By Chris Kuehl, Ph.D., NACM Economist—
Short Items of Interest—U.S. Economy—
Massive Increase in School Funding—
The current plan from Senator Elizabeth Warren would allocate $800 billion to public education—$450 billion to Title One funding for low income students, $200 billion for students with disabilities, another $100 billion for various grants over a 10-year period and $50 billion for infrastructure. It is not clear what the $150 billion on grants and infrastructure would involve, but there is no specific mention of additional emphasis on trade schools or education oriented to the trades or similar job-focused education. The need for trained people has been acute for years—a predicted shortage of over two million manufacturing workers and a like number in transportation and construction. Perhaps this training is included in the fine print of the plan, but thus far, there has been no mention of it.
Rate Cut on the Horizon
Analysts are nearly unanimous in asserting the economy really stands to gain very little from a rate cut from 2% to 1.75%, but that seems to be the path the Fed will be taking in another couple of weeks. It is being described as an effort to insulate the U.S. economy from the slowdown in the global economy, but even the advocates for the reduction acknowledge that the problems in the global economy are attributable to the trade and tariff policies pursued by the U.S. It is not at all clear that a lower Fed Funds Rate will have any impact at all. The issue has not been the availability of money—it has been market insecurity.
Impact of Minimum Wage Hike
There have been a spate of new studies on the impact of raising the minimum wage, and they will certainly not be the last. Several facts are often ignored. There are just 21 states where the minimum is $7.25—the others are states that have higher minimums; the average nationally is $11.80. It was assumed that higher wages would put many small companies out of business, but that has not been the case (for the most part). Even restaurants have managed to continue to be profitable. The most serious impact has been on the very low skilled and young workers as they are not finding jobs—even in an environment with 3.5% unemployment. There are few willing to pay these higher wages to those with very limited skills, experience or education.
Short Items of Interest—Global Economy
Israel Remains Without a Government
Former Prime Minister Benjamin Netanyahu has given up trying to form a ruling coalition with the party that came in first in the elections. Benny Gantz of the Blue and White Party has been unwilling to give the former PM what he was demanding. Now it falls to him to try to cobble together a ruling coalition of center-left, left and a right-wing party led by former Defense Minister Avigdor Lieberman. Most analysts assume this will be a failure as well and may force then country back to the polls to try again. The surveys suggest very few people have changed their minds and that brings the possibility of yet another stalemate.
Another Brexit Defeat
Prime Minister Boris Johnson has 10 days left to work out a deal with the EU and it doesn't look good. He seems destined to have to ask for another extension. This is something he vowed he would never do. It is wholly unclear what real difference this extension will make as nobody has offered to shift their positions in any way. The most likely situation will be a vote of no confidence and another election, but as has been noted, there is no candidate that would have a suggestion acceptable to the majority in parliament.
The 'Nothing' Campaign in Canada
There are no real issues and no real platforms in evidence from either Prime Minister Justin Trudeau or Andrew Scheer. The issues have been minor scandals that barely rate a mention outside Canada. Nobody seems to know what the plan would be in the event that either is elected.
Copying the Germans (and Others)
The U.S. has a unique set of arrangements and rules that govern everything from education to how people work, live and play. These unique features exist in every other nation as well. In the vast majority of them, this unique approach is rooted in the history and culture of the nation. The candidates for the Democrats are openly suggesting that the U.S. copy the Germans, French and Japanese (among others), but as appealing as this may seem, there are major barriers brought on by the differences between these cultures.
Analysis: The Germans have a unique labor system that involves having corporate boards made up of labor representatives as well as those who represent management and the stockholders. This seems an ideal balance of power except that the needs of the parties involved differ substantially. The investors want to maximize the value of the investment, the labor representatives want to maximize pay and benefits and provide job security, management wants efficiency and profit and the community wants stability and taxes. These are all in opposition to one another. In the U.S., the differences are addressed in a fundamentally confrontational manner through unions and organized opposition of some kind. The differences in Germany tend to rest on a more cooperative system, but it often breaks down. German companies are not nearly as nimble as the global marketplace often demands—the labor representatives will opt for the status quo if it means losing jobs. Communities will oppose moving operations even if that move would make the company more competitive. The German system is based on decades of cooperation and trust and a government that is very active in protecting those who are badly affected by change. The U.S. has none of that system in place.
Parting Shots
Cristine Lagarde is about to embark on her new assignment—heading the European Central Bank. She is not leaving her previous post as head of the International Monetary Fund (IMF) quietly. The meeting of the IMF has focused on the role the U.S. has played and what it should be. That she has been an intense critic of the Trump administration is no secret, but she had been somewhat cautious in her assessment given the fact the U.S. has been the major contributor to the IMF in past years. She will be leaving the bridge building to the incoming head—Kristalina Georgieva. Lagarde has declared the U.S. is risking its leadership role in the global economy with the policies Trump has pushed. It goes beyond the trade war with China as Trump has threatened tariff and trade battles with almost every nation on the planet—allies and enemies alike. There have been threats issued against Mexico, Canada, Europe, India, Vietnam, Australia, Japan, South Korea and so on. Most of these have been abandoned as Trump has been talked out of the actions by his advisors or has simply moved on to other issues.
Analysis: The critique is easy enough to understand and Lagarde has been explicit, but the real question is whether there is any other nation or entity prepared to pick up the slack. It appeared the EU might be in a position to take over that global influence, but with the major economies of Europe in or near recession, the power of the group has been eroding. The Brexit mess will hammer the U.K. hardest, but all of Europe will be affected as well. At one point, there were many who asserted China would supplant the U.S. and there have certainly been efforts undertaken by the Chinese with the creation of their own version of the World Bank. The problem is China is now essentially in recession with an anemic 6% growth rate. Japan has been mired in deflation for over a decade, the Asian tigers are too small, Latin America is badly divided and badly governed. There are no alternatives to the U.S. That presents an even more serious problem. How does the global economy function with no leadership at all?
This has been the point made by Lagarde and others. The U.S. was the champion for free and open trade and led the move toward globalization. There have been many nations that chose to pursue isolationist policies and tried to close themselves off, but they suffered the consequences as long as the U.S. pushed the alternative agenda. Now, there is nothing to prevent the return of the "beggar thy neighbor" mindset of the Great Depression.
Crisis in Chile
The riots and demonstrations in Chile are as intense as any in Latin America in recent years and have been provoked by many of the same issues that have led to protests in other nations such as Brazil, Argentina, Colombia and Venezuela. Chile has long been held up as the example for other Latin nations to follow. It is arguably the most stable nation in the region and one of the fastest growing. It has attracted investment from all over the world in everything from the copper industry to wine making. The capital of Santiago has been the resilient and peaceful locale for companies that wished to avoid the chaos that affects Buenos Aires, Caracas or Sao Paulo. That reputation is now in tatters as the population has taken to the streets to essentially protest the extreme levels of income inequality.
Analysis: The initial trigger for the protest surge was the attempt by the Pinera government to raise the price of public transportation. The fee hike would hit the poor parts of the population especially hard and the rationale for the increase seemed very weak. Within days, the protests grew and the whole country has been shut down. Transport centers have been torched and there have been heavy concentrations of military and police equipped with everything from water cannons to rubber bullets. There have also been widespread episodes of looting and other expressions of violence. The demands have now moved from the initial demand for the rejection of the new fees. The government has agreed to go back to the old fares, but that has not been enough to quell the violence.
The country is extremely divided between those who have benefited from the years of economic growth and those who have not. The frustration level has been growing exponentially. The Pinera government has not been able to work through the divided legislature and that has prohibited progress on any of the free market reforms promised by Pinera. The former center-left regimes promised a lot and started many expensive programs that were only sustainable when the price of copper was high. As these prices fell, the ability to fund these programs vanished. The Chilean government faced a stark choice—reduce the outlay on these programs or find some other source of income. Neither has been a really viable option. The Pinera government is now considered a lame duck—unable to pursue any of the original plans.
More Data to Peruse This Week
Not that every week is not chock full of the stuff that delights and informs the life of an economist, but this time of year the usual interest is heightened more than a little. It is the transition period when the holidays take on special significance. There is all the retail activity to be sure—the consumer plays an outsized role through the next few months, but there is more. Holidays mean that business slows down a little—all those vacations and office parties. The housing market slows as it is smack in the middle of the school year and nobody wants to move during the holidays. Then, there is the impact of the impending election year. By all accounts, this will be one of the most vicious and vituperative in decades.
Analysis: One of the first releases up this week will be the report from the National Association of Realtors on home sales. In August, sales were as strong as they had been since March with a gain of 1.3%, but this month, the expectation is there will be a decline of around 0.2%. The factors pulling on housing have been trending in opposite directions—low mortgage rates but a shortage of homes in the starter category and reduced inventory due to a shortage of construction labor. This is data that pertains to the new home sector, but the existing home numbers are not expected to be much better. As always, the regional data will vary widely as housing shortages exist in some areas while there is surplus in others.
There is not much good news expected from the durable goods numbers either—most analysts are predicting a drop of 0.8% from the prior month. None of the manufacturing data has been all that positive of late—the Purchasing Managers' Index has been in contraction territory for two straight months, while the latest numbers from the industrial production data showed a sharp decline in the manufacturing sector (along with a slip in the mining category). Durable goods orders will be released later this week. They are expected to be down as well. Some of this is normal and connected to the season, but the fall is also rooted in the angst that has been felt of late by manufacturers in general.
The All-Powerful Consumer
The University of Michigan assessment of the consumer mood will be released on Friday. It will attract the usual attention, but with a special edge given this is the holiday spending period and the time that retailers count on to make their annual numbers. The retail data has been weaker than would be ideal, but it hasn't collapsed either. Confidence is not at the peak set earlier in the year, but it has also managed to stay generally positive. The challenge with consumer confidence measures are that they are extremely volatile. Many noneconomic factors can affect the mood of the consumer as well as economic ones. Generally speaking, elections depress consumers, but it is still a little early for this to be a factor.
Analysis: The economic issue that matters most to the consumer is employment. As long as the jobless rate is low, the mood will stay relatively buoyant. The other factor of importance is the rate of inflation. Thus far, this has not been something that has provoked all that much concern as there has been little in the way of either wage-driven inflation or commodity-driven inflation. The one factor that remains of concern are the tariff-induced price hikes. These have been less than expected as the retailers have been very reluctant to pass the costs on to their consumers. The big players like Wal-Mart have been pushing back on their suppliers and have made them eat these additional costs, but at some point, these suppliers will be unable to meet these demands without affecting their own operation. That could mean layoffs at these companies.
In Praise of Libraries
I have always loved libraries. What else would one expect from an acknowledged bibliophile? My first real job was as a page in our local library. I was endlessly reprimanded for spending more time reading the books than shelving them in their proper order. I have spent many hours in them since—doing presentations, attending presentations, conducting research and otherwise availing myself of the offerings within. These days I have another reason to be grateful.
As a road warrior, I am very often without a place to do my work. In past years, I would seek out a coffee shop or hang in a hotel lobby, but these venues always left much to be desired. Too much noise, too many inane conversations impossible to ignore (especially when one is by nature—nosy). I have been using local libraries as my ersatz office for quite a while now. They just get better and better at providing what is needed.
The study/meeting rooms make dandy locations for some business conversation. They are now offering coffee and other refreshments and all the tech help one could require. A malfunctioning laptop at a coffee shop can ruin one's whole day, but in a library, there is assistance from some unlikely sources. I have been rescued by the library IT guy and by a patron who was watching my perplexed and befuddled face and noticed the veins bulging from my forehead. Best of all, there are many delightful distractions when one is simply in need of a break. Everything from music to films and books and unexpected programs and talks I was heretofore unaware of. The library is once again my favorite hangout.
U.S. Retail Sales Growth
There has been a consistent and substantial recovery in retails sales activity since the recession, but some of that advance may have started to come to an end. The predictions for retail activity this year are generally down from what they have been in recent years. There is a sense that consumers have been more cautious than in past years. That is expected to drag down activity for this season and into next year.
