14 minutes reading time (2810 words)

Strategic Global Intelligence Brief for November 22, 2019

By Chris Kuehl, PH.D., NACM Economist

Short Items of Interest—U.S. Economy

American Mobility Declines
Once upon a time, the U.S. was characterized as one of the most mobile societies in the world. It was a driver of the economy in a variety of ways. It meant people were willing to relocate for jobs and that there was a vibrancy in the economy which allowed people to sell their homes and buy new ones. Today, that mobility is all but gone as the rate of moving is as low as it has been since the end of WWII. The factors include the inability to sell an existing house, the inability of a spouse to get a new job, the need to stay and take care of family and even the rise of telecommuting as it allows people to take that new job and remain in their old home.

Dissent in the Farm Sector
The Trump base has traditionally included a wide swath of rural communities in the U.S. They have been distressed by some of the social policies of the Democrats. There has been a sense they get ignored when it comes to economic issues. Trump had been playing to that latter concern, but the tariff wars have hurt the farm sector and that has started to affect their enthusiasm. There has also been distress over the changing ethanol policy and comments from the head of the Dept. of Agriculture, Sonny Perdue. He has asserted there is no longer any room for the small family farm. This has been a tough year for farming in any case and that has created unease.

Tariff Exemptions
The trade talks between China and the U.S. have stalled again—as if they had ever been on pace to succeed. The issue now is whether certain sectors of the economy will be spared the impact of the dispute. It looks as if Apple will be exempt from any of the tariffs on the parts and goods they import from China. There are also a number of other large U.S. operations that will get a similar pass. The choice of what to exempt and what not to does not appear to be related to the U.S. consumer or to whether that decision really affects China.

Short Items of Interest—Global Economy

Eurozone Slowdown Extends to Services
For the last several months, the manufacturing sector in the eurozone has been struggling. That has resulted in a decline in the growth rates. The impact has been blunted to some degree by the more buoyant services sector, but now, that situation is also getting rough. The service community is in service to do something and in Europe, the manufacturing community plays a major role. The slump has been dragging down services and the consumer, which ensures that the recession threat has been amplified.

Private Sector Growth Slows in the U.K.
The Brexit impasse has been taking a toll in the U.K. for months, but the situation is worsening as the uncertainty drags on. There had been an expectation that something would have been settled by this point, but the issue keeps getting dragged out. Now there is an election that will likely determine the next steps. The problem is polls suggest neither side is going to win a clear victory. That leaves Brexit up in the air through most of next year. Business has become hesitant as far as investment is concerned and the consumer has also become less interested in larger purchases as there is real fear of job loss.

Unrest in Colombia
For the last few years, it has been a story of progress and growth in Colombia as the nation seems to have gained control over the rebels and drug gangs. That reputation is now fading as the leadership has been accused of corruption and incompetence by a restive population that has been taking to the streets. The pension system is in disarray and the expense of the millions of refugees from Venezuela has been unsustainable. There is not yet a fear that the rebels and the cartels will make a comeback, but the population seems ready to oust the current leadership to try something else.

Lagarde Calls for Public Investment
When Cristine Lagarde was tapped for the post of European Central Bank (ECB) head, there was some concern she would have a hard time leaving the platform she had as head of the International Monetary Fund (IMF). Her first formal speech as the ECB chief has amplified that concern. As the director of the IMF, it was her job to comment on the fiscal policies of the members and others, and she did so frequently. As ECB head, her mandate is monetary policy; less focus on the fiscal activities of the European states. As IMF head, her words were important, but there was not an entire financial community parsing every syllable to determine what it might mean as far as interest rate policy. This is the world she lives in now. The transition may not be an easy one.

Analysis: Her first speech was entirely about fiscal policy and, to the extent that monetary policy was discussed, it was to assert that actions taken by the ECB can't be the primary tool for economic recovery in Europe. This is true enough, but it is more than a little unusual to hear the head of the bank make that assertion. Her comments are cogent and accurate enough, but it worries the financial community that she is still sounding like the head of the IMF.

She has called on the governments in Europe to boost public spending considerably. She made the point—albeit obliquely—that monetary policy alone can't pull Europe out of its economic malaise. This is a point that Mario Draghi also made and so did his predecessor—Jean Claude Trichet. These men made the point in more subtle terms by pointing out that monetary efforts have their limits and letting others draw their own conclusions as to what else might be tried.

Lagarde is urging that Europe spend aggressively on "development." That means infrastructure projects, education and R&D efforts. These are certainly worthwhile areas of focus, but there has been no discussion of what would have to be cut to shift attention to these other areas of emphasis. If there is simply to be more spending on development while continuing to spend on all the other areas, these nations will have to go even deeper in debt; a policy the ECB has not supported with much enthusiasm. The financial community is starting to think Lagarde will be a very aggressive dove when it comes to central bank policy. That is not going to be a universally popular position—especially with the Germans.

The Success of Abenomics
The world has been focused on what has been taking place in China due to the tariff/trade war with the U.S. There has also been ongoing fascination with Europe due to the issues of Brexit and the rise of right-wing populism. The country that has been to some degree ignored has been Japan. It seems many forget that it remains the third-largest economy in the world. It has been dismissed as a nation mired in the "lost decades" due to deflation and sluggish growth. These assumptions are not as accurate as they might have been. Shinzo Abe is now the longest serving prime minister in the country since World War II—he has been in power since 2012. Upon taking office, he launched a policy that was dubbed "Abenomics." It has gone from being an unusual Japanese plan to one that other nations are essentially copying.

Analysis: The Abenomics approach was designed with three strategic focal points. The first was higher levels of government spending. This was certainly not an unusual move for a government seeking to pull out of economic malaise. The difference was that Japan worked hard to get money in the hands of the consumer through this plan and thus worked to get cash in the hands of the middle class and business as opposed to the poorer members of society.

The second "arrow" was a very loose monetary policy from the Bank of Japan (BoJ). Rates were slashed aggressively and they stayed low. The Abe government cooperated with the BoJ head to make lending very easy although demand has been far weaker than expected. The low rates at least made borrowing a possibility when there was a desire. It also kept the yen from rising too fast and affecting the level of exports.

The third part of the plan was perhaps the most complex as it involved a whole series of structural reforms designed to boost economic growth. Some of these plans worked better than others. Efforts to get consumers to spend more were often unsuccessful, but the moves to bolster infrastructure development worked better. The overall sense is that Abenomics was not spectacular, but has served to keep Japan from sliding into recession. These incremental efforts are now being examined by many other nations.

Does the Global Slowdown Lead to Recession?
It has been abundantly obvious that business has slowed over the last several months. The pace of global growth is now as slow as it has been since the recession of 2008. Many major economies are formally in recession with negative growth rates for at least two consecutive quarters. Every one of the international economic assessments have come to the same conclusion—the global economy is either in recession already or dangerously close. The U.S. has been the notable exception, but even the growth in the U.S. has tapered off and is now sitting at 1.9%. The question on the minds of investors, businesspeople and ultimately the consumer is whether this slowdown ends up in a real global recession. If that occurs, the next question is how deep and how long would that recession turn out to be.

Analysis: Part of the frustration with the current slowdown is that much of it is manmade. Of course, the reality is that all economic trends are manmade as they are the result of the millions of decisions made by the world's producers and consumers, but most of what happens in the economy of a given nation is due to the actions of these consumers and producers as opposed to the decisions made by policymakers of one kind or another. The policies set by governments, legislatures and institutions such as central banks essentially set the stage and establish the rules that consumers and producers live within. The assertion by many analysts holds that the global economy has been affected negatively by the trade wars that have dominated over the last several years. This does not come as any great shock as disruption of trade is the whole point of the tariffs. The U.S. wants a reduced trade deficit with China. That means either less in the way of imports from China or more exports from the U.S. To achieve this goal has meant a radical restructuring of the trade patterns that have been in place for the last several decades. This has inevitably slowed the economies of China and everybody else. As China has slipped from double digit growth to 6%, it has reduced the imports it had been bringing in from other nations. That has affected the U.S., Europe, Asia, Latin America, Africa and the Middle East—in short, everyone.

Would an end to this trade war result in a surge of global growth and an end to the recession threat? It may be too late to avoid a downturn altogether, but it is clear that a resumption of traditional trade patterns would keep the situation from getting worse.

Trade Uncertainty Over Autos
To illustrate the challenge that has been Trump's trade policy, there is the missed deadline regarding auto exports to the U.S. from Europe. There was supposed to be a decision on these tariffs made on Nov. 13, but that deadline came and went with no decision one way or the other. If Trump decides to impose restrictions now it is very likely the Europeans would bring a legal case against the U.S. for breaking the rules of the Trade Expansion Act of 1962. President Trump could elect to start the whole process over again and use the Trade Act of 1974 which is the mechanism used to impose tariffs on China, but this is a more draconian step and one that would signal real hostility towards Europe, Japan, South Korea and others. It may be that Trump has decided to call off this particular trade war altogether. The problem is nobody seems to know and that makes planning more than a little difficult.

Analysis: There is no support for the tariffs from the U.S. auto industry as the car companies are very highly integrated globally and the domestic makers rely on parts from all over the world. It has become very hard to separate companies by nationality and artificial barriers such as tariffs accomplish very little. The expectation is that other governments would retaliate should the U.S. move to impose these tariffs and restrictions. That would further muddy the waters. The car market remains very important in the U.S. and elsewhere. Disruptions like this will cost jobs and will create big problems for the U.S. carmakers as well as those in other nations.

Existing Home Sales Rise but Inventory Limits Slow Pace
The rate of sales of existing homes rose last month by 1.8%, certainly good news. The not so good news is that the rise in sales was limited primarily to the higher-end homes. The starter home sales were limited by a general lack of available inventory. The homeowner at the upper end is still mobile and this has boosted sales. This is the fourth month in a row that existing home sales have been up on an annual basis. The problem is those at the bottom of the market are not moving and not putting their homes on the market.

Analysis: The majority of the new homeowners are seeking existing homes as opposed to new builds. This lack of available housing has slowed their ability to get into a home despite the low mortgage rates and the relatively low prices available in some markets. The major differences between markets have made computing the housing trends challenging as there are radically different situations in cities like Nashville and Austin as opposed to communities such as Cleveland or Pittsburgh. Even within a given city, the differences between neighborhoods can be profound. The good news for housing is that Millennial buyers are starting to emerge as they get older, but at the same time, there has been a glut of homes owned by retiring Boomers that are not in the most desirable areas and are struggling to find buyers.

I Suppose I Have Been Naïve
In another episode of "Voyeurism on the Road" I was exposed to the conversation of three guys at an airport restaurant. I can't think of a time that I have been exposed to bigger jerks. The first round of conversation was innocuous enough although I marveled at the waste of time. They were discussing their gaming passions and the countless hours they spent on them—innocent enough, but I don't see the appeal myself. To each their own, however, as I am sure they would look askance at how I spend my time. It was the next topic of conversation that was appalling.

It was a detailed litany of all that was wrong with their wives. The complaints ranged from how the house was cared for to child rearing strategies. The impression one would take away is that all three were starting divorce proceedings. I was shocked, but this is the fourth or fifth time I have heard similar diatribes from a group of guys in the last few weeks. I do not even begin to understand this attitude.

I realize that I am extraordinarily fortunate to have married the woman of my dreams. We have been married for 35 years and together for over 40. I treasure her now every bit as much as when I first met her. I have never uttered the kind of nasty complaint I have heard of late and have never had cause to. I am both shocked and deeply saddened that these guys would be so bitter towards their wives. I wonder how one exists in such a miserable state. I would venture to guess their wives are not so thrilled with them either and that saddens me even more.

Effect of Abenomics
The trend in the Japanese economy under Shinzo Abe has been remarkably positive and without a lot of fanfare. The next big challenge will come as the Japanese government raises taxes. The long-delayed increase has been designed to relieve some of the fiscal pressure that has come from years of austerity budgeting, but it is not clear that Japanese consumers are in a position to handle the tax hike without compromising their spending.

Existing-Home Sales Increase in October
Strategic Global Intelligence Brief for November 2...


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Tuesday, 11 August 2020