Short Items of Interest—U.S. Economy
Barriers to Higher Wage Growth
There has been something missing as far as the economy has been concerned. The issue has been persistent enough to create some real issues. Every study of the economy over the last several decades has revealed a logical connection between the levels of employment and wages. The logic seems impeccable. As the rate of unemployment falls, the shortage of available workers should cause the business community to hike wages across the board as they work to hire the most qualified before somebody else does and at the same time hang on to the good workers they already have. This has not been happening this time. There have been several suggestions as to why. The first problem is the overall lack of qualifications for the people trying to enter the workforce. The second problem has been a dramatic reduction in productivity in the workforce due to lack of investment by business and the lack of motivation for employees to stay current with their training. Then, there is continued competition from overseas workers.
Why Women Survive Recession Better than Men
This has been the case over the course of the last several recessions and is likely to be the case when the next one rolls around. The key difference between men and women in the workforce is there are generally more women in "recession-proof" sectors of the economy such as health care and education. There is also the perverse fact that because women are often paid less than men, the company trying to reduce its costs will be more likely to cut the higher-cost males from the company rolls. As women become more involved with jobs on an equal basis with men, they will find their immunity to the vagaries of recession erode.
Dealing with the 'Caravan'
The group of between 4,000 and 5,000 migrants from Honduras and other Central American states is inching closer to the U.S. border every day. The threats from Trump are getting more strident with assertions he will close the border or send the military, or both. The fact is the U.S. has to stop a wave like this or risk the kind of invasion the Europeans have been overwhelmed by. These are planned and organized and will utterly swamp any attempt to monitor or control who is entering. It risks a bloody confrontation, but now that they are in Mexico, there is little desire on the part of the Mexican government to accommodate them.
Short Items of Interest—Global Economy
Shifting Positions on North Korea
The agreement between the U.S. and North Korea began to unravel as soon as it was signed. That comes as no shock to anyone who has observed the behavior of the North over the years. It has worked to get its adversaries in this position many times. There has been almost nothing done by the North—all the concessions have been coming from the U.S. Now the U.S. has been trying to get tougher, but the South Koreans have their own agenda and have been pushing the peace talks harder with even more concessions to Kim. The U.S. no longer seems to have the upper hand with this conflict and may struggle to get it back.
EU Deal With the U.S. Seems Distant
There may have been a handshake between Trump and Head of the EU Jean-Claude Juncker, but that hardly means a deal is in the offing. The hope had been that a deal would be worked out rather quickly. It would be perhaps along the lines of what had been developed with Canada and Mexico, but the Europeans are not looking at this deal with the same kind of urgency the Canadians and Mexicans did. For one thing, they would like to have the Brexit deal put to bed before getting serious with the U.S. The other point is Europe is far more independent than either Canada or Mexico when it comes to the U.S. A bad deal for Europe would be bad news for leaders like Chancellor Angela Merkel of Germany or President Emmanuel Macron of France, and several others as well. The sense now is that serious talks will likely wait until after the U.S. election.
Chinese Markets Boom on Expectation of Help
There is said to be a several-part pattern of grieving the loss of something important. It can be argued that a trading relationship between the two biggest economies on the planet would qualify as important. Watching the deterioration of interaction between China and the U.S. is akin to watching the departure of a family member. The first stage is denial. There was certainly a lot of that coming from both China and the U.S. as both nations seemed to refuse to believe any of this would last very long. Surely, both nations knew how much they needed one another. The second stage is anger. There has been plenty of that as both nations have had very sharp and furious words for the other. The third stage is bargaining. That was what the U.S. and China seemed to be seriously engaged in for the last few months, but to no avail. That leads to phase four—depression. It becomes obvious the impasse will not be ending anytime soon and there will definitely be pain associated with the breakdown of relations. The final stage is acceptance. To a degree, it appears both the U.S. and China have arrived at the same conclusion. This is not an issue that will easily be solved. It now looks as if China and the U.S. are both undertaking efforts to blunt the impact of this fight.
Analysis: The two nations face different challenges. The U.S. may have the simpler task ahead as the solution lies in finding other sources for the material and product that is no longer being purchased from China or has become too costly due to the tariffs and other trade barriers. This is not a simple task by any stretch, but neither is it impossible. The U.S. once bought a lot of stuff from many different nations, but over time, the Chinese developed a competitive edge through investing in their infrastructure. The U.S. is already seeing a lot of interest from nations like India, Brazil and Indonesia as they try to fill the void left by the Chinese exit. It will take a while to fill the gap and the prices may not be as low as they were, but they will certainly be competitive.
China has the harder task as it needs to find consumers that can match the appetite of those in the U.S. That is a very tall order as there are no consumers in the rest of the world that can keep pace with the U.S. The only real option the Chinese have is to stimulate the economy through government intervention. The leadership had been backing away from this kind of stimulating as it was overheating the economy and creating fears of inflation. Every government seeks to avoid the scourge of inflation, but the Chinese have an especially negative reaction given the historical connection between inflation and social unrest. The country was starting to see a lot of bubbles. The desire was to burst them while they were still small and manageable. The government now states openly it will be providing direct support for the economy in the wake of the issues that have been raised by the trade fight with the U.S.
Both the U.S. and China will face consequences as far as this trade fight is concerned. The U.S. is going to have to cope with higher consumer prices and limited supply for a while. The other nations that would eventually pick up the slack from China will not be able to do so immediately and will doubtless take advantage of the pricing situation as long as they are able. China will struggle to get its own consumer base to replace the mighty U.S. consumer. It can be done, but not quickly.
Why the Assassination of Jamal Khashoggi Is a Big Deal?
The killing of a prominent journalist and critic would tend to attract a certain amount of attention. In the past, these attacks on the press and media and dissenter have resulted in a certain amount of condemnation. What has made this case so much more important? It is complex, but has to do with all the ways Saudi Arabia is intertwined in the region and the world as a whole. The criticism that Khashoggi had been leveling at Crown Price Mohammed bin Salman is rarely tolerated in that country. The regime has dealt with these critics very harshly in the past. This was different because he was in exile in the U.S. and worked as a journalist in the U.S. But that is not all that is going on here.
Analysis: A big part of this is a power struggle between the Saudi government and the other nations in the region—most notably Turkey. The Erdogan government has been leading the charge against the Saudi government for a variety of reasons. It has taken some of the attention away from the problems Turkey has had with its own dissidents and it has weakened the Saudi position in the area. Turkey wants some of that influence for itself. There are also issues around Saudi Arabia and the attacks in Yemen. These have been brutal. Nobody in the region has any desire to see them get worse. Turkey often sides with Iran these days. This kind of scandal in Saudi Arabia erodes their power and influence in that region as well as with Europe and the U.S.
Some Good Markers for the Economy Due This Week
The data haul will be good this week—for the U.S. as well as for international observers. There will be data releases to be reacted to right away and some that will need to marinate a while. With all this information, it is always good to remember the rules of data—you can't have it both fast and accurate. It is also important to understand the limitations as there will only be answers to the questions one specifically asks. Not all data will be relevant to every question one might have. Finally, it is important to understand that national data may not be as informative as one might need. For example, this will be the week third quarter data is released. It will be looked at closely as a grade card for the overall economy, but for most business, it matters more what is happening in the region or state where they are doing business. After all, the state of California had a GDP of $2.75 trillion in 2017 and Great Britain had a GDP of $2.62 trillion. The U.K. is the fifth-largest GDP in the world—behind only the U.S., China, Germany and Japan. That means that all by itself, California is the fifth-largest country in the world. This has all sorts of implications as far as overall national growth—it means if California is having a good year statistically, the whole United States is having a good year statistically and vice versa.
Analysis: Third quarter GDP numbers will be released this week—on Friday. The data from the second quarter was quite impressive at 4.2%. The U.S. economy as a whole rarely gets this high and analysts do not expect the Q3 numbers to be this high. There were some important extenuating circumstances as far as Q2 was concerned—most notably reaction to the impending tariffs and threats of a trade war. Any company that needed to protect its supply chain started to buy or sell as much as it could as fast as it could to beat the restrictions. That boosted the GDP numbers temporarily. Most analysts expect this quarter to be good, but not quite as inflated as Q2 was—growth somewhere around 3.3%. That is certainly very solid performance for an economy that has been averaging around 2.5% for the last few years.
Durable goods orders will be released by the Commerce Department on Thursday. There will be a lot of interest in whether the growth in August continued into September. Most assume it will not as the expectation is there was a decline of around 1.9%. This number does not include defense spending nor does it include aircraft. The sense among economists is the impact of the tax cuts at the start of the year has faded and no longer pumps up the economy. From this point, the growth of durable goods numbers will be more reliant on the actual demand from consumers—both direct and indirect.
Another release that will attract attention will be the latest edition of the Fed's Beige Book. This is a collection of observations from the 12 districts. It reflects the pressing regional issues that are affecting more specific parts of the country. Some of these regions are compact and only include a few states, but others are immense. The district anchored in San Francisco covers almost the entire western half of the country. There are no big shocks expected this time, but this will be one of the first examinations of the retail mood of the country. That will be combined with the latest consumer confidence number as measured by the University of Michigan. Not that these consumer studies are always that accurate, but they have been consistent of late. Many will be eager to see what this issue looks like. The consensus view is that it will remain high, but will have eroded a little from where it was earlier.
The world as a whole will be looking forward to the latest round of PMI findings. The majority of these will be coming from the British firm—Markit. The U.S. data comes from the Institute for Supply Management (and from Markit) and China has its own version (as does HNTB bank out of Hong Kong). The expectation is most of the readings will be positive with a marginal improvement over last month. There will be intense interest in nations such as Germany, Japan, China, France and the U.S.
Housing Market Slumps
There have been many premature declarations as far as the end of the housing boom, but it always seems to defy the analysts and keep growing albeit at a slower pace from time to time. For two years, the expectation has been that "headwinds" would ultimately stall the market and thus reduce the pace of overall growth in the economy. It is hard to overestimate the role housing plays in the U.S. economy as it is both a source of consumption for a variety of industries, but it also serves as the No. 1 source of consumer wealth.
Analysis: The headwinds that had been expected to play a role have finally started to make their appearance. The No. 1 issue is the expense of homes as measured by the Case-Shiller index and other tools. The cost of a starter home has risen sharply in many of the hottest housing markets and the more expensive homes have just continued to escalate. The second major factor has been higher mortgage rates. The Fed continues to hike rates as long-term rates in general keep climbing. These have been issues for a while, but had not slowed things down all that much. Consumers remained confident in terms of their employment and their personal financial situation, so they did not worry about affording a home. The job market remains solid, but there has a slowdown in retail noted of late. This activity feeds into the sense that consumers are expecting a reversal of fortune and have become more cautious.
Beyond all this, there remains the question of the Millennial generation. They have been reluctant to leave the multi-family option and buy a single-family home. Many are still dealing with student loan debt that makes further debt obligations tricky. The older part of this cohort is beginning to buy homes, but they are still in the minority.
What WILL It Take to Unite?
This has been an interesting week; one full of opportunities to observe and listen. It was something of a national tour as in five days I was in Des Moines, Fort Worth, St. Louis, Hilton Head and New Orleans. Lots of groups to interact with and lots of people watching (and eavesdropping) in airports, hotels and on Uber rides. Three things struck me about this particular sojourn.
The first is that disaster is not the unifier it may once have been. This has been a bad few months (and years) for coastal communities as the hurricanes have been frequent and violent. Once, this tended to get people to rally around the stricken. There was some evidence of this in the communities that were hit and from their neighbors, but nationally, the mood was not so helpful. One group hastened to assert this was all due to climate change and another group was just as quick to blame the poor people who lacked the means to either reinforce their homes or flee. I heard lots of comments along the lines of "if you can't afford to handle a disaster like this you shouldn't live near a coast."
The second observation is a general lack of respect for others. The protests over police shootings from athletes demonstrated boundless intolerance by all concerned. The person who places a great deal of symbolism in the flag, the national anthem and other demonstrations of their allegiance is dismissed as some kind of intolerant racist, while the people who have a genuine and justifiable concern regarding the way that minorities are dealt with in the U.S. are dismissed as whiners and anti-American. The actual issues just get buried in the anger and invective from both sides
Finally, there was a more positive observation. A man leaving the plane was missing his left leg at the hip. As he was hopping in the aisle and retrieving his crutches, he paused to get several bags down from the overhead that belonged to a group of elderly women who were waiting for wheelchairs. None of us in the able-bodied category thought to do this. One guy remarked that he now felt a little ashamed. The guy with the missing leg simply said "As much help as I need from people on a daily basis, I can hardly pass up an opportunity to give a little back. Would it make you feel better if you helped me carry my bag to the top of the ramp?"