By Chris Kuehl, Ph.D., NACM Economist—
Short Items of Interest—U.S. Economy—
Business Loan Decline—
The Fed has announced that business loan demand was down last quarter. The expectation is that the pace will slow even more in the fourth. This is not much of a shock given all the other data that has been accumulating. The business community is scaling back on plans as it watches the economy get more sluggish. The demand for new equipment is down and so are plans to expand territory or develop new markets. This is not a full-scale retreat into recession mode—at least not yet. It is a reaction to uncertainty over everything from trade wars to the impending political year. The pressure on the Fed to lower rates is motivated by the assumption that low rates will mean more investment, but these numbers suggest banks are not seeing much demand at this point and lower rates will not alter that pattern to any extent.
Market Surges Again
It has been since July that the market saw new and record highs, but it broke through again this week. The investor remains confident in the ability of the U.S. economy to continue at a reasonable rate of growth. The impetus for the latest rise seems to be the possibility of a deal with China as well as decent news from the consumer sector. Not to throw any rain on the parade, but there is also the fact that other nations are doing far worse than the U.S. That leaves the investor with limited options. As long as the U.S. is essentially the only game in town, they will put their money into the U.S. equity markets and hope for the best.
Trade and Politics
It is generally hard to isolate what motivates a voter to act in a specific way and even harder when the election is essentially local and the issue at hand is global. That doesn't keep people from trying. A study was conducted to determine if the trade war was good or bad for the Trump position. It seems those states and communities that were hardest hit by the tariffs and trade war provisions were the least supportive of Trump and GOP candidates. There was, however, no corresponding support for these candidates when the tariff policies might have favored them. In truth, it is almost impossible to know what motivated these voters one way or the other.
Short Items of Interest—Global Economy
It has long been a point of pride for Australia that it has seen economic growth for 29 straight years, but there are always caveats. The growth in GDP is not the same as GDP growth per capita. If one looks at the per capita GDP, there have been three recessions since 1991. One of these was at the start of this year. The country has seen solid population growth through these years. That added population has put pressure on the economy. The growth is still real enough, but it has become harder to get the whole population participating in that expansion.
Calls for a New Relationship Between U.S. and China
There are many analysts trying to figure out what the future of the U.S. and China looks like. The term that is being discussed in China is coopetition (the act of cooperation between competing companies and businesses that engage in both competition and cooperation). This is already descriptive as the two nations have been rivals and partners at the same time. The sense is this concept will have to be codified to some extent with the use of treaties and agreements that spell out the responsibilities of each. That may require a level of diplomatic interaction that neither nation has shown itself capable of.
Campaign Gets Underway in the U.K.
The outcome of the upcoming contest may come down to the so-called "red wall." This is a region in the middle of the U.K. that traditionally votes solidly in favor of the Labor Party, but it is also a region that is very pro-Brexit. If Prime Minister Boris Johnson is to make gains, he will have to get these voters to react more to the Brexit issue than to their traditional loyalty to the Labor Party. It helps Johnson that Jeremy Corbyn is not popular in that region at the moment.
France Moves to Tackle Immigration
The seminal issue for the political right over the last several years has been immigration. This has been true in Europe, the U.S., Asia and most other nations. There has been a wave of migration underway as several causal connections have combined to fuel the desire and need to relocate. The prime motivators for migration include warfare, famine, poverty, drug gang violence and a simple desire to find better opportunities. Each of these migrant populations are radically different in terms of why they are seeking new homes and what their future expectations are. The refugees are unwilling migrants and are relocating out of fear—they have no real desire to assimilate or even make this move permanent. The economic migrants seek to start new lives. Some just want to work for a while and then return home, while others seek to start over in a whole new life. Every nation is now faced with the need to develop a policy that controls this wave while remaining open to the kind of migration that benefits the country.
Analysis: France is now embarking on an ambitious plan designed to reduce the number of unwanted immigrants, while getting the people that are needed in the business community. France has long had a generous policy towards migrants, but this has become a matter of intense political debate. It has been exploited by the far-right National Front for years. The overwhelming majority of the migrant population in France has come from North Africa and the Middle East. That has introduced both ethnic tension as well as cultural and religious disputes. The terrorism that France has dealt with in recent years has been rooted in various brands of Islamic extremism, although the vast majority of those that migrate to France have posed no threat at all and only want to become part of the overall French population.
The provisions range from the pragmatic to the draconian. There will be strict limits for legal economic migrants. They will be granted access according to the skills they are bringing to the French economy. This will mean a sharp reduction in the number of laborers and the unskilled in favor of those who have education and the talents that are in short supply. Those seeking asylum will not be able to access health care or other public assistance for three months while their applications are considered. The asylum process has been abused for years as many are claiming persecution in nations where this activity is not as likely to take place—East European states such as Albania, Bulgaria, Ukraine or Georgia.
The left in France has been outraged, but these provisions are clearly aimed at blunting the power of the emerging right. Thus far, there seems to be some satisfaction with the moves among those who rank the issue of immigration as high priority.
Fading Hopes for Moderate Approach in Argentina
During the recent campaign in Argentina, there were some observers who hoped the emerging leader of the Peronists was the more moderate and pragmatic one. Alberto Fernandez was the supposed voice of compromise as compared to the former president, Cristina Fernandez-Kirchner. There may yet be time for that side of him to develop again, but for the moment, Fernandez sounds as radical as his running mate. The statements made regarding foreign policy are straight out of the past with praise heaped on other leftist leaders such as Evo Morales and Nicolas Maduro. At the same time, there have been attacks on Brazil's Jair Bolsonaro and demands that former Brazilian leader—"Lula"—be released from detention. The political risk thus far is minimal as many other nations share a distrust of Brazil's new leader, but there have been hints that Argentina might try to intervene in countries such as Chile or Colombia. That would provoke some very angry reactions.
Analysis: All of this commentary is coming at the same time that Fernandez needs to court the institutions and governments on which Argentina is financially dependent. The country is teetering on the edge of default again. It has been warned not to pursue the same path that Cristina Fernandez and Nestor Kirchner pursued. The defaults made this nation a financial pariah for many years and made recovery under Mauricio Macri that much harder. Another round of defaults will mean Argentina will be cut off from access to money for decades—at least money at a decent price. The country is highly dependent on exports and mostly commodity exports at that. It can ill afford to alienate the world it plans to export to, but this tactic has been tried before. The hope still remains that Fernandez has a pragmatic side and that all this foreign policy commentary is just to keep his left-wing supporters in line while he tries to work out financial rescues.
Some Serious Moves in Trade Dispute?
The pattern that has emerged as far as the trade war between the U.S. and China has everything to do with politics in both nations. The actual negotiators for the Chinese and the U.S. have come close to deals on many occasions as they have focused on issues such as reducing the deficit through more Chinese purchases, reducing the subsidies that China pays its exporters, increasing the protections for U.S. intellectual property and so on. These agreements are not perfect by any stretch and leave both nations short of what they really want, but they were considered a step in the right direction. Each time these deals seemed close to approval, there would be a political attack from either President Trump or President Xi and the progress would halt. It was not clear that either man really wanted an end to the confrontation given how this was benefiting them in domestic politics.
Analysis: There is now a more serious move underway to reach a deal and everybody is holding their breath to see what the reaction from Trump and Xi will be. The Chinese had demanded that some of the tariffs be rolled back before any new deal was struck; now this is on the table. The U.S. had only offered escalating threats prior to this and now there appears to be a willingness to back down. It will all come down to how this move is presented by the White House and whether this has opposition from within the "Trump base." The expectation is China would offer expanded imports in return. That would please the farming community in the U.S. The investment community is already showing some enthusiasm and that could bolster economic performance enough to provide ammunition for the coming campaigns in 2020.
Imports Down—Is that Good or Bad?
The level of imports declined by quite a lot last month—a decline of 4.4% in consumer goods and a 3.4% decline in the importation of vehicles and parts. Generally speaking, this would be seen as somewhat positive news as it would mean the trade deficit would be declining. Whether this is good news or not depends on why. There are two reasons for this reduction in import activity.
Analysis: One reason for the decline would be that consumers are generally spending less on everything and thus are demanding less in the way of imported consumer goods. The fact that only certain categories of imported goods were affected lends credence to this idea. The more expensive products were not in as high demand as they had been. The other reason for the slide in imports could be the impact of the tariffs. Many of the products affected by the increased tariff costs have seen a slip in demand. That would be about what was expected.
The sense at this point is that consumers are slowing as there have been reductions in imports from countries that have not been affected by the tariffs and trade wars. The consumer has been more or less active in this holiday period, but it has been steering away from some of the higher-cost goods. In past years, there have been significant sales of big-ticket items such as appliances, recreational equipment, cars and the like. There were also more luxury goods sold. These have been slow thus far this year although these purchases often come towards the end of the season.
It should come as no surprise that budgeting is the single-most difficult task Congress undertakes. It is also the most important task set before the legislature as the decisions made regarding the budget will determine what the government does. The White House has input into this conversation, but it is limited and indirect. There will be a budget recommendation submitted by the president, but it has no real weight in the ensuing debate unless he gets his supporters behind the plan. He can veto the whole thing, but that is considered far too radical a move. The real battle is between the two parties and their priorities as far as what to spend on and how much revenue to raise (and by what means).
Analysis: A full-year budget has not been passed since Congress was divided into a Republican Senate and a Democratic House of Representatives. The budgets that have been produced have been stopgap efforts that allow the government to continue functioning for a few months. The last one that was produced in September allowed the government to continue until November 21. If a new extension is not passed by that point, there will be another government shutdown. Thus far, there is no desire to impose this kind of government crisis on the country on the eve of Thanksgiving. It is likely that another short-term budget will be cobbled together. This does not address the major differences of opinion regarding longer term budget goals, however.
The primary point of contention remains the border wall and the continued emphasis placed on its construction by Trump. There has been some funding provided, but not as much as Trump desired. That has prompted him to redirect money from military construction budgets to the wall. This complicates the military spending proposed in the budget as it means money allocated for the military is not used for the purpose intended. The latest reports on the areas where the wall has been built are not encouraging as the structure has been repeatedly breached with the use of power tools from a hardware store. The bottom line is Democrats are deeply opposed while most Republicans are supportive but not to the degree they once were.
The Loyalty Balance
It doesn't take long for this subject to come up when discussing employment and expectations. The Boomer can be relied upon to comment that those ungrateful and spoiled Millennials have no concept of work ethic and loyalty. They job hop with incredible frequency, demand raises and promotions 10 minutes after they are hired and expect a cappuccino machine at their desk to go with the Swedish massage every hour on the hour. The Millennial comments that Boomer bosses are ready to fire them on a whim, expect long hours and make unreasonable demands with no thought of compensation. The Boomer doesn't understand how tech works and demands that Millennials pretend it doesn't exist or demands what can't be produced. Neither position is entirely wrong and neither is entirely correct.
Loyalty works both ways. That seems to have been forgotten by many. The employer wants the employee to take on tasks as needed and to work hard for goals that may be years and years in the future. The employee may be willing to do what is asked of them but not if they think they will be cut loose at the first sign of distress. I have seen many companies approach a bad quarter or two with big job cuts. Then they wonder why the rest of the staff is freshening up their resumes. Both employer and employee end up offering half measures with no commitment to one another.
There has been a slight improvement as far as the trade deficit is concerned, but the longer-term trend is still obvious. The U.S. simply imports more than it exports. That is a direct result of the U.S. economic balance. This is a consumer-driven nation and U.S. buyers will purchase from anywhere. The U.S. is not able to do a lot about the consumption patterns without crippling the overall economy, so it has to find ways to sell more overseas.