By Chris Kuehl, Ph.D., NACM Economist—
Short Items of Interest—U.S. Economy
The latest industrial production numbers showed a fairly steep decline in the manufacturing sector—the biggest part of the measurement. The utilities held their own and there was a small decline in the mining sector (oil and gas) as well. The overall score fell by 0.4%, but manufacturing alone fell by 0.5%. The reason for the decline has been no shock. It has been a combination of the trade war impact and the ongoing struggle to get needed workers. The vast majority of manufacturers indicate they would be hiring right now if they could find people with the needed skills. One of the intended consequences of the tariff imposition was to bring production back to the U.S., but manufacturers can't expand if they don't have the people they need.
Fed Considers Lower Rates
The Open Market Committee meets again in two weeks and all eyes are on the Fed as it considers what its next move might be. At the last two meetings, there have been two dissenters when it came to the decision to cut rates and there is no reason to assume that Esther George and Eric Rosengren have changed their mind. James Bullard also dissented at the last meeting, but in the other direction, as he wanted rates cut further. Will the Fed decide to cut again and will there be more dissent this time? The statements have not been definitive, but they have not ruled out the move. It all depends on how bad the global economy looks and whether easier access to money will make much difference to either lenders or borrowers.
The economic sanction has long been a tool in diplomatic disputes—a reaction to the behavior of a given nation that stops short of a war. The idea is that economic pain is to be inflicted in order to change behavior. No president has been as active in imposing sanctions as Trump, but it is clear they have not been all that effective. Two factors determine their efficacy: The first is that the U.S. has something these nations want—usually access to the U.S. market or access to financial resources. In conjunction with this, the sanctioned nation has to have limited alternatives to the U.S. The problem now is that few other nations are backing the U.S. play and the sanctioned nations can simply do business with some other nation. The U.S. ends up the loser from the sanction rather than the intended target.
Short Items of Interest—Global Economy
Slow Growth in China
The trade war has taken a bite out of global growth and it has been affecting the U.S. manufacturing sector, but China seems to be taking the brunt of the attack. Growth has now slowed to levels not seen in over 30 years.A rate of 6% would seem to be pretty good, but in the Chinese context, that is recession territory. This is a nation that needs to generate around 1.3 billion jobs a month and that is not accomplished with growth rates at 6% or under. The export-driven economy has been slammed by the global slowdown that has accompanied the tariff war and the Chinese consumer is not yet in a position to pick up the slack.
"Talk is Cheap"
Canada's prime minister is essentially hoist by his own petard. In his campaign, he positioned himself as the progressive champion with motives pure. Within weeks of his victory, he was caught up in an influence scandal and has since comported himself as a man out of touch with the average Canadian. His elite background essentially undid him as it contrasted so starkly with the message he wanted to send and the young voters who backed him rejected him as not authentic. He is falling further and further behind in the polls.
Bolivia's Slide Toward Autocracy
Evo Morales is running for his fourth term as the leader of Bolivia and there is little that stands in his way as he has become another Latin autocrat who routinely crushes dissent. As a nation making money from gas and lithium, he has the resources to ensure his victory.
Slip in the Retail Data—Signal of Problems?
The expectation was that retail activity would at least hold steady and many assumed there would be an improvement, but that has not been what the data shows and there are now some alarm bells sounding. There was a decrease of 0.3% and the decline seemed to hit a wide variety of sectors. The consumer had been showing a good deal of resiliency up to this point. The decline this month was the first one since February of this year and this suggests there has been some impact on consumer mood from issues like the trade and tariff war. The big issues for the consumer are still in good shape—employment and inflation at the top of the list. It is other issues that seem to be weighing on the consumer and making them a little more cautious than usual.
Analysis:All eyes are on retail this time of year and for good reason. The reference to Black Friday was an observation that this is the time when retailers finally start to see their accounts in the black. The sales for Halloween have been decent, but no records appear to have been set. It will come down to "Blackvember" now—the entire month is devoted to sales and discounts designed to lure the shopper's dollar. The expectation is still that this will be a decent retail year, but there is more trepidation than has been manifested in previous months. That same caution is showing up in the manufacturing community and is a primary reason that many have been expecting economic growth to slow to below 2% for the fourth quarter.
No Going Back for China and the U.S.?
There are two schools of thought in regards to the emerging relationship between the U.S. and China. One interpretation holds that this trade war and subsequent escalation of tension is a personal feud between Trump and Xi. The assertion is this conflict will essentially end if Trump loses in the 2020 election or if either leader decides that the economic cost of this confrontation has become too steep. The other school of thought asserts the relationship has changed unalterably as the two nations are natural enemies and this ideological split has now been exposed.
Analysis: There are arguments to be made for both assumptions, but we tend to come down on the side of the latter. Tracing the lack of progress on the trade talks seems to illustrate this point. What started as a fairly simple dispute over deficits has now become far more complicated with issues of human rights and politics. The U.S. is criticizing China for its attacks on Uighurs and Tibetans and other minorities, its attacks on the Hong Kong dissidents, its support of U.S. enemies, and a whole panoply of business issues. The U.S. had made assumptions about what a policy of engagement with China would mean. There was an expectation that China would be more like the western nations due to this exposure—more democratic and more cooperative with western states. That has not been the case as China has demonstrated that capitalist notions are perfectly compatible with an autocratic political system.
There will not be a complete withdrawal from China by the U.S. or the global business community. It is the second largest economy in the world and a growing market that many companies want to be engaged in. There are millions of Chinese businesses that want to sell to the U.S. and millions of American consumers that want to buy Chinese products. The changes will range from the aggressive (through tariffs and other trade restrictions) to the subtle (consumers preferring goods from other nations and companies choosing to set up in nations other than China).
There has been talk of a new Cold War, but in fact, there has been something of a Cold War underway for decades. Their military is focused on us and ours on them. We contest over dozens of global hotspots and rarely agree on issues that come before the United Nations Security Council. It is very clear the two nations have been rivals for years, but this relationship is destined to deteriorate in the years to come, regardless of the political leadership in either Washington or Beijing.
Beige Book Shows Cautious Attitude
The latest iteration of the Fed's Beige Book provides some good news and some bad news. The overall sense is the economy is poised for more slow to moderate growth—somewhere in the range of 1.8% to 2.1%. The usual culprits have been blamed for the sluggish behavior—worries about the trade and tariff war, worries about the ability of the Fed to further stimulate the economy, the sharp decline in global growth prospects and the potential for a faltering consumer.
Analysis: The trouble is showing up in manufacturing and agriculture and thus has been hitting the middle of the country harder than others. The Beige Book is a collection of comments from the various business advisors for the 12 Fed banks. These advisory board members have their ears to the ground and simply relate what they are experiencing at this moment. The sectors which continue to expand include energy, health care and to some degree transportation and distribution. The construction sector has held its own despite the sluggish public sector. The automotive sector has been expected to slump but has maintained its momentum over the last year. Much of the growth has been in the old "rust belt" when it comes to manufacturing, and there have been general gains in the West, Southwest and Southeast.
Is There a Brexit Deal or Not?
The British parliament put Prime Minister Boris Johnson in a box several weeks ago by passing legislation that would require him to push the Brexit deadline into some time next year if a deal with the EU was not struck by Oct. 31. Delay was most definitely not in Johnson's best political interest and would likely have accelerated calls for a new election. Given that he has been disappointing his Brexiter supporters, he would not have fared well according to polls. The last-minute deal with the EU means that he has technically met the requirement, but the deal is anything but certain. In most respects, it resembles the deal Theresa May tried to pass through the parliament as the EU has not budged on any of the key issues. Johnson now has to get the support of the Conservatives to make the deal a reality, and that doesn't seem any easier than it was for May.
Analysis: As soon as the deal was announced, the Democratic Unionist Party announced it was not willing to support the deal, and that instantly robbed Johnson of 10 supporters in parliament. Johnson was counting on the DUP to want to avoid a chaotic hard exit, but they are extremely angry at the prospect of customs duties between Northern Ireland and Ireland. Johnson seems to hope other Brexiters will choose to back the deal in order to avoid the "no-deal" departure, but the real issue is what the EU will do if this deal is not approved by the British.
There have been some hardline statements from some in the EU as they assert they will accept the no-deal option rather than extend these fruitless negotiations for months and months more. At the same time, there have been comments from Donald Tusk that contradict this tough position and open the possibility of more talks. The Brexiter faction may choose to force the EU to make that choice. The odds are that an extension will be proposed and approved but not without some assurance by the U.K. that positions will change. By the same token, the U.K. will demand that EU positions remain flexible as well. Thus far, there has been no sign of flexibility on the part of either side, but that intransigence has led absolutely nowhere.
Will the Kurdish Issue Remake NATO, Middle East and Russia?
The region has been in turmoil for a very long time and has earned the reputation as a diplomatic quagmire. The U.S. stumbled into this mess with its incursion into Iraq and has struggled to define its mission ever since. The alliance with the Kurds was a marriage of convenience for the U.S. as an ally was needed to attack the Sunni forces under Saddam Hussein without getting too close to the Shiite militias backed by Iran. The Kurds didn't like either one and allied with the U.S. but for their own purposes. They want a nation of their own rather than being scattered across Iraq, Iran, Syria and Turkey. The U.S. was supposed to be their ticket to that end.
Analysis:Now that the U.S. has walked away from the Kurds and allowed the Turks to attack across their border into Syria, the Kurds are abandoning the U.S. as well. They have turned to the Russians for help and are getting it. Russia has backed the Syrian government of Bashar al-Assad and he now backs the Kurds as well. It certainly helps that al-Assad has been hostile to the Turks.
Today the Turks are being sanctioned by other NATO members, and they face criticism from the U.S. (except from Trump). The Kurds are now allied with Russia which has exponentially expanded its influence in the region as they move to fill the void left by the U.S. The rebuilding of ISIS has accelerated, and this time they seem to be avoiding a confrontation with Syria and even with the Kurds as they focus their attention on Sunni enemies and the western states that support them. Turkey has been moving closer to Russia as well and the attacks from the other NATO members accelerates this process. The short ceasefire seems to have been arranged by Russia and Putin is putting himself squarely in the middle of the issue as he seeks to leverage his new relations with both the Kurds and Turks. Both now need him and he can play peacemaker and gain effective influence in the entire region.
U.S. foreign policy has been strained in this area for years. It has been nearly impossible to figure out friend and foe in a region working through centuries of grievance. It can be asserted the U.S. is better off out of this mess and some would assert that Russia is about to inherit that hornet's nest. On the other hand, the rationale for engagement here remains as it always has—oil, spread of terrorism and the accumulated wealth in the oil states. Is it really in the best interests of the U.S. to cede control of all this to the Russians? Most strategists agree that U.S. policy here has been chaotic and misguided for years but this latest move has done nothing but make the situation worse.
My airplane reading of late has been "In the Garden of the Beasts" by Erik Larson. It is the account of the U.S. ambassador to Germany in the 1930s as Hitler and the Nazi Party rose to power. It is very easy to look at the evil of that regime in hindsight now that we know the atrocities but in the 1930s this was not clear. The message from the Nazi leaders was appealing and seductive to a people still smarting from the treatment of Germans after WWI. It was all about standing up for the aggrieved German people and demanding fairness. It was all about pride and history and regaining a place at the table. The population longed for that return to legitimacy and hope and welcomed these messages without understanding where they would ultimately lead. The pride turned to bigotry and hatred of the "other" and soon it was acceptable to destroy anyone who disagreed.
I am not suggesting the U.S. is on that same path but the parallels are impossible to ignore. There are too many of us willing to demonize the other side—to urge their elimination. It is pure "us vs. them." The right attacks the left as mortal enemies and the left returns that attack in kind. People refuse to interact with those they differ with—tolerance is a dirty word and so is compromise. A democracy doesn't work that way—not for very long. We have to be able to set aside our legitimate differences to find common ground and substitute understanding for intolerance. I don't have to agree with you to understand why you feel the way you do. You don't have to think like me or act like me to be considered a friend—we can always find common ground on something. I mean, some of my best friends are dog people so if I can overcome that I can overcome anything!