Strategic Global Intelligence Brief for September 6, 2018

Short Items of Interest—U.S. Economy

Rise in Productivity
Later in this issue, there is an article that goes into the issue of why there has not been much of a wage hike given that there is a very low unemployment rate. It has been noted in the past that a low rate usually translates into higher wages, but not this time. One of the reasons for the slow wage hikes has been a lack of worker productivity, but the latest numbers indicate that U.S. worker productivity is as good as it has been in over three years. The most important factor seems to be that business has been adding technology and machinery at a much faster clip than in previous years due to the additional money provided by the tax cuts as well as the additional income from solid growth numbers in Q2.

Jobless Claims at 49-Year Low
There are any number of reactions that can be counted upon when the rate of unemployment falls as low as it has been for the last few years. The most obvious issue is that hiring becomes a challenge as there are too few people with the right skills. The other reaction is that business becomes very reluctant to reduce the size of its workforce as they know it will be very hard to replace these people should there be a reason to start staffing up again. There is almost no incentive to let people go these days unless some big merger or acquisition has created redundancies of some note. The rising number of people who are willing to just quit their job because they are confident they can find another one is a good signal that labor markets continue to be very tight.

Mounting Concerns in Farm Country
It is not news that there are problems in the agricultural sector, but it has escaped many that the issues have been getting worse and worse, and at a rapid clip. The weather has been the trigger for much of the crisis—too little rain in some places and too much in others. There have been odd temperatures to contend with as well. The global farm situation is tough as well and many nations are facing a similar crisis. Add in the vagaries of trade wars and you have all the makings of a widespread disaster. The impact on the rural communities is severe and the country banks are feeling the impact right now. The potential for widespread rural recession has rarely been greater.

Short Items of Interest—Global Economy

Ukraine Raises Rates
The central bank in Ukraine has pushed rates to 18% in an attempt to get control of the rampant inflation threatening to demonetize the economy. The government is under intense pressure to adhere to the International Monetary Fund (IMF) demands presented over a year ago as this will mean a big release of funds will take place, which could ease the crisis. The reluctance to adhere to IMF demands stems from the fact that government spending would be cut severely. There is real fear that such a cut would seriously jeopardize the stability of the ruling party. For now, the nation will try to struggle out of this on its own.

Aid to Africa
It has long been assumed that all Africa needed was some consistent investment and these nations would soon be able to catch up. The reality is that hundreds of billions of dollars have been poured into the continent and there is not much to show for it. The recommendation now is that aid be directed to the farm sector almost exclusively as opposed to those big infrastructure projects. The notion is that nations would be able to feed themselves and export the rest.

U.S. Middle East Policy
The latest policy developments as far as the U.S. and Israel are concerned stem directly from the Israeli right. The U.S. has long sought to balance between the dominant coalitions in Israel as it is never known when one might come out on top in an election. The Trump approach has been to put all of its eggs in the Likud basket and to ignore the Labor politicians. This will make things awkward for the U.S. should Likud be voted out.

North Korea Wants More
For the last several weeks, the leader of North Korea has been making it clear to anyone who will listen that he is not happy with the way he has been treated. Kim Jong-un has made magnanimous gestures—at least in his mind. He has closed a nuclear weapons test site and dismantled a missile launch pad. That only leaves perhaps 100 more such missile sites. As for the nuclear test site—this is the same one that experienced an explosion of unknown origin and was wrecked long before any talks were scheduled with the U.S. or South Korea. Besides this, there are several other sites where testing can be carried out. The world remains skeptical as far as North Korea's intentions regarding their nuclear program. Kim is now slamming the entire process and the U.S. in particular as there has been very little progress on the issues that matter most to Kim.

Analysis: There have been a series of demands made by Kim Jong-un. They tend to fall into three buckets. The first is diplomatic. Much of that agenda has already been achieved thanks to the willingness of the Trump team to meet with him and interact as equals. This had never been offered to the "Hermit Kingdom" before and was generally treated as a reward bestowed on the North Koreans if they ever elected to abide by the rules of the global community. They haven't and this recognition was denied. Now that Kim got some of this attention, he wants more. He specifically wants a formal end to the Korean War. It comes as a shock to many in the U.S. that this war has never formally ended; there is only an armistice. To formally recognize the North Koreans as the victor would elevate the Kim regime domestically, and to some degree, internationally as well. Thus far, that level of recognition has been held back, which has irritated Kim.

The second series of demands has revolved around economic issues. The country has been in dire straits for many years with a population that is malnourished and living on the razor's edge of extreme poverty. It is clearly a society of haves and have nots. Those close to the Kim regime do reasonably well and he takes care to feed his army. Everybody else scrambles to eke out a subsistence existence. The deal struck with the U.S. and the South Koreans held out hope for massive levels of food aid and other financial assistance, but that has not been forthcoming either. There has been some additional delivery from South Korea, but nothing of note from the U.S. To a degree, this has been withheld pending more concrete actions from Kim, but it is not clear what the U.S. would actually require.

The third issue is military. Here, there have been some gains—just not enough to satisfy Kim. The most impressive gesture made by President Trump was his decision to pull the U.S. out of military exercises with the South Koreans. This has been an annual affair and is designed to show U.S. commitment to the South Koreans as well as show the capacity of the joint forces in the region. It has been seen as a means by which to discourage North Korean adventurism. Kim wants a drawdown of U.S. troops in South Korea, but this doesn't seem to be on the table as this would make South Korea very vulnerable.

None of this is to indicate that nothing has come from the high-level talks between Kim and Trump. It is simply that much more needs to take place if there is to be any further rapprochement. The ball seems to be in Kim's court at the moment.

Why the U.K. Pursues the Poisoning Case
The statements by Prime Minister Theresa May were as strident and angry as any heard from her on any subject. There have been many that question what difference it can make. Several months ago it is alleged that agents from Russia attempted to murder a former Russian intelligence officer and his daughter with a nerve agent sprayed on their doorknob. Both survived and it was quickly asserted that Putin's government was behind the attack. Russia was subjected to sanctions and global criticism. Then the case seemed to fade. Now, two men have been identified as the likely culprits, but both have returned to Russia. There is no extradition treaty between the U.K. and Russia so they will not be standing trial in Britain at any point. Why pursue this when it will be impossible to prove the allegations?

Analysis: The basic reason is to apply enough pressure to ensure that nothing like this is tried on British soil again, but there may be bigger issues involved. The British position on Russia and Putin is more hard line than other national leaders. It seems that May is trying to persuade other global leaders to see Putin as she sees him—a danger to global democracy and a man who deserves pariah status in the global community.

Why Have Pay Hikes Been So Hard to Come By?
There are always anomalies when dealing with economic trends. After all, the subject matter for economic analysis is human behavior—little is as changeable and volatile. It is never quite clear what really motivates people to do what they do. This is despite the valiant effort on the part of the economist to assert we are all "rational maximizers of expected utility." One of the more vexing anomalies to deal with at the moment is wages. The rules of the economic road would state that by now there would be significant gains in terms of overall wages as there has been a very low rate of unemployment. The rate has been hovering near or below 4% for many months, but the wage gains have been spotty and paltry. This is not good for those who would like to see a raise, but it is probably a good thing in the sense that it has slowed the development of serious inflation. It had been assumed that inflation would be forcing the Federal Reserve to dramatically hike rates by now, but that hasn't been the case. Given the fact that logic would hold that fewer applicants for jobs would mean that business would have to pay more to get the people they need and want—why has there not been that pay hike?

Analysis: The theories abound, but there are three that seem to jump out and are at the center of most of the assessments. It appears that sluggish pay hikes are the result of some combination of low levels of productivity, an aging workforce and the level of overseas competition.

The level of U.S. productivity has been falling behind for some time now. It was once an article of faith that U.S. workers were the most productive in the world, but that is no longer true by most measures. The basic definition of productivity is output per person. It has traditionally been a measure that looks at the marriage of technology and labor as well as the role of management. To make a worker ever more productive means they have to be well trained, well equipped and well managed. If they lack the skills and education needed to do the job, it will be a while before they are productive. It has been estimated that it takes between 24 and 36 months to train a person sufficiently. Given that many younger workers seem unwilling to stay at a job any longer than this, there is an ongoing issue of constantly having to make do with an ill-trained workforce. The last 10 years of recession has slowed the rate of adoption of new technology as well. This means people are working with antiquated machines or yesterday's tech. That limits their productivity. Finally, there is the management challenge. If the workforce is not properly supervised and organized, there will be major delays and workers will find that they are wasting a great deal of time. The upshot is that many nations in the world now have more productive employee collections than does the U.S.

The second reason that wage gains have been paltry has to do with the aging population. The fact that the Baby Boom generation has been altering the economy since they started always seems to come as a shock. The Boomers are now retiring in large numbers. It is estimated that some 10,000 a day call it a career. That adds up to some 3.5 million a year. This has impact on labor in a variety of ways. The simplest is that highly paid Boomers are leaving and are being replaced by lower-paid workers from the Gen-X and Millennial generations. This means wages will be dropping overall even if the starting wages for new hires are better than they used to be. The other impact of the Boomer generation is it features a lot of people delaying their retirement. That allows less opportunity for people to move up or even enter the workforce at all.

The third reason for low wage gains is overseas competition. We have been familiar with this issue for years. The major reason companies move away from the U.S. is they need access to a workforce that has the skills needed or is at least significantly cheaper to train and employ. A U.S. manufacturer setting up in China or Mexico will have access to better-trained workers than in many parts of the U.S.—especially if the work being done is relatively low value. The standard of living in the U.S. is such that paying people less than $10 to $15 an hour is going to consign them to near poverty. But a company can't long survive if it pays unqualified and untrained people that much and more.

Consequences
There has been much made of the transportation revolution brought on by the ride-sharing system. Much of this has focused on what Uber and Lyft and the others have done to the traditional taxi industry. There have also been many explorations of the impact this model has on the whole notion of the "gig economy." One of the overlooked areas is the way these services can alter consumer behavior.

Analysis: Whether you are aware of it or not, the passenger gets rated. The drivers have an opportunity to award you stars just as you get a chance to rank them. For most people, this seems like just another rewards card as highly rated passengers will likely get deals and offers from Uber. But that is not all. In several countries, the low-rated passengers may find themselves banned from summoning a ride. It is common for drivers to refuse to respond to the request of a low-rate driver. The ride share system also tries to match the highly rated drivers with high-rated passengers. It seems your behavior does indeed follow you. This could radically alter a lot of consumer behavior if it spreads to other businesses. The restaurant knows you are a lousy tipper and a chronic complainer so you get the worst table in the house. The retailer knows you wear stuff and bring it back so they stop selling to you altogether. The flight attendant who has been forewarned slaps duct tape on your mouth as soon as you settle in.

Small Acts of Heroism
It is amazing what can constitute heroism. It seems there are many things that cause people to be fearful. At the top of that list are certain beasties. There are people who are deathly afraid of snakes, spiders, wasps, bats and so on. When one of these intrudes on one's daily routine, there can be real pandemonium until that local hero appears.

Yesterday, I was getting a little work done in a hotel lobby when it became evident that something was awry. A small bat had blundered into the hotel and was fluttering around in the lobby trying to get back to where it belonged. Various guests and employees were diving for cover, screaming and generally behaving as if Genghis Khan had just ridden through the sliding glass doors. Just as it seemed that total chaos would rule, a young man in a suit walked down the hall with a pillow case he had retrieved from his room. Two swipes and he had the bat inside. He walked outside and located the woods behind the hotel and carefully encouraged the little guy to fly away and it did.

This reminded me of a time when I was to board a bus shuttle that was taking us from Rockford to Chicago to grab a flight at Midway. Everyone was standing outside the bus despite the fact we should have been leaving. There were at least two bees on the bus and people were in a dead panic. The terrified driver was trying to swat them with a rolled-up paper, but thankfully missed every time as she kept her eyes closed. I went to the coffee shop and grabbed some sugar packets and made a slurry of sugar water in my hand and sat at the front of the bus. In less than five minutes, I had three honeybees in my right palm—happily slurping down that sugar water. I escorted these ladies off the bus to a nearby flower garden. My work there was done and we all boarded the bus.