Strategic Global Intelligence Brief for September 9, 2019
By Chris Kuehl, Ph.D., NACM Economist
Short Items of Interest—U.S. Economy
Global Debt Is Rising Concern
In the years since the financial crisis that led to the recession, there had been an assumption this miserable experience would convince those in the business and financial community to be more cautious about debt. It was also assumed this experience would make consumers and the government more concerned about high debt levels. Just how wrong was that assumption? There has been a massive accumulation of debt at every level. Consumer debt is at an all-time high and we all know the shape the government is in when it comes to the subject of debt and deficit. The corporate debt levels are also at record levels—up by close to 50% over what they were before the financial crisis. If there is another recession in the offing, there is going to be a major issue of debt default, and at nearly every level.
Inflation Expectations Are Down
This is an interesting situation to be sure. The latest data is starting to show an increase in inflation and the potential for even more. Wages have started to climb at last—not as fast or as high as theory would indicate but rising. The Phillips Curve may have been delayed a little, but still seems to work. There has been inflation noted in sectors such as health care and education, and the impact of the tariffs will be felt at some point. Despite the fact inflation pressure is building, there is a perception of less threat now than before. This could end up creating good news or bad. If there is no anticipation of inflation, there will not be a consumer reaction that would trigger it. However, if there is real inflation and people are not expecting it, they could be thrown into a panic that ends with recession.
No Change of Heart at the Fed
The latest jobs data from last week was not as robust as had been expected, but these slightly more anemic numbers have not changed the opinion of the Fed as far as the need to lower interest rates. There had been some conversation about possible delay in dropping the rates by another quarter point so the Fed could see what the next month or so looked like. That seems less likely now as the jobless rate still looks low enough to justify some action.
Short Items of Interest—Global Economy
Putin Loses Big in Local Elections
These votes are not going to unseat Vladimir Putin or really compromise his power in any real way, but they are a rebuke, nonetheless. The local elections in Moscow and St. Petersburg went against Putin and his party. They gave a great deal of local influence to a collection of opposition candidates. This vote took place despite a concentrated effort to block the opposition from even being able to run. Most of the more well-known candidates were banned from even appearing. Putin is now facing an unhappy population that has decided they have waited far too long for the economic progress they were promised.
'Fantasy Land' in Mexico
The government in Mexico under Andrés Manuel López Obrador (AMLO) has managed to send the country hurtling towards economic crisis and recession. It has just released a budget that will make matters far worse. The budget asserts there will be ample new revenue coming in to justify all the new social programs that he has conjured up. The majority of analysts are extremely dubious and assert that the revenue targets will be missed, and badly. The expectation is that income will be less than a quarter of what has been forecast.
Foreign Investment Motivated by Taxes
A recent study by the International Monetary Fund (IMF) has concluded that almost 40% of all the foreign direct investment (FDI) that takes place in the world has been motivated by a desire to reduce tax obligations. Some refer to this as "tax dodging," while others assert it is a legitimate tactic to reduce exposure to onerous and crippling taxes. The nations offering a tax haven certainly see the issue differently than those nations with high taxes.
What Is Really Likely to Happen with the Tariffs?
The talks are back on again—maybe. By this time, nobody is really expecting much from these discussions other than another round of posturing by both Presidents Trump and Xi. What is really likely to happen to the U.S. consumer? In the short term, there will be little impact as many retailers had been expecting something like this and beefed up their inventories. This will be sufficient to get them through the holidays. There is also the reality that consumers are not willing and able to pay higher prices so the retailers will not be able to hike prices even if they want to. They will put maximum pressure on their suppliers to keep prices down.
Analysis: The group that will feel the impact of the tariffs will be smaller retailers who do not have the same leverage over suppliers that Wal-Mart, Target and Home Depot have. The suppliers to the retail community will also feel the pinch as they will not be able to hike their prices. The suppliers in China will likely have to absorb the price hikes unless they want to risk losing significant market share. This may be easier to do than some assume as many of these companies are state supported and they will simply turn to the government to subsidize them again. The bottom line is that the U.S. consumer will likely not see a major change in terms of their costs, but there will certainly be some areas where the price hike gets passed on. Even those areas will likely not start up until later in the year or possibly next.
Looking at Economic Clues This Week
This is not an especially loaded data week, but there will still be releases that should help shed some light on where the economy is right now. If you have been paying attention (and we all know that faithful readers always pay attention), you will note that analysts have been pretty deeply divided over the issue of where the economy stands right now. It is normal enough for the politicians to argue over this as they are really good at the tunnel vision that only sees what supports their narrative, but even among objective commentators, there is disagreement. The data supports optimism one minute and pessimism in the next breath.
Analysis: On Tuesday, the latest Job Openings and Labor Turnover Survey (JOLTS) report will be issued by the Labor Department. Last week, the jobs report showed there had been a somewhat disappointing increase in new jobs—130,000. These are not awful numbers, but the rate of gain is slower than it had been and slower than had been predicted. The JOLTS report will show how many jobs remain open. If that number is still on the high side, it will suggest there are still many businesses that want to hire and are offering jobs, but they have been unable to find the people they need. The impact of a labor shortage rolls through the economy in a variety of ways. The fact that many unqualified people are being hired means starting salaries have been lower than would otherwise be assumed. That has held down wage inflation. The need to train new workers extensively means productivity levels have also been down. The lack of workers has meant companies have been unable to expand even if there is business enough to justify that expansion.
On Thursday, the Labor Department will release the latest Consumer Price Index (CPI). There will be a lot of attention focused on this data as well. The early trends suggest inflation may be starting to rise as there have been increases in wages as well as some goods. At the same time, the price of gas at the pump has been steadily falling. This is at a time when these prices usually go up. It has been noted that the new tariffs that have gone into effect will add around $1,000 to the costs for U.S. consumers, but the drop in the gas prices will have saved that same consumer around $1,000 a year. The CPI will start to show whether there has been an impact from the tariffs, but the majority opinion is there will not be a major change showing up yet. Perhaps the inflation numbers will react by the end of the year, but not in the short term.
Also, on Thursday, there will be another release of the weekly jobless claims. Here nobody is expecting much change. The number from one month to the next has been around 200,000. That suggests there are still no big layoff trends emerging. The fact is business should be starting to think about cutting the size of their workforce in response to the slowdown in the economy, but here is another example of the impact of the labor shortage. Business is not willing to lose the trained people they already have on the payroll and will likely hang on to that workforce longer than would normally be the case. They know that in this environment their skilled people will be snapped up by the competition very quickly.
On Friday, there will be data on retail sales. This may be the most important set of readings all week. In July, there was a stunning increase in retail activity—a gain of 0.7%. This reading is expected to return to the more normal level of around 0.2%. This is still pretty solid performance and all eyes will be on the consumer. Manufacturing numbers have been slumping now for several months. That is putting a lot more pressure on the consumer as this the right time of year for the retailers to see gains. The expectation is that spending will be solid, but there continues to be concern over the spending habits of the Millennial and the fact that they tend to prefer spending on experiences and services as opposed to things. The impact of Boomer retirement continues to play a role as they are reducing their retail footprint as they start to downsize.
Confused? Welcome to the Club
Are you among the millions who are confused as to what to believe about the state of the economy? There are reasons for this confusion. To begin with, it is important to note that at its heart economics is both a philosophy and a social science. This has two major implications.
Analysis: As a philosophy, there will be differences of opinion among economists over what is a good thing and what is a bad thing. More liberal-leaning economists will observe the fact that 10% of the population controls around 80% of the nation's wealth, while the bottom 50% controls about 1%. They conclude this is a state of affairs that must be changed through some form of income redistribution. More conservative economists will look at the same numbers and conclude that those who start and run businesses and engage in investment are the ones who drive the economy and therefore get a bigger share. They observe that the upper 1% pay 40% of all the income tax collected by the government. The numbers are the numbers, but what they mean is open to interpretation.
Beyond the philosophical differences, there is the fact that economics is a social science. That means it is trying to study the always fickle consumer/worker. The human being is ever-changing, which also impacts their role in the economy. The average person reacts to a whole host of economic motivations—the security of their job, what they are paid, how much things cost, what they can get by saving, what they need at different stages of life—when they have kids in school as opposed to saving for their own retirement. It can be hard to keep up—especially when there are big differences between Baby Boomers, Gen-Xers, Millennials, and the latest cohort, the Gen-Z.
Having said all that—what shape is the economy in at the end of 2019 and what does this say about the prospects for 2020? In truth, there is a little for everyone. For the sake of simplicity, we can look at two of the issues that come up most often in economic discussions: unemployment and the job market as a whole and the potential for a recession in the relatively near future.
The unemployment rate has been at or near record lows for the last few years—which is a good thing. There are a couple of caveats to be aware of though. The first is that a significant reason for the low rate of joblessness has been the large number of retiring Baby Boomers. They are leaving the workforce at a rate of 10,000 per day. A quick look at the math reveals that this translates into 3.6 million people a year. Not all of them will be replaced, but many will. It is also important to note that the majority of the new jobs have been in the relatively lower-paid service sector. It is indeed good that the jobless rate is around 3.8%, but not everything about the job market is healthy. There are severe shortages of people with needed skills for sectors as diverse as manufacturing, transportation, construction, health care and even the professions. The manufacturing sector alone is expected to face a shortage of 2.5 million workers by 2025.
The next issue is recession. There are indicators that convince people it is imminent—such as the inverted yield curve. It is important to note that an inversion doesn't cause a recession—it is an indicator of conditions that might lead to one. The yield curve inverts when investors start to assume the central banks will slash rates to deal with an impending recession. That reduces the demand for those long-term rates. It has also been pointed out that the Purchasing Managers' Index has fallen very close to contraction territory (anything below 50) after having been close to 60 less than a year ago. But at the same time, there has been an uptick in the durable goods orders and factory orders have been essentially stable. The capacity utilization numbers are not quite in the ideal range (between 80% and 85%), but have been consistently in the range between 75% and 78%. In other words, there are some signs of a slowdown for sure, but it would be very premature to assert that a recession was looming. It is reasonable to expect growth to slow to between 1.8% and 2.1% yet this year and into next.
The housing market has long been a good indicator for the economy as a whole. It has, however, been sending mixed signals. The pace of new home sales has slowed and there has not been as much growth in the existing home market as would be expected with mortgage rates falling again—along with a slight decline in the price of homes, according to the latest data from the Case-Shiller index. The good news is that permits are generally up. The challenge of housing is that markets are widely divergent around the country—hot in some cities and ice cold in others.
So—how is the economy doing? It depends on who you ask and what your definition of "doing good or bad" might be. As some say, "Could be worse." That says it all.
Oh Boy! Another Service Gripe
I have been off my game of late and haven't indulged in an old-fashioned gripe session. Time to catch up, I think. The experience over the weekend was something of a shock as I was led to believe that our local nursery was pretty good about this whole customer satisfaction thing. It started innocently enough with a decision to put in a bunch of garden gates and arbors. We needed quite a few things—four arbors with gates, 20 fence pieces and all the other stuff—a not insignificant order. We go to the desk and learn that this store did not have all the stuff we needed and had no way to order from other stores so we would need to make a trek to the other outlets. OK—kind of inconvenient but OK. Then we set about paying for what they did have and go to pick it up. The system said they had the stuff, but in reality, they didn't. Now we have paid for things we can't get.
It took three people to figure out how I was to communicate to the other store that I had already paid for things I was going to pick up there. One helpfully suggested I just pay for them again and submit a claim for a refund in six to eight weeks. Excuse me—let me clarify. You can't keep track of your stock and sell me things you don't have. I am then supposed to buy these same things over again and wait two months for you to return the $1,000 I just spent. Oh—and by the way—you neglected to mention there were parts that I needed to buy separately to attach the fences. Granted, I should have checked to make sure I was getting all that I would need, but it might have occurred to one of the three people to ask. (Sigh).
The latest JOLTS report will be interesting. If it continues down the path it has been on, the message will be clear. The U.S. needs more workers—a lot more. More to the point, the U.S. needs skilled, trained and educated workers. The business community is still rooted in some old and unhelpful patterns, but it has been changing. The biggest change is that some of that age discrimination has been fading as companies can't afford to turn their backs on people who can do a job just because they are in their 60s and even 70s. Then again, there is IBM which is being sued for blatant age discrimination as it wants young and tech savvy (and cheap) workers.