Short Items of Interest—U.S. Economy
Angst Setting In
Thus far, the U.S. is not quite as bad as the Germans when it comes to questioning a good run. Germans remain the king of angst as they seem devoted to looking for the potential downside of every situation. The U.S. economy is doing pretty well according to the latest data from the Fed's Beige Book analysis, but at the same time, there is a lot of anxiety regarding what to expect in the future. The reports from the 12 Fed districts are somewhat anecdotal and are drawn from both the staff and the local Boards. The message this time is a bit complex. The economy is performing well and growing, but there is a lot of concern regarding the development of trade war crises and the looming specter of inflation higher than has been seen in over a decade.
Producer Prices Fall
The Producer Price Index fell for the first time in well over a year. That took some by surprise as it had been expected there would be continued inflation at the producer level with higher commodity prices and an increase in wages. This month, there appear to be some anomalies. The price of food and fuel dipped a little as the summer driving season wound down, but the biggest decline was in a category referred to as trade services. This is not likely to be repeated next month—the longer-term trends will return and bring with it more of an inflation threat. The majority of the industrial community is just starting to adjust to the higher wages. It now looks like hurricane activity will serve to ramp up oil prices as some of the new storms seem to be heading toward the Gulf of Mexico.
Brainard Calls for Higher Rates
Lael Brainard has added her voice to the chorus calling for more rapid interest rate hikes at the Fed. She has added a new rationale to those cited by others on the Fed Board. Not only is there the threat of inflation, the need to curtail speculative borrowing and investing and the need to create more room for a Fed reaction at the next recession, but there are concerns about the burgeoning national debt and deficit. Both have grown at exponential rates under Trump—faster than under any president since the end of WWII. The Fed wants to do its part to temper this expansion, although what is really needed is frugality on the part of Congress and the White House.
Short Items of Interest—Global Economy
More Talks Between U.S. and China
It is still not all that easy to figure out what the U.S. wants from China when it comes to trade. There seem to be three priority areas. The first is perhaps the most insoluble. China bashing is very popular and President Trump may not want to cut any deal at all for fear of not having that punching bag. The second priority is for China to stop meddling in its own economy and the global economy, giving Chinese exporters an edge that other nations can't match. There is also a third priority. It is to get China to buy far more from the U.S. than is the case now. Most analysts assert pursuit of this third option could be the most lucrative and successful.
Hungarian Populists Isolated
The intensely nationalistic and populist leader of Hungary may have finally taken his positions just a little too far. Viktor Orbán has been in a long-running dispute with the EU. Now even his populist allies in Europe have been turning on him with votes of censure. Orban has become the standard bearer for extreme nationalism and anti-immigrant policies. His advisor has been Steve Bannon, the right-wing champion who was once part of President Trump's inner circle.
Crisis in Venezuela Leads to Calls for Intervention
There is deep fear that Venezuela is becoming a failed state whose crisis will slop over on to other nations. There is the start of an exodus from the country fleeing the grinding poverty and oppression. It is wholly unclear what could be done without starting a civil war as nobody trusts the Maduro government with any amount of humanitarian aid.
The Latest Word from the Index of Indices
For the last several years, we have been the economic analysts for a pair of industrial organizations—the Chemical Coaters Association International and the Industrial Heating Equipment Association. They are both involved in treating metal in various ways and are sensitive to sectors like automotive and construction. These are some of the indicators they watch. Here is the executive summary and a few of the more specific breakouts. Let me know if you have a desire to see the index in its entirety—complete with cool graphs and charts.
It is hard to find fault with the performance of the economy of late since the majority of the indicators have been pointing in a very positive direction. There has been a lot of argument over who or what should be able to take credit for this performance, but at the end of the day, the behavior of the consumer and the business community's reaction to that behavior is the most important factor. In the roughest of terms, the economy is finally getting the recovery spike from the recession that usually occurs far earlier than it did for this one. Much of the impetus for growth this year has been attributable to the tax cuts and the increase in federal spending—in other words the classic response to a recession. When there is a downturn, the mission of government is to spend money like a drunken sailor on leave. That finally happened in 2018 as opposed to any of the previous years when such a move might have been expected. There is now a crushing issue of debt and deficit to deal with and inflation will soon be the next major worry, but for the moment, the economy is responding to this stimulation.
Analysis: Of the 12 indicators, six are trending positive and six are trending negative, but few of them have showed any really dramatic movement in either direction. The activity has been essentially subtle and suggests there is some treading of water when it comes to economic activity. The six that are trending upward would include new home starts, steel consumption, PMI New Orders, appliance activity, the Credit Managers' Index (CMI) and the Transportation Activity Index. This is a pretty diverse list of economic motivators. The rise in home starts is a minor one and comes after several months of decline, so there is no sense the housing market is about to resume the rapid growth seen in previous years—those headwinds discussed over the last year are finally manifesting in a way that slows the sector. There was firmer ground with steel consumption as there has been some reaction to the increased demand for commercial and public sector construction. There is also still reaction to the steel tariff threats. The most encouraging news has come from the Institute for Supply Management and their Purchasing Managers' Index (PMI). It is up above 60 for the first time in over a decade. The new orders index is getting back to its growth pattern as it remains in the upper 60s as well. This signals very strong expansion. The movement in appliances has been very subtle, but there are more unfilled orders than previously. That indicates more demand. In addition to the positive movement seen with the PMI, there has been similar movement with the CMI. This month's data is very similar to last month and that is good news. The favorable factors are all in the 60s again. Even the unfavorable factors are steady and even improving in some sectors. The Transportation Index is moving in a positive direction as well. Most of the sectors have been affected with the biggest gains in trucking and the rail sector, while air cargo still lags behind.
The six indices that have shown decline include new automobile and light truck sales, metal prices, capacity utilization, capital investment, durable goods and factory goods. The bad news is that these are all squarely at the heart of the national industrial community, but the good news is that most of the movement has been very minor. The bottom has started to drop out of vehicle sales, but the collapse has been measured—the main issue is that people are hanging on to their vehicles far longer than they used to (11.5 years). The prices of metal should be rising, but thus far demand is not outpacing supply. The level of capacity utilization remains just south of what would be considered normal, but it isn't losing much ground. As companies start to work their new machines into the routine, these numbers will improve. Capital investment has cooled off a little, but not by very much. There was a dramatic ramp up at the start of the year and companies have not regained their appetite just yet. Durable goods orders are just slightly off, but they have been solid all year as companies invest in new technology and move to replace the older machines. Factory orders are down slightly as well. That has been attributed to retail caution regarding the coming holiday season. This will be another year of an "inventory light" approach to selling as there is still some trepidation as far as consumer commitment.
New Automobile/Light Truck Sales
The flattening of the auto sector has been a constant now for several months. Lately, it has been dipping slightly. Thus far this year, the sector has defied some of the early predictions, but that run may have started to end. At the beginning, there was much discussion over the "headwinds" that would presumably affect car buying (as well as other big-ticket items like homes). It was assumed that demand would shrink in reaction to higher prices, a reduction in job growth, emergence of consumer frugality and the like. The expected inflation has only just started to materialize as wages are finally starting to rise, but this may end up being good news for the carmakers if they are able to limit the price hikes that come with inflation. Consumers will start to see higher wages which generally stimulates car buying. The expectation at the start of the year was that jobless totals would stabilize at around 4.5% to 5%, but we have seen the rate of unemployment fall to 3.8%. There are plenty of jobs and very little reason for anyone to fear losing theirs. Frugality continues to be a consideration, but consumers are not getting carried away with it. They are still spending a good part of their paycheck; a new vehicle is still high on most lists. The one development that worries the carmakers is that cars are now averaging 11.5 years in age, the oldest the U.S. fleet has ever been.
New Home Starts
The plunge in the housing sector has slowed a little, but there is no signal there is a reversal in the offing anytime soon. It seems the headwinds that have been discussed since the start of the year have finally started to have an impact. The price of homes continues to accelerate although this has been variable according to how hot a given market has been. Overall, the Case Shiller index has been rising at a steady clip. There have also been mortgage rate increases sufficient to push some of the first-time buyers out of the market. There are still some creative techniques for buying a house, but many fewer than was the case a few years ago. Now, it is often the down payment that presents the biggest barrier. It is true that jobs are secure and that often bolsters home buying, but thus far not quite enough. The Millennial buyer remains a challenge as they are still far more interested in the multi-family options than in buying the traditional single-family abode. They are starting to buy more consistently, but this is generally confined to the older members of the cohort—those in their 30s that have finally started families.
The level of steel consumption is trending back up again, but generally, the demand for steel has been more or less steady throughout the crisis caused by steel tariff policies that seem to change on a whim. The status of the tariff plan right now imposes the tax on major steel exporters such as Mexico, Canada, Japan, Europe and Turkey. At the same time, there has been a removal of the tariff on steel that is coming from Brazil, South Korea and Argentina—at least for now. Given the fact the U.S. and Mexico seem close to a deal that would replace NAFTA, there may be a lifting of the tariff on their steel. However, nobody really knows where the Canadian negotiations are going and there is still talk of a comprehensive deal with Europe before the end of the year. Steel consumers have been seeing price hikes that average around 40% rather than the 25% that would be expected by the tariff policy. This is making these consumers more than a little angry. It has not stopped consumption however—there has been stepped up demand from construction and even from transportation. The growth experienced by the overall economy is driving demand hard enough that it has offset the drag from higher prices—at least for the time being.
Industrial Capacity Utilization
Ever closer it creeps, but the rate of capacity utilization is still a little short of the "norm." It is assumed the sweet spot is between 80% and 85% capacity utilization as that signals a minimum of slack in the manufacturing sector, but it has not become so tight that there are shortages and bottlenecks that can lead to inflation. There has been a steady improvement in this data, but it has started to level off over the last few months. There has also been a marked improvement since summer of last year, but there is a way to go yet. One of the more recent factors affecting the rate of utilization has been the purchase of new machines and equipment, a development spurred by the tax cuts. Many of these machines have only now started to come into heavy use as it takes a while to get them in place, train the workers and develop the markets. Now that most of that is complete, these machines will be contributing to utilization rather than being a drag on it.
PMI New Orders
The Purchasing Managers Index is back on track and has been surging to levels not seen in years. The overall PMI crested above 60 this month. The new orders version is headed back to its high levels although it still has a climb to get back to the 70 it notched at the end of last year. The drivers seem to be the ones that have been affecting the economy most of this year. The manufacturing community has been taking full advantage of the tax cuts. This has combined with resurgent consumer interest. There has been a little bit of an unusual wrinkle in the data for the last few months and it is not clear how long this influence will last. The threat of tariffs and trade has advanced the purchasing strategies for many companies as they feared they would be subject to tariffs later in the year. There was concern that some of the inputs needed would be unavailable if these restrictions came to be. The result was a lot of advance buying to beat any proposed tax or barrier. That has propelled numbers up slightly higher than they otherwise would have been.
Durable Goods Shipments
There was a slight downturn in the shipment of durable goods this month, but overall, the data remains strong. There has not been all that much activity in the aerospace sector to throw the data off, so the majority of what has been taking place has been in the traditional industrial sectors. The bulk of what is being purchased falls into four categories that also happen to describe some of the hottest economic sectors. There has been a surge of interest in oil field and mining equipment now that the oil slump is over. There has also been expansion in medical machinery. Transportation has surged (except for the aerospace segment for the moment) and there has been more acquisition of machinery for general manufacturing use. The slowest sector has been farm sector machinery and lately construction equipment has softened a little.
Humility—A Rare Commodity
I grew up in a household that was not very tolerant of bragging. I was admonished repeatedly when my ego started to rear its ugly head. The attitude was "don't tell people what one has done or is good at—they will find out sooner or later." I was instructed by my father to strive to be the dumbest person in the room since one doesn't learn from anyone unless they are smarter than you. Being humble wasn't actually all that tough as I have plenty to be humble about, but the point was made. Dad had a genius level IQ, but no one would ever hear it from him. To this day, I am irritated by the boaster and the egomaniac who declares their supposed superiority at every opportunity.
I recently read of a charitable group that has very quietly built 145 homes for single parents. It was started by Warrick Dunn. If that name doesn't trigger immediate recognition you can be forgiven. He was a running back for Tampa Bay and Atlanta and made a couple of Pro Bowls about two decades ago. He played for 12 years, mostly because he did whatever the team needed. His mom was a police officer and a single parent who was killed in the line of duty when he was 18. He suddenly became the head of household for his siblings and never forgot the struggles he faced to keep his family together. He started this foundation as he knew how much single-parent families struggle. He has been devoted to this throughout his life. My point is we constantly hear of the boors and clods who can't go a day without trumpeting their supposed accomplishments, while only a few know the real work done by the tens of thousands of unsung (and humble) heroes. Humility is a real virtue and one well worth bringing back.