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Strategic Global Intelligence Brief for September 7, 2018

Short Items of Interest—U.S. Economy

Service Sector Growth and Angst
The latest survey of the service community by the Institute for Supply Management is more than a little encouraging with numbers that rival those that came out in the manufacturing version. They went from 55.7 to 58.5. That would seem to suggest all was well within these communities. That is generally true, but there are concerns starting to build indicating these sectors are a little worried about the future. The service sector is very broad, but the survey tends to be loaded towards retail, health care and construction. Retail in particular expresses worry about the impact of trade wars and tariffs on the prices of the things they are selling to the consumer. They are watching price hikes start to move up the supply chain and it worries them.

Not a Lot of Progress in Puerto Rico
The thing about natural disasters is there always seems to be another one looming to take one's mind off the last one. The hurricane that ravaged New Orleans was replaced by the next storm and the one that decked Puerto Rico has faded as people worry more about the western wildfires. The problem is these devastated communities need a more consistent level of attention. It was only last week that all of PR got its electricity back, but the power company still tells everyone to expect daily brownouts. Much of the population remains without work and the debts are still mounting; not nearly enough has really changed.

Key Issues for the Election
It is always a little challenging to determine what the voter is really concerned with as there is a tendency for politicians to define the issues rather than ask people what is really on their mind. It has long been asserted when all is said and done that it is the economy. However, that may not be quite as true this year given the fact the economy has been performing pretty well. It will remain the top issue in those communities where the recovery has been incomplete, but other topics that register voter attention include health care, immigration and some of the social issues (everything from the #MeToo movement and the Bureau of Land Management issues to abortion opposition and patriotic displays).

Short Items of Interest—Global Economy

Assassination Attempt in Brazil
The leading candidate to win the next presidential election in Brazil was stabbed in the stomach by an assailant who asserted he was ordered to do so by "God." Jair Bolsonaro is a right-wing politician who has stressed a strict law and order policy and has taken a fierce stand against many of the social policies promulgated by his predecessors (Lula, Dilma Rousseff). The press in Brazil has been very active in pointing out the attacker has a history of mental illness. He was discharged last year because there was no more money for the facility. It has also not escaped notice that the anti-crime candidate was a victim of this violence. He is expected to recover, but the wound may keep him off the campaign trail for a time. It was a serious issue and required a two-hour surgery during which it was unclear whether he would live or not.

Nationalists Set Tone in Sweden
The Sweden Democrats will not win a majority in the parliament. It is unlikely they will even come second, but they are defining the race. The two main parties have been forced to develop positions on the nationalist's agenda. The most important issues according to the polls are immigration and crime, and the two are related. The waves of immigrants that have arrived in the last few years (150,000 in 2015 alone) have strained traditional Swedish hospitality. The areas settled by the migrants have a far higher crime rate and there are glaring cultural differences. Those who advocate for the migrants point out they have been shunned since they arrived and have not been able to get jobs and assimilate. It has also been noted these migrants arrive traumatized and broken by the violence they are fleeing from. These are not the ambitious young people who once traveled to Europe to start new lives. They are refugees who have been forced to flee a home they never wanted to leave in the first place.

Is Japan Next?
There has been one nation that seems to have escaped the ire of President Trump and that would be Japan. There has been much said regarding the relationship Trump seemed to have established with Shinzo Abe, but that doesn't seem to be dissuading the him from lumping Japan into the bucket of nations that "treat the U.S. unfairly." It is expected that trade restrictions will be imposed on Japan sooner than later. There are already tariffs on Japanese steel exports and there have been threats to the auto sector as well.

Analysis: Japan seems to be preparing for the onslaught and has been discussing the tariffs and trade barriers it would impose in retaliation. Most of what has been mentioned would aim at U.S. farm exports. That would be the final straw for many U.S. farmers given the mess with China right now. Japan is uniquely positioned to benefit from such a trade war as Japanese companies produce all over the world and their global market presence is second only to the U.S. The major danger as far as Japan is concerned is it does not have an active consumer base that can offset a decline in exports. Japan relies on exports for roughly 14% of its GDP, while the U.S. is about 15% reliant.

Jobs Report
By the time you read this, the latest jobs report will have been released. As this was written prior to that point, it will give you one last chance to determine whether the economists of the world have a clue as to what is taking place. To be honest, there is not a lot of suspense as far as this month's data is concerned as there has been consistent data for the last several months—no big events that would provoke big changes in the jobs data. There will be parts of the report that merit closer examination as these may point to developments later this year.

Analysis: It is likely that the unemployment rate will fall again. Many are predicting that it will fall to 3.7%. That would be the lowest point since 1969. Just as important is that the U-6 rate will also fall again. This is the measure that includes the discouraged worker category as well as the involuntarily part time. Usually the U-6 numbers have been twice the U-3 readings, but in recent months, the two have come closer and closer to one another. That trend will likely have continued. The new claims for unemployment have been at a very low level for the last few months. That means that there are relatively few people being added to the ranks of the jobless in any given month.

This year there has been an average of 214,000 jobs added each month, slightly ahead of the pace last year when there were 185,000 added on average each month. There is some expectation this number will rise a bit in this report as it is the end of the summer. This brings thousands of teachers back to the classroom at the same time that retailers start to gear up for the holidays. It is a little surprising that hiring has increased given the issues with labor shortage, but it now appears many companies have given up trying to hire aptitude and experience. They have resorted to hiring attitude with the understanding they will need to do their own extensive training.

Look closely at the part-time numbers. There are a great many people who have extended their working lives through part-time work. They are now a significant factor as far as employment patterns are concerned. The majority of these people are those who have reached retirement age and beyond, but either have to work or want to work. Not only are they adding to the size of the part-time work force, they have become a factor as far as keeping young people out. These are the jobs that often went to high school kids in the past, but fewer of the kids want these jobs and employers tend to prefer the older workers.

It is likely that wage gains will once again be modest, which will be vexing. By now, the low rate of joblessness should have triggered higher wages as employers struggle to find the workers they need. The problem is that employers are now hiring people who lack the qualifications needed and will have to do extensive training. This means they will start people at a lower wage until they complete that training and demonstrate they are worth what an experienced person would be paid. This is one key reason inflation has not been the issue many thought it would be by this time.

Perhaps the most important measure is the rate at which the "marginalized" worker is finding work. The jobless rate for the college educated has been very low for several years now. So has the rate for those who have skills and experience. The rate for those who have less than a high school diploma or some blemish on their work record remained high. There has not been a lower rate of unemployment for the high school dropout or the person with a criminal record in over 20 years. The employers are seeking people from every corner as long as they have a desire to work.

The Impending Arrival of Gen-Z
Just about the time you think you might finally have a handle on how to work with and manage the people referred to as the Millennial generation, there is the next group to start thinking about. The oldest of the Generation-Z cohort have started to enter the workforce (17 million or so at this point). They will not have the numbers that the Millennials (or Boomers) have and may end up at about the same level as Gen-X. It is interesting that they are already far different than the Millennial and may be closer to the Boomer in attitude.

Analysis: Several characteristics have been identified already. They are far more interested in financial security than any but the Boomers. They are not as interested in partying and social activity and have been described as pragmatists. They are not as entrepreneurial as they seek a good job they can stick with. Security is high on their list in all things.

Some Comments That Make One Think
Some stories, I think, are basically just musings. I do not expect them to provoke much of a reaction by readers, but I am always surprised because these are the very stories that do evoke some really interesting reactions and promote some very thought-provoking discussions. Such a story was the one I wrote yesterday on the Uber decision to allow drivers to react to the ratings that other drivers have given their passengers. One reader has reacted to many of the things I have written and we have published some of his comments in the past. This is another time I think his take on a subject is well worth considering. I suspect it will provoke more discussion on this topic. Here are his comments.

Part of me raises a cheer. Anonymous online reviews, statistically far more negative than positive as measured against total volume of transactions, have been a bane to business in the electronic age, particularly small business out of which economic progress grows. Finally, there is the prospect of some balance to the Force (of popular opinion). Nonetheless, it may be an example of not actually bringing about a correction of bad behavior; instead, adding to it.

What will happen when a legitimate consumer complaint leads to provider retaliation, or a legitimate vendor complaint leads to consumer retaliation? Those willing to assert their view of appropriate behavior may quite likely, as a class, be thrown under the bus of the increasing weight of an apathetic middle who become increasingly incentivized to conform to non-confrontationalism, which further leads to persistent low expectations and results. (Could this also be contributing already to our lack of maintaining labor productivity??)

As it is, vendors and particularly retailers and retail service providers have been cowed into submissive fear of social media, causing them to sacrifice profitability to the unreasonable demands of consumers. No one is measuring it sufficiently yet, but I believe it is costing us in economic activity. What will happen when either side of the transaction will commonly be able to start the war of negative reviews?

Analysis: (Chris Kuehl) I think this is something that extends deeper than business transactions. There has been an intense focus on the power of social media of late. It seems that it has been needed for some time. We have been influenced by Russian hackers who spread rumors and falsehoods. We see conspiracy theorists spreading nonsense and getting the same attention as bona fide experts. Facebook is accused of fomenting political bias and Google is defending itself against the same charges. It seems that every opinion is given the same weight regardless of origin. That is an immensely dangerous trend.

I am infuriated when I confront somebody with no command of economics or even basic math and they elect to argue with fact and statistics. The numbers do not lie. Anyone is entitled to how they interpret the numbers as there will always be those who win and those who lose in any economic scenario. I expect people to listen to me when the topic is economic and to completely ignore me when the topic is how a computer works or why my car will not start. Expertise matters, but is now lost in the social media frenzy.

Do I really care what a random person thinks of a movie or restaurant? I "love" it when somebody who hates sci-fi movies reviews a sci-fi movie and decides it is bad. Likewise, there's the person who exists on a diet of Twinkies and frozen pizza reviewing an ethnic restaurant. The point, I think, is that we must maintain our own minds and make our own informed opinions. We have to care enough to study and learn about something before we opine. I will never be someone from whom to take auto advice, but I am getting a lot more comfortable with my opinions on raising cats.

When Does One Notice or Decide
As I have confessed before, America's Got Talent is a guilty pleasure of mine. I have been known to go as far as to look at several of the international versions of the show. Japan's has to be seen to be believed and Brazil's is not something the kids should be watching. I am impressed with the degree of talent on display, but what really fascinates me are the "talents" that are quite out of the normal realm of experience. What told people they had this ability and why did they elect to spend countless hours to perfect it? I marvel at the acrobatic displays that were once the draw of the circus and struggle to figure out the magic acts. Perhaps the ones most entertaining and bizarre are those that feature people simply making a spectacle of themselves. A few years ago, there was a gentleman called Prince Poppycock. He did a one-man version of Bohemian Rhapsody that I still remember. He was ostensibly a singer, but he was really a spectacle in and of his own. This year it was the character called simply "Hans."

When do we know we have a talent and when do we know whether it is one worth pursuing and sacrificing for? I know many millions of people who have been thwarted as far as their dreams are concerned since they had to make hard choices. They put family or jobs ahead of that dream. My wife is a singer, possessed of a light and lilting soprano voice worthy of being in the conservatory when she was younger. Things intruded and she had to leave that talent on the bench. Now that she has been active in the Liberty Community Chorus, she has rediscovered that talent and joy. And I have rediscovered my talent for appreciating the talent of others!

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