By Chris Kuehl, Ph.D., NACM Economist—
Short Items of Interest—U.S. Economy—
Agriculture—Key to Breaking Trade Deadlock?—
There is far more reason for pessimism than optimism about the trade war between the U.S. and China, but if there is a glimmer of hope, it may well come from the agricultural community. The Chinese are back in the market for U.S. soybeans and have been buying more than they have in recent months. The motivations for these purchases are a combination of shortages from other producers and a need by China to start rebuilding their livestock operations. The country had been dealing with a swine flu epidemic. Now there is an all-out effort to rebuild that population and additional feed is needed. The Trump motivation is that farmers are part of his core base and he needs to do something to shore up that support.
Employment Reduction as Government Policy
Over the last few years, there has been a focused effort to reduce the number of people working for the Federal government. In general, there has been an assertion that the size of the governmental workforce had grown too large. There has been support from both Democrats and Republicans to reduce. The question is where the reductions should come from. The Trump approach has been to increase the numbers in areas like the military, border enforcement and some aspects of the financial sector. The cuts have come from agriculture, education, health care, housing and welfare in general. The size of the government workforce has grown under Trump, but at a slower pace than in the Obama years.
The Training Conundrum
All over the country, there has been a demand from manufacturers, construction operations, transportation companies and the like for workers. This labor shortage has been building for years. There have been responses from the community colleges and trade schools, but there have also been new problems. The most vexing one is that students start these training programs but often do not finish them. It is not that they lose interest or fail—they are being snapped up by employers long before they finish. The need is so great that companies can't afford to wait. The schools then lose the students. That affects their ability to continue their programs.
Short Items of Interest—Global Economy
Labor Struggles Elsewhere
The U.S. is not the only nation struggling to find workers. Even the Europeans with their vaunted systems of apprenticing and training are finding it harder to recruit young people into these professions. The Millennial German is not as drawn to the industrial side of things and neither are those in the U.K., France or anywhere else. The appeal of steady work and good pay is not enough as these are still hard jobs and challenging ones. Beyond that lack of interest, there is the simple fact that there are fewer people in that demographic than in the past.
Uprising in Ecuador
The left-leaning government in Ecuador has been forced to flee the capital city in the wake of mass demonstrations. The indigenous population of the country has been harboring grievances for years and they are now boiling over as the decision was made to cut their fuel subsidies. The government is running out of money as the oil sector has not been what it was. The cuts in the subsidy hit these communities hard and they are rebelling aggressively.
Brexit Deal by October Is Very Unlikely
Prime Minister Boris Johnson is many things, but a diplomat he is not. A day after he lambasted German Chancellor Angela Merkel and Irish Minister of Defense Leo Varadkar for obstructing a deal and trying to ruin the U.K., he is beseeching them to keep the talks alive. To say he is getting a cold shoulder is an understatement. It has become obvious that Europe is far better positioned to survive the split than the U.K. The sense is that Britain will not be able to rescue the situation and will fall into a very deep and persistent recession.
Why the Kurds Matter
The latest foreign policy move by President Trump took the defense and intelligence community by surprise. There has been an unusual level of opposition to the move—even from those who have been staunch allies of the president in the past. Why is this considered such a big problem by so many? The vast majority of Americans know little to nothing about the Kurdish people, the relationship they have with Turkey or what the Kurds have been doing as U.S. allies. Now it is suddenly front page news.
Analysis: There is not the time or space to go into great detail in this newsletter; however, in the briefest of terms, the Kurds are an ethnic group spread between three nations (Iraq, Syria and Turkey). They have been fighting for their own independence for decades and have battled the governments of these three nations many times. They became allied with the U.S. when the invasion of Saddam Hussein's Iraq took place as they were eager to fight that regime and worked closely with the U.S. The U.S. has long considered the Kurdish militia (Peshmerga) allies against ISIS and other terror groups.
The majority of the Kurdish population lives in Turkey where they have been agitating for autonomy and independence for decades. This battle has been violent at times and Kurdish groups have employed terrorist tactics on numerous occasions. Turkey considers them enemies and insurgents and has tried to ban their language and culture. The Kurds on Iraqi and Syrian soil occasionally support Kurds in Turkey. The increasingly autocratic leader of Turkey—Reccip Ayyip Erdogan—is bent on destroying the Kurdish "threat" as he seeks to distract his population from economic failures.
The phone call with Erdogan apparently convinced Trump to pull U.S. troops from northern Syria and expose the Kurds to an attack from Turkish troops. The invasion appears imminent and the U.S. will do nothing to stop it. The implications are extremely serious and the U.S. military and intelligence communities are deeply concerned. The U.S. is turning its back on an ally that fought with the U.S. against Hussein and has been fighting with the U.S. against ISIS. The Kurdish forces have lost upwards of 13,000 fighters in this war. The U.S. is now abandoning them as Turkey moves on their positions. The U.S. instantly becomes an unreliable ally and it is doubtful that any group will agree to assist the U.S. in the future. ISIS is regrouping and is very far from dead. The U.S. will either have to tolerate the destruction brought on by a renewed ISIS or will have to intervene. If the U.S. has no allies in that effort, it will mean thousands of U.S. troops deployed and with that will come casualties. The military has been clear on this issue—a VERY bad idea and one that compromises security.
Trade War Damage
I had an opportunity to be part of a panel discussion on the topic of the tariffs and trade barriers that have been imposed by the U.S. and China on business between the two nations. Usually, I am only exposed to the sound of my own voice, so it is more than instructive to have an opportunity to hear the perspectives of other analysts and authorities. On the panel was an economist with the Federal Reserve. His comment rather neatly captured the nature of the challenge facing the U.S. business community as well as the rest of the world.
Analysis: He broke the issue down into three buckets—a direct impact, an indirect impact and a global impact. Of the three, the most serious threat comes from the global implications. The direct impact has been the focus of the most attention as this is connected to the tariffs that are being imposed by the U.S. on goods imported into the U.S. from China. In simplest terms, this is a tax on U.S. companies and on U.S. consumers. These goods will be simply more expensive—how much more will depend on how much of the tariff cost is passed on to the consumer. The indirect impact affects the exporters as the Chinese have reacted to the U.S. tariff imposition with tariffs and barriers of their own—making it hard for U.S. companies to sell their product into the Chinese market. It has been noted that the U.S. trade deficit has only worsened since all this started. That did not seem to be expected by the Trump team. It should have been though, as the U.S. consumer continues to want those imported goods, while at the same time U.S. goods are not making it to the global market. This is the more important of the issues. The levels of global trade have collapsed as the two-largest economies in the world are at war with one another. China's growth has stalled and now the U.S. is experiencing some of that slower progress. It means nations that sell to China and the U.S. are selling less and they will, as a result, buy less. The slide into recession in Europe as well as many other nations can be attributed to this general slowdown in global trade. The U.S. is not only exporting less to China because of the tariffs, it is exporting less to every other nation in the world that had been selling to China.
Status of Those Trade Talks
It has been several weeks since the U.S. and China have been in real negotiations, but there is yet another round scheduled for this week. However, few expect anything of substance to emerge. The Chinese say they are interested in a deal and there have been similar statements coming from the U.S. side. At the same time, there are statements indicating where both sides are unwilling to go. These barriers have been in place for well over a year. Both nations are feeling the strain, but not to the point that compromise is imminent. China has expressed willingness to buy more from the U.S., but reiterates that no substantial changes will be made to their structure or to the support and subsidies that Chinese companies receive. The U.S. suggests it will reduce or slow down the tariff imposition, but only with Chinese willingness to reduce those subsidies, protect intellectual property and allow more U.S. investment.
Analysis: The bottom line is this conflict has been personal for many months now. The economic rationale for a truce has been in place for months. If the original aim of the U.S. was to reduce the deficit with China there has been an opening to accomplish this. China has offered to buy much more from the U.S. That would go a long way towards balancing the relationship. However, the dispute has transformed from an economic issue into a political war of wills. China is President Trump's enemy and he continues to gain support from his political base for the position he has taken. President Xi has a base of his own and gets support for his hardline stance on the U.S. China has become more nationalistic and less willing to knuckle under to U.S. pressure. There are now frequent references to the ability of the Chinese to suffer for principle in the Chinese press. That is a signal that China is willing and able to endure hardship brought on by these tariff and trade fights. It is not at all clear the U.S. is similarly inclined. The consumer is already starting to lose patience with this situation. It will now come down to who the average person blames for the impasse.
IMF and World Bank Warnings
These two key global economic institutions have new leaders. They will waste no time as far as setting the course of their institutional policy. What makes this period interesting is that one of the leaders is by tradition selected by the Europeans (Kristalina Georgieva) and one by the U.S. (David Malpass). Both have been critics of the organization they now run, but from different perspectives. Malpass, president of the World Bank, is a former Treasury official appointed by Trump. He has attacked the World Bank for waste and inefficiency and for failing to focus on the real issues of economic development. Georgieva, director of the International Monetary Fund (IMF), was with the World Bank and has criticized the IMF for lack of understanding regarding the real needs of emerging market nations. She is Bulgarian and has seen the result of overly strict IMF policies.
Analysis: What both agree on is that global growth is slowing and dramatically. This is having very deleterious impact on every nation in the world, but some countries are going to get hit far harder than others. It is a cascade effect. The U.S. and China battle each other and they experience economic crisis to some degree, but other nations get hit even harder as their economies depend on the two-biggest economic powers. The expectation is many states that are marginal now will slide quickly to some kind of failed state status. With that will become the potential for famine, mass dislocation, political violence and a host of humanitarian crises. The two institutions have gone beyond simply calling attention to potential issues and are now sounding an urgent warning. These trade wars have to come to an end as they are not driven by economic issues, but by the personal egos of the leaders involved.
What Might Be Learned from Fed Minutes
The Fed minutes will be released later today. They will be assessed with more than the usual vigor given recent events. It is relatively unusual for the Federal Open Market Committee (FOMC) to have dissenters—the Fed prides itself on being a consensus-based decision-making body. This time there were three dissenters and all of them regional Fed heads. Two objected to lowering rates (Esther George and Eric Rosengren) and one wanted the cut to be deeper (James Bullard). We will find out a bit more about their line of thinking.
Analysis: A more interesting set of discussions took place around the status of the overnight lending market. The Fed has been pouring money into the repo sector in order to preserve liquidity. The real issue is why this tactic was necessary. Why were banks suddenly unwilling to make these very short-term loans? Did the bank reserves become scarce sooner than was expected or were there other factors at work such as changes in bank supervision or big changes in the overall market structure? The Fed acted quickly to settle the liquidity crisis. It certainly has the tools to execute on that strategy again, but the question is why this action was made necessary in the first place. Many see this as another sign of the economic jitters and a further warning that the financial sector and the business community as a whole is getting nervous about a future downturn and has become more cautious. The danger is that this kind of sentiment can become a self-fulfilling prophecy as this cautious slowdown can drag growth down to the point of a real recession. The Fed has been trying to hold that sentiment at bay.
My 'Dog' Cats
Just when my readers thought it was safe, along comes another cat story. What can I say? They demand their moments of fame. The situation that prompts this particular screed was an opportunity to hang with some friends who have two large Golden Retrievers. They have long had Goldens and at times there have been as many as four in their home. As we arrived at their home, there was the usual wild greeting as the dogs jumped and barked and generally behaved as if their beloved people had been gone for years. The question was asked: "do your cats do anything like this?" The inference is that cats do not show that kind of boundless joy, but I beg to differ.
I am often gone for a day or two and even a week as my travel schedule suggests. Upon my return, there is a welcome home ritual engaged in by the feline five. The most demonstrative is Scoot as she will stick to me like glue for days. I sit down for an instant and she is in my lap with almost frantic purring. She has been on my desk all morning as she stares at me and pleads for just one more belly rub. The kitten brings his toys and drops them at my feet. Spike heads for the "box," a flat cardboard container that has become the official location for him to get attention. Sven is nearly 20 and reacts about the way one would expect a 95-year-old to react. Smoke is subtle, but waits his turn for his favorite thing—a thorough combing. They do not bark and they do not jump, but I am certainly warmly greeted and am well aware that they have missed their human.
The Cost of the Tariffs
Thus far, the tariffs have cost the U.S. business community about $6.8 billion. The numbers only go up from here as the tariffs are rising to truly prohibitive levels of 25% to 30%. To many people, this seems like an arcane subject, but remember that "tariff" is just a fancy word for "tax." The business community and the consumer are being taxed by the U.S. government to the tune of an additional $6.8 billion. Perhaps the gesture is worth it in the long run, but in the short term, the impact is the same as if the U.S. government just decided to hike everyone's tax obligation.