By Chris Kuehl, Ph.D., NACM Economist—
Short Items of Interest—U.S. Economy—
Another Round of Stopgap Funding—
The government shutdown will be averted once again, but there is still no real budget in place. The decision was made to pass another short-term extension and keep the government functioning through December 20. The Senate will take up the House measure and Trump has indicated he will sign it despite the fact that key issues are still not addressed. The primary hang-up has been over funding of the border wall. The House Democrats do not want it funded and there are more than a few dissenting Republicans now. The issue is a priority for Trump. That means it will feature prominently in the debate over the budget next year.
Energy Slump Hits Manufacturing
The good news for manufacturers has been that energy development has been booming in the U.S. over the last decade. The emergence of the U.S. as the dominant energy producer again boosted the sectors that fed into oil and gas. The bad news is that manufacturing is dependent on that sector and is now affected by the frequent booms and busts in oil field activity. Oil is an inelastic good. That makes demand and supply crucial. As the economy of the world has stuttered, there has been a reduction in demand for oil, which has meant declining production in the U.S. oil sector.
Jobs but Not Good Ones
There has been a good bit of job creation over the last several years—almost every month has featured gains of over 100,000 and often close to 200,000. The problem is the vast majority of these are low-paid service sector jobs and there have continued to be layoffs in the better-paid sectors. The irony is manufacturing has lost roughly 30% of total employment at the same time there is a worker shortage. The problem is the workers losing their jobs lack the skills and education to take the new jobs. The solution would be to train the old workers to do the new jobs, but that is far easier said than done given the background of those who need the training and the expense involved in that conversion.
Short Items of Interest—Global Economy
ISIS Rebounds Quickly
The latest report on the status of ISIS from the Pentagon indicates reports of their demise have been grossly exaggerated. The organization has not been affected by the death of its leader as others swiftly replaced him. The Turkish incursion into Syria was a boon to ISIS as it removed their Kurdish opponents and provided a recruiting tool for ISIS because it now has the Turks to react against. ISIS is getting stronger in the region, but it is not clear what the focus of their attacks will be since the idea of a Caliphate has been dashed.
Tories Gain in Election Polls
In a race that has been called a contest of lesser evils, the Conservatives have been gaining at the expense of both the Labor Party and the Liberal Democrats. At last look, the Tories had a 42% share as compared to 29% for Labor and 14% for the Liberal Democrats. The Brexit party has around 6% with the others bringing up the rear. If a government was to form today, the two main parties would need to form a coalition. The Tory/Brexit combo would still fall just short of a majority with 48%, while a Labor/Liberal Democrat combo would hold 43% and also fall short. The potential is great for a minority Parliament and that is inherently unstable.
WTO Predicts Slower Global Growth
It comes as no shock that the World Trade Organization (WTO) has added its voice to the chorus of international organizations that predict a far slower pace of global growth in the coming year. Trade throughout the world has been constrained by a variety of factors—everything from new tariffs and other barriers to issues connected to slower domestic economies. The pace now is as slow as it has been since the recession in 2008 and could slump even more next year if these trade wars escalate. The major concern is the battle between the U.S. and China, but there are many other confrontations.
Tired of This Dance Yet?
It comes as a shock to absolutely nobody that the trade negotiations between the Trump White House and the Xi government have stalled again. This set of talks ceased being about economic issues months ago and has deteriorated into a very personal test of wills between Presidents Trump and Xi. There are valid reasons to want a different trade relationship between the two nations, but the current impasse has transcended any sort of pragmatic approach to a complex problem. The ostensible reasons for the latest breakdown are simply not serious enough to warrant this kind of reaction. It is apparent that neither leader really wants a solution right now—not if that solution appears to make them look at all weak.
Analysis: Trump is insisting China dramatically boost agricultural imports from the U.S. The reason for this insistence is apparent enough as Trump needs to score points with his political base—a base that remains largely in the rural areas. To cut a deal with the Chinese that does not include significant increases in imports would frustrate that base. The Chinese have agreed to buy more from the U.S., but the reality is they do not need all that much from the U.S. or anywhere else at the moment. The Chinese are facing a severe outbreak of swine flu. It has been estimated that between a quarter and a third of their hog population has been destroyed so they don't need to import soybeans. If there is still reluctance to buy more soybeans next spring, the blame can be laid on tariffs and trade politics as this will be when the Chinese will be trying to rebuild that hog population.
The Chinese are also making demands and difficult ones for the U.S. to agree to. The Chinese want the current tariffs lifted—almost in their entirety. It is obvious enough why this is desired, but the U.S. would essentially lose all of its leverage over the course of future talks. The U.S. would prefer to halt further tariff hikes and perhaps scale back some of the tariffs already imposed, but it does not want all the restrictions and tariffs removed before there is progress on some of the bigger issues such as protection of intellectual property, government subsidies and the like.
At this point, a solution to the trade crisis doesn't seem likely before the end of the year despite the fact both leaders claim this remains their goal. Either Trump or Xi will have to capitulate to the other. This is not something that appears at all possible.
More Trade Politics
The fate of the NAFTA rewrite is unclear at this point. The USMCA (U.S., Mexico, Canada Agreement) was supposed to be an improvement over NAFTA and it was supposed to have been in place long before this point. In many respects it is simply NAFTA with a new name, but there have been changes in areas such as domestic content in manufacturing, agricultural trade and rules regarding the environment and labor. The legislation has not reached the House for a vote because the White House has not yet sent it, the fulminations of Trump notwithstanding. There is nothing for Pelosi to hold up at this point—assuming this is the desire of the House Democrats.
Analysis: The delay in bringing the pact to a vote revolves around language and certain provisions that have been demanded by both Democrats and Republicans. The Democrats want stronger provisions around labor protections in Mexico as well as more assurance of environmental protection. The GOP members want more access to Canadian oil and pipeline development as well as greater market access to Mexico. The danger of all this language adjustment is that it could change the agreement enough to cause Mexico and Canada to rethink their own agreement to it.
It has been a goal of the Trump administration to get this deal done by the end of the year, but that now looks very unlikely. The opposition to the deal in both the Democratic and Republican parties has been hardening rather than softening. If it is not passed before next year, the chances will diminish as the election process takes center stage.
Warning on Hong Kong
The legislation passed by Congress regarding Hong Kong is almost entirely symbolic, but it has nonetheless infuriated China and has led to a torrent of denunciations and threats (most of which are equally symbolic). The U.S. has now officially warned the Chinese not to engage in violence against the protests, but at this point Trump has not indicated whether he will sign the bi-partisan legislation. There are now punishments or sanctions spelled out in the statement. The U.S. has very little leverage given the fact there is already a trade war and tariff battle underway.
Analysis: China has asserted this is an internal affair and the U.S. has no right to intercede. That much is essentially true, but the actions in Hong Kong have been steadily escalating. The rest of the world has been expressing opposition to the way China has been handling the protests thus far. There is very little that can be done to stop the Chinese from attacking the demonstrations. Most observers and analysts are convinced that a violent confrontation is imminent. China will be criticized and there will be more outrage, but as with the Tiananmen Square attack, there will be no price to pay. China will see business as usual after the protests are crushed and the world will rapidly put these events in the rear-view mirror.
Middle East Ferment
It would be possible to write something like this at almost any time in the last 50 years—if not longer. There is no part of the world more fractured and tense than the Middle East. Events today simply add to that long and unhappy record. The three most immediate concerns involved the status of ISIS, the state of the Iranian economy and the conflict between Saudi Arabia and Iran over the status of Yemen. Lesser but nevertheless important conflicts involved the state of the Lebanese government, the confrontation between the Turkish government and Kurds, the incessant tribal conflicts in Libya, the mutual hostility of factions in Iraq, the lack of a functioning government in Israel and so on. This area of the world has been a political and diplomatic quagmire for generations, but lately there has been a new wrinkle in all this. The biggest change has been the status of oil.
Analysis: The U.S. and other nations felt compelled to engage in the Middle East chaos because the oil wealth of the region drove the economies of the rest of the world. It is not that this oil is no longer important as Europe and Asia still depend heavily on the oil states in the area. The fact is the U.S. is now the world's largest oil producer and nations such as Canada, Mexico, Norway, U.K., Brazil, Nigeria, Angola and many others play a far greater role than in past decades. The role of oil has changed and so have the dynamics in this region.
It can be argued that the primary interest of the U.S. in this area is now fighting terrorism rather than protecting oil access. Even this focus on terror has changed. The main goal of the U.S. has been to isolate terror groups as opposed to actually trying to defeat them. The U.S. has not ended ISIS, but it has less global reach than before—at least that is the assumption. The U.S. withdrawal from Syria gave ISIS a boost, but it is not clear that ISIS constitutes a direct threat to the U.S. at this point—it will depend on the tactics it chooses to pursue from this point. The decline in the price of oil and the sanction pressure on Iran has severely weakened the Iranian economy. That has created a great deal of frustration within the country. It has also weakened its ability to interfere in the region through support of groups such as the Houthi and Hezbollah.
The U.S. has not walked away completely from the region, but the presence is far less than in the past and now seems highly reactive. The U.S. maintains its support for Israel, but nobody is sure who is in charge there at the moment. There is still support for the Saudi kingdom, but a more limited one and the U.S. has been less and less engaged in Iraq. The nations that have been moving into that void are Russia and Turkey. Nobody is quite sure what their goals are at this point.
No Climate Change Concern in China
The U.S. has come under severe criticism for its stance on climate change. A good bit of this is justified given the mounting evidence of economic, social and political impact. The decision by Trump to pull out of the Paris Accords has been cited as a significant blow to the effort to cope with the issue, but at least the U.S. can avoid the assertion of hypocrisy. China still remains a signatory to the agreement, but clearly pays no attention to the deal. The country has embarked on a massive expansion of its coal-fired power plant capacity as a means by which to boost the sagging economy. The plans will add more coal-fired capacity to China than currently exists in all of the EU—this is additional capacity on top of the largest collection of coal-fired power plants in the world.
Analysis: As recently as 2016, the Chinese had been reducing the number of coal plants and trumpeted a commitment to alternative fuels. There was much conversation over the development of solar and wind power, but that was all before the Chinese economy started to fade. Now the rush is on to build capacity. Most of those shuttered coal operations have been reopened and dozens of new ones are under development. The Chinese will single handedly undo whatever progress had been made in reducing global carbon emissions.
This about face illustrates the challenges of dealing with climate change. A nation faces a choice of either developing the power needed to spur and sustain economic growth or it has to curtail that expansion in order to preserve the environment. It is short-term gain versus long-term protection. It is a safe bet to assume that short term will always appeal to a political leader. China has rarely made an effort to place anything above economic expansion given the need to accommodate the needs of 1.4 billion people. It is not alone in this assessment as the same logic has been expressed by governments in India, Brazil, Indonesia and the U.S. for that matter. The impact of climate change is immensely serious, but it is also diffuse. The impact of slow economic growth leading to unemployment and business failure is what costs politicians their jobs.
Snatches of Conversations
I have to confess to a certain level of voyeurism. One can't really avoid this when traveling. We are forced into proximity we would otherwise shun and thus get an opportunity to hear more than we would care to under normal circumstances. We certainly see things that will be forever etched on our memories. On occasion one even finds oneself the center of commentary.
It was a rather large and giggly group of adolescent girls wearing matching uniforms signifying their involvement in volleyball. They were accompanied by some dads and moms who clearly had left their athletic days behind them. Three young ladies were busy scoping out some young guys and discussing their levels of "hotness" when one of the dads spoke up. "Enjoy it while you can—sooner than you think they will look like me and Tom here." He pointed proudly to a belly that had been years in the making and his compatriot patted his own ample creation.
One of the girls quickly reacted and pointed to me. "I will get a guy that looks like that when I am really old." Dad laughed and commented "he had better be really rich if you think he will look like him." Excuse me—I am right here you know! The Dad noticed that I had heard all this and laughed—asked how old I was and apologized if his girls were rude. I travel in a suit and tie as I don't want to haul any more than I have to when flying. There are not many guys in suits these days. Apparently, that makes me look successful as opposed to being too lazy to change clothes. I assured him I was not offended. Dad finishes the conversation with his daughter by asking "just what do you think a guy like that looks for in a wife?" I didn't have time to describe my lovely wife, but I did point out that we have been married for 35 years (and dated six years before that). Obviously, a woman with lots of patience and tolerance has to be high on my list.
Coal Power Increases in China
The chart from the Financial Times illustrates China has been focused on coal development for many years. The fact is much of the coal that is mined in the U.S., Australia and elsewhere is destined for use in China and to a lesser extent—India. The world has been trying to reduce coal consumption, but that has not been high on China's priority list. It is perhaps time for Greta Thunberg [popular Swedish teen activist advocating climate change] to pay a visit to Beijing.