallen into that trap, it is hard to break out of it. Now this same process is taking place with car loans. This is an even more vicious trap. People are buying new cars before paying off the original loan; carrying over the old loan as well as the new one. This is resulting in people getting loans for twice what the vehicle is worth and thus they can rarely get ahead again. As with underwater mortgages, the risk of default with an underwater car loan is very high.

Not So Fast
To the shock of almost nobody, there is a considerable amount of gamesmanship involved with the trade and tariff discussions. Both the U.S. and China have been trying most everything to push the other into a given position. China announced that a deal might be struck soon and it would involve rolling back tariffs. Trump has announced that no such deal has been made, but his negotiators have hinted that something like a truce is in development. President Xi and the Chinese are positioning the U.S. and Trump as the villains in this arrangement as they are depicted as behaving dishonestly. That is the same assertion Trump makes as regards China. Now it remains for the rest of the world to decide who is at fault and for what.

Tariff Income Increases Dramatically
The U.S. has collected $7 billion in tariffs in the month of September—a 9% increase over August and 59% higher than was collected a year previous. This has been a windfall for the Treasury, but these are taxes paid by the U.S. business community and ultimately the U.S. consumer. Trump continues to assert these tariffs are paid by China or some other foreign entity, but that is not true. The tariff is paid by the entity that buys the import. That means it is paid by Americans. To the extent that other nations are affected by the tariff, it would be indirect. A Chinese company afraid of losing market share will lower the cost of their product to offset the tariff and turn to the Chinese government for subsidy and support. The U.S. business and consumer still pays that tax.

Short Items of Interest—Global Economy

Death Toll Mounts in Hong Kong
A violent end to the protests in Hong Kong is not a matter of if but when. The latest shooting death of a protestor by the police has escalated the tension. The demands now are far beyond anything the Chinese would agree to. The hope by authorities was that the energy of the protests would have ebbed by now, but incidents like this one have only boosted the tension and seem to have set up a major clash that will likely involve considerable bloodshed.

German Recession Is Not Affecting Everyone
As is often the case, the recession in Germany has been hitting some parts of the economy far harder than others. There have been two straight quarters of negative economic growth. That constitutes recession, but thus far it is only manifesting in the manufacturing and industrial sectors. The trade wars that have decked the global economy have had a very negative impact on German export-oriented companies, but at the same time, there has been a surge of activity in the service sector and consumers are still very active.

U.K. Avoids Recession—Barely
The Q3 data in the U.K. was up by 0.3%. That allowed the British to miss recession by the narrowest of margins. There was not a two-consecutive-quarter decline, which is marginally good news. It doesn't change the fact that growth in the U.K. is as slow as it has been since 2010 and the depths of the last recession. The expectation is that negative growth will reappear in the fourth quarter. Then it all depends on what happens in the December elections and the impact on Brexit.

Evo Morales Forced to Resign
The protests have been building in intensity for weeks. They finally reached a breaking point as the military in Bolivia demanded the resignation of President Evo Morales and his entire government. Morales had "won" a fourth term as president just a few weeks ago, but the election was badly flawed. The assertion was that Morales and his supporters rigged it. There were accusations of ballot box stuffing, destruction of opposition ballots, intimidation of voters and so on. The Morales government had been consistently behind in all the independent polls and yet claimed an overwhelming victory. This prompted protests from the opposition at first, but these soon expanded to a larger segment of the population. The Morales government was seen as corrupt to the core and was frustrating the majority of the population with policies that were similar to those of Hugo Chavez in Venezuela. A great deal of the money earned from Bolivia's gas and mining interests went to prop up other leftist regimes and politicians in the region—Maduro in Venezuela, the Fernandez campaign in Argentina and the governments in Ecuador and Cuba. This spending came at the expense of the Bolivian population and fed the anger at corrupt practices within the Morales inner circle.

Analysis: The situation now is very fluid with a temporary government trying to form under the leadership of Jeanine Anez—deputy head of the Senate and a member of the opposition. She has asserted that she would only serve as a caretaker until another round of elections can take place. The timing of that election is up in the air as the country is essentially in the hands of the military for the time being and they have not indicated they are in a hurry to shift power back to the civilians. The sense is that the nation is now as deeply divided as it has ever been with the Morales supporters now taking to the streets in protest. The military has urged calm and has not ruled out the use of force to bring an end to the protests.

Various left-leaning leaders in the region are calling this a "coup." They have been joined in this assessment by Jeremy Corbyn from the Labor Party in the U.K. This stance has not gone over well with many of the moderate Labor members as Morales has been viewed as a left-wing tyrant through his terms as president in Bolivia. Most wonder why Corbyn decided to get into this debate at all given the more pressing issues of a U.K. election in a matter of weeks.

Bolivia is a major provider of natural gas to the region and also sits on one of the largest lithium deposits in the world. That makes what happens in this nation more than a little important to the region as well as the developed world needing that lithium for modern electronics.

Spanish Elections Inconclusive
There had been some faint hope that new elections in Spain would break the current stalemate, but instead, the political situation is murkier now than it was before. The Socialists had hoped to gain more control in the Parliament; there were even those who thought they might gain an absolute majority. This was not the case as they continued to be the largest party but lost seats and are now even weaker than they were before. They may not even be able to cobble together a coalition this time as the only party that could help them get a majority is Podemos—a radical left-wing party that has opposed the Sanchez government at every turn.

The big winner was the far-right Vox party. It doubled the number of seats in Parliament and took a great many votes away from the center-right Ciudadanos group. The Vox supporters seemed to react to two issues—a tougher line on Catalan autonomy and a tougher line on immigration. Vox wants a state of emergency in Catalonia and an end to autonomy. It also wants immigrants returned to North Africa and the Middle East. The right-wing parties are not large enough to form a government—even if they could find a way to work with one another.

Analysis: Spain is going to be without a functioning government once again. This creates immense problems as far as the financial position of the country. The EU has been demanding fiscal policy that deals with the debt and deficit. That means raising taxes and reducing spending. Even a strong government would be hard pressed to pull this off. A weak collection of mutually hostile parties tied together by convenience will have almost no ability to get this reform passed. The country had been making some progress on issues such as employment and economic growth, but these programs are now in jeopardy as the focus of the voter now seems to be on emotional issues such as immigration and Catalan protests.

What is Motivating the Job Market?
The decision to hire somebody or to fire them is a very personal one and has everything to do with the circumstances facing that specific employer. The rate of job creation has been tapering off for the last several months. This is a pattern expected to continue through the bulk of next year. Thus far, there have been few signs suggesting layoffs are in the offing, although there have been some sectors that have started to feature some manpower reduction (especially in some manufacturing areas). The question is why this slowdown has been taking place as the answer to this query will inform policy reaction.

Analysis: There are three primary reasons for a slowdown in hiring. All three appear to be playing a role although it is not clear that any one of them is the dominant rationale. There is the fact that companies think they have the staff they need and see no reason to hire more. This would suggest that business is not expanding at a pace that would justify additional employees. If this is the main reason that hiring has tapered off, it is reinforcing the idea of an economic slowdown.

A second reason for a slower hiring pace is the shortage of qualified workers. There are still millions of stated job openings every month, but they are not getting filled as there are too few people with the qualifications for the jobs on offer. This sends a completely different message. The economy might be able to grow faster and perhaps is growing faster than the available talent will support. There is quite a lot of evidence that hiring has been compromised by this lack of skilled workforce.

A third reason for a slow pace in hiring is related to the number of people in the workforce. There has been hiring, but there has also been a lot of retirement as some 10,000 Boomers reach retirement age every day. This skews the numbers as it can obscure the fact that hiring is taking place—just not at the same pace as those that are leaving the workforce.

Data to Look for This Week
Both the Commerce Department and the Fed will release data later this week. These numbers should help define where the economy is at the moment. The Commerce release will look at retail activity thus far this year and is expected to improve. The estimate is growth at about 0.2% as compared to a slight decline the previous month. This is not too surprising given the time of year. It will be a strong signal if the actual number is either much higher or lower than forecast. The Fed will release industrial production numbers. These have been a little rocky of late. Manufacturing has been down for several months. In some sectors, it has come close to recession with two consecutive quarters of decline. The mining sector (including oil and gas) will likely remain flat and utilities will have declined a little now that the summer months and peak demand are over.

Analysis: At this point, there is no expectation of a dramatic data change this week. The hope is that continued steady progress is made through the rest of the year in retail and that the slump in manufacturing doesn't turn into a rout of some duration. The majority of the economic indicators are turning flat; some are in actual decline at this point. The Purchasing Managers' Index has been declining and has been in contraction territory for the last three months. There have been reductions as far as durable goods and factory orders as well.

Fed Tackles Climate Change
The facts regarding climate change are irrefutable. There may be ongoing debates over what exactly is to blame for the increased levels of greenhouse gas and the altering of the climate (auto exhaust, power plants, gassy bovines, sunspots and so on). The point is that the climate has been changing and faster than has been anticipated. This has had an impact on the global economy. That impact will only accelerate. The Federal Reserve is trying to determine just what this looks like going forward.

Analysis: There will be an impact on productivity and long-term growth as there already has been. The larger number and longer duration of heat waves will affect agricultural productivity as well as force adaptations to the heat (more use of air conditioning in places that didn't need it before). There have been more natural disasters and these have been more expensive. Flooding has become an issue in places that it wasn't before. Migration patterns will be affected as has been evident the last few years. Those that have been fleeing their original homes are being driven out by the shift in growing seasons and a shortage of water. Developed nations are also running short of water and have seen their farm communities altered drastically.

The Fed is trying to determine what this might mean for the long-run neutral position for interest rates—the level that is neither stimulating growth nor addressing inflation. The rates over the last several years have been more volatile than would be preferred. When they are always changing, it is harder for businesses to plan and anticipate as they are always wondering if there will be a rate change that would make money more or less expensive. The Fed would much prefer a nice long period of stability so that everyone could assume a given rate.

Winter Has Arrived
It's here at least temporarily. As I gaze out the window, it looks pretty bleak—bitter cold, snow and high winds. It's the kind of weather that makes one wonder what it would be like to live elsewhere—somewhere warm. In truth, I am not all that opposed to a good dose of winter weather on occasion—although this blast is a little early. I like the contrasts I get in the middle of the country and I am not just saying that as a defensive Middle Westerner. I like the fact it gets cold and snowy for a few months as it encourages those cozy indoor pursuits and means I will be spared some of that outside yard work for a while. I like the anticipation of spring in a few months and the fact I will have forgotten all the muscle aches by then.

As I travel, I get a chance to see other climates in action and can certainly appreciate the splendors of alternative weather. In the weeks to come, I will escape my hometown chill with short jaunts to Ft. Lauderdale, Las Vegas, Orlando and Bonita Springs. Of course, I also get to throw in winter trips to Boston, Tulsa, Indianapolis and Nashville. At least nobody is asking me to go to Fargo or Duluth right now. The "fun" part of this kind of travel is that I never have the right clothing as I try to travel very light. I will be in Chicago, Wichita, Las Vegas and Ft. Lauderdale this week—what exactly should I have? As usual I will travel in a suit and hope my wait for my Uber is a short one!

Industrial Production for Total Industry and Main Industrial Groupings
The graph (from Eurostat) shows that there has been a dramatic convergence of industrial production data in the last few years. There was considerable volatility through the early 2000s, but now the readings are far more tightly grouped. That suggests there are bigger economic drivers at work that have been affecting all these categories. The tightest range was in 2015. Now there are some hints of divergence, but nothing like what was seen prior to 2014.


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Saturday, 07 December 2019