Strategic Global Intelligence Brief for October 18, 2018
Short Items of Interest—U.S. Economy
Slumping Housing Market
The slide continues as far as the housing sector is concerned. Both starts and permits are down—starts fell by over 5%. This is not taking anybody by surprise as most had expected to see this kind of decline some months ago. It seems to have taken a little longer than expected for the headwinds to kick in—everything from higher priced homes to higher mortgage rates. The factors supporting the housing sector remain viable, but they have not been able to offset the negatives. Consumers remain confident as the jobless rate has continued to stay very low. The Millennial has started to buy homes, but the pace remains far slower than any of the previous generations. The bulk of that demographic has yet to start families and still seem content to occupy multi-family units.
Budget Cutting
The tax cuts that boosted the economy for the first few months of this year also contributed to the largest federal deficit in six years—nearly $800 billion. There are only two ways a deficit can be addressed—an increase in revenue or a reduction in spending. The hope had been that tax cuts would boost the economy enough to boost revenue, but that was never a realistic goal as the pace of growth would have had to be between 7% and 10% a year. The U.S. has not seen that pace for over a hundred years. The only option now is deep spending cuts. President Trump has asked the Cabinet departments to each find a way to cut 5% off their current budget. It is not clear if this includes the military as they have seen a dramatic budget expansion over the last few years. It has long been a rallying cry to "cut the waste," but independent analysis indicates most departments are efficient and will not be able to cut without sacrificing their ability to do the job.
U.S. Regains Top Spot
It has been a long time since the U.S. was considered the most competitive of the world's economies—not since 2008 and the start of the Great Recession. For most of the last decade, the U.S. remained in the top five or top 10, but now that economic recovery has been underway for a while, the U.S. is back at the top according to the World Economic Forum. The remaining members of the top five include Singapore, Germany, Switzerland and Japan. The U.S. gets high scores for its entrepreneurial culture, but falls short on many of the social readings such as poverty levels and health concerns.
Short Items of Interest—Global Economy
Guilt Tipping
There are few things as diverse in the world as tipping. There are cultures where it is frowned on and is almost seen as an insult. Other cultures utterly depend on tips for the workforce to survive. The rationale behind tipping has all but vanished in the U.S. and elsewhere. It was once seen as a somewhat rare expression of having received service beyond the norm. Now it is expected and seems unconnected to service of any kind. Somebody hands you a cup of coffee at a counter and you are urged to tip. An eager young man wheels your suitcase 20 feet and stands expectantly waiting for a tip. Today, the world is dividing between those who tip at every opportunity and those who rarely tip at all.
Chinese Growth Expected to Slow
Thus far, the tariffs and trade wars have not played a huge role. The country is expected to see growth of just around 6.6%, as anemic as it has been in several years. Many assert China is close to recession at 6% growth. Fourth quarter numbers will likely reflect the tariff impact, however. The reason for the current slowdown has been a deliberate policy of restraint imposed by the government as it has been worried about too much speculative lending and the potential for overheating.
Managing the Saudi Crisis
The U.S. and European intelligence communities are backing the Turkish assertion that Jamal Khashoggi was killed almost the moment he entered the Saudi consulate. Now the challenge for Turkey, the U.S. and Europe is how to react to the assassination without totally isolating Saudi Arabia.
Is European Trade Deal Unraveling?
To be honest, it has become very hard to determine what is going on with trade deals these days. The patterns that once dictated the development of trade pacts have all but vanished and nobody is quite sure what has replaced them. The old system tended to be highly circumspect and diplomatic. There were plenty of areas of disagreement, but the disputes were somehow played down as all the parties involved stated how eager they were to work out deals. The goal seemed to be maintaining friendships and alliances while trying to advance and protect one's own economic growth. Trade talks under Trump and the MAGA (Make America Great Again) banner seem determined to alienate and infuriate trade partners, but in the final analysis, a pact emerges anyway that seems to meet the demands of everybody. Nobody offered much hope for a reworked NAFTA, but we are now looking at the USMCA and noting how similar it is to NAFTA. It isn't a done deal by any stretch as now it has to be ratified, but there has been a start. Meanwhile, the surprise trade agreement that was essentially reached between President Trump and the President of the European Commission, Jean-Claude Juncker, now looks to be in peril. Is it or is this more jockeying for position?
Analysis: When Juncker arrived in the U.S. several weeks ago, the consensus view was that he was just there to express the anger of the EU about the threats made by President Trump over cars, steel, aluminum and a few other commodities and items. The U.S. seemed poised to ban European cars from the U.S. along with blocking steel and aluminum. The threats continued and might have eventually led to an even larger number of banned and taxed products. The meeting careened off in an entirely different direction as Trump and Juncker met and emerged all smiles and handshakes. The threat to stop cars was abandoned. It was also hinted that steel and aluminum would be next on the list of things to be granted access. This is where things stood until this week and the collapse of talks between the top negotiators for the U.S. and Europe.
European Commissioner for Trade Cecilia Malmström asserts the U.S. is dragging its feet and has not moved forward on any real trade deal and still dangles the threat of import bans. The U.S. negotiator— U.S. Ambassador to the European Union Gordon Sondland—asserts Europe is dragging its feet and has not moved forward on any real trade deal. The U.S. accuses Malmström of trying to wait out the U.S. elections to see if Trump will be weakened, while the Europeans assert Sondland and Commerce Secretary Wilbur Ross have decided to wait to see if Chancellor Angela Merkel is weakened further by splits in her coalition in Germany. Both sides are playing the same game.
The U.S. upped the tension a little with the statement that it was looking to set up a trade deal with the U.K. That had been shelved for a while as the British remained confident they would find a way to develop a Brexit plan, but now that this looks less and less likely, the U.K. may elect to throw its lot in with the U.S. and truly walk away from Europe. Is this a ploy to get more cooperation from the EU? Is it a knee-jerk reaction to the antagonism directed at Britain? Is it something President Trump will forget about next week? It is really unclear.
Labor Shortage Strikes France
There is really no nation on the planet that is not facing this issue to one degree or another. France has one of the most persistently high rates of unemployment in Europe at 9%, but even with this supposed pool of available workers, the majority of the business community struggles to find people it can hire. It is the same issue from one country to the next. They lack the appropriate education or training and the business community simply can't afford to hire someone without the needed skills and get them up to speed in time. It was once assumed that a new hire could be made productive within six to nine months. It is now estimated that a person who lacks these basic skills will need from 24 to 36 months. That means carrying deadweight on a payroll for two to three years. This assumes the trained worker then elects to stay with the company that trained them, which is very often not the case.
Analysis: The French have a universal education system along the same lines as that in the U.S. In theory, almost everybody in the country is provided an education, but the reality is that many of the schools are badly run and the education provided is minimal and often irrelevant. There is a dearth of trade schools—students are not even aware of what professions are hiring people. Even at the university level, there is little practical guidance. Too many students emerge with vague degrees that do not correspond to the workforce. The French economy is modern and becomes more sophisticated and digital with every passing month. There is no real opportunity for the unskilled or low-skilled worker as they are destined to remain the working poor.
A Bit of a Temperature Check
This has been a tumultuous year for economists and analysts. I realize this sounds a little lame given all the other stuff that takes place in the course of a year—everything from hurricanes to fires to crime and health scares, but we have had our share of the unexpected and inexplicable. Some of this has been generated by a president who leaps in an out of economic issues in a cloud of tweets and leaves everybody wondering what just happened. But there have also been indicators that are not indicating what they used to and reliable theories that are suddenly not all that reliable. The big movements in the economy are making their way through—everything from exiting the age of the Baby Boomer to the rapid pace of robotics and automation. Just this week, we said goodbye to yet another icon of the past as Sears finally seems to have succumbed to the inevitable. Where are we at the end of 2018 and what does all this say about 2019?
Analysis: It seems there are four major shifts underway. All four have been accelerating in terms of their influence on the economy. To contend with these will require a whole series of paradigm shifts that will affect how people live and work—not just in the U.S. but globally. First there is the dramatic shift in labor and the impact it is having on many of the world's economies. The separation of people by what they do for a living is creating a chasm where there once was just a gap. It is nearly impossible to have a successful career without extensive education and training. The days of hiring on to some manufacturer in order to learn a skill on the job are nearly over. The manufacturer, the construction company, the transportation company and many others struggle to find qualified employees and don't have the time and resources to train people from "scratch." This currently means companies struggle to find workers at the same time that millions of people are underemployed or working in jobs that do not allow them financial security. This will be a bigger issue in the years ahead due to a related shift.
Robotics and automation have been accelerating at an exponential pace. Not only are companies struggling to find the workers they need, but they are also discovering machines are capable of doing far more than was once possible. The robotic revolution may have started in the manufacturing sector, but it has been spreading to health care and many service sector professions ranging from accounting to law and finance. The unskilled worker once worried about their jobs going overseas as their employer decided to outsource. Now they are losing their jobs to machines, robots and technology. These same machines are replacing the workers that once took the low-skilled jobs away from people in developed world. China has the fastest rate of robot adoption of any nation in the world.
A third major shift is taking place among consumers. The department store is dead. Even Wal-Mart has started to lose its juggernaut status. The consumer has embraced the internet wholly and relies on sites like Amazon and Wayfair to meet nearly all their needs. This displaces a whole profession—retail clerks are no longer needed and those who remain are generally low paid and lack any sort of expertise past operating the cash register. Stores are abandoning clerks altogether as shoppers ring themselves up and food providers are going in the same direction. If the consumer completely abandons the brick-and-mortar operation, it will make it almost impossible to exert trade pressure as the buyer simply goes direct to a purveyor in China who ships the product without it ever entering the U.S. merchandise flow.
The changes in the way people make a living are creating what has been dubbed the "gig economy". This makes the worker a free agent in somewhat the same way a musician is. The best example of this new paradigm is the ride share concept. The driver works when they want to and essentially operates independently. It can be a great opportunity, but just as with any other "gig," the threat is competition. The guy who was the only singer a club could book might charge a lot of money, but when there are dozens arriving every day, there is no more leverage—ask the legions of hopefuls that land in Nashville every day. The guy who made lots of money as an Uber driver three years ago now waits for an hour to get a passenger at the airport. Just as with the musician—now people need that day job or two or three. There are more and more people who have to work many "gigs" just to stay ahead. This changes the relationship between employer and employee as there is no longer an expectation of a lifetime employment experience that ends with a gold watch.
The bottom line is today's economy is doing quite well, but it is also right on the edge of a tectonic change or two. That makes looking ahead more than a little unnerving.
Fed Paying No Attention to President Trump
There is really nothing new about the Federal Reserve paying little heed to the president or any other politician. This is why the central bank is independent. The politician is going to score no points by advocating a policy that slows the growth of the economy. That is exactly what interest rate hikes are supposed to do. On the other hand, these same politicians would rather not have to explain why inflation is ravaging the paychecks of millions of workers so they rely on the central bankers to do that dirty work.
Analysis: The latest set of minutes from the Federal Reserve make it very clear there is unanimity on the issue of rates. The economy is judged to be strong enough to handle a gradual increase that will lower the odds of a serious inflation bout without really interfering with continued solid growth. Trump is making these comments to please his base and knows the Fed is not paying any attention to him.
An Observation and a Conversation
I spend an inordinate amount of time in hotels and airports and I am nosy. I listen to conversations between people who are obviously on some kind of business mission. Occasionally, I get up the nerve to ask questions. As the U.S. has been inexorably cutting ties with China, there have been many reactions from within the U.S. and in China, but other nations are reacting as well. In past years, I always noticed rather large delegations of Chinese businesspeople on their way to do some deal in the U.S. Of late, there have been fewer of these. At the same time, I have started to see big groups of business people from India. A hotel manager in Dallas confirmed this was true and so did one in Chicago.
As I was waiting for a flight, I struck up a conversation with an Indian woman who was part of a group calling on transportation companies. She noted they had never been able to match Chinese prices when looking at total landed cost. They could price the parts competitively, but the transportation infrastructure was poor in India and added cost—something the Chinese rarely encountered. Now that China is facing tariff and trade pressure, that advantage has vanished and India is back in the game. She also noted the Indian Diaspora in the U.S. was vast and networked to the point she had never really had to make a cold call. Shifting the U.S. supply chain to India or other nations will certainly not be easy, but it will be far easier than China's search for another set of consumers like those in the U.S.
