Short Items of Interest—U.S. Economy
Debate Still Rages Over Chinese Import Influence
We have been discussing the debate that has been raging among trade economists as they try to determine the impact of Chinese exports to the U.S. The aim is to really understand whether the influx of goods from China over the last few decades can be blamed for the decline in U.S. manufacturing jobs as well as other economic reversals. It would seem intuitive that these imports would have a negative impact, but guessing and assuming is not enough to inform policy. The imports certainly challenged domestic producers and caused everything from closures and layoffs to relocating overseas. On the other hand, the cheaper goods gave consumers more buying power, allowing other businesses to grow. The latest wrinkle in the debate is based on trying to determine the impact on the housing market.
Soft vs. Hard Data
The split is getting wider by the day. For the last few months, there has been a steady improvement in “soft” economic data. The consumer sentiment surveys are up, confidence measures for the manufacturers are improving, investors are feeling encouraged and so on. The problem is that nobody really knows why. The “hard” data is weak. There has been a decline in most of the manufacturing indices and retail sales have been down for three months in a row. The latest Credit Managers’ Index showed some distress as far as dollar collections and slow pays are concerned. Those are both early signs of concern. The question is whether attitude will be able to pull the economy forward or will the real news start to fade all that enthusiasm.
IMF Worries About Trump
It is essentially a matter of “damned if you do and damned if you don’t.” The International Monetary Fund (IMF) report asserts that there are risks to the current Trump impact regardless. If the upbeat attitudes suddenly start to fade and the markets get concerned, there is a profound risk of a major market correction in the U.S. that would affect the whole world. If the plans do pan out, there is a risk that many of the most leveraged companies will borrow more and the hikes in interest rates will put these very companies in jeopardy. Either way, there had better be some contingency plans in place.
Short Items of Interest—Global Economy
Eurozone PMI Looks Good
There is certainly reason for the European business community to be concerned about what has been happening politically, but thus far it has not affected their outlook or their day-to-day activity. The latest flash Purchasing Managers’ Index (PMI) from Markit shows that Eurozone PMI numbers are up to a six-year high of 56.7. This is even better than last month. The various sub-indices on new orders and employment are likewise improving. The French PMI would likely have been the most affected, but it has improved as well—going to 57.4, better than the reading in Germany (56.3). The overall sense is that Europe is growing at a respectable rate despite all the turmoil.
The threat of a coup attempt has been increasing in Venezuela as reports are circulating that segments of the military and police are disobeying orders to break up some of the protests. There have been unconfirmed reports that soldiers have thrown down their weapons and have joined the marches. There is also considerable speculation regarding the whereabouts of some key military leaders. The pattern in this country is for the military to step in when there is chaos. The betting is that there will be a junta in place in a short period of time.
World Bank Downgrades African Growth
The expectation had been that sub-Saharan Africa might grow at around 3.2% this year, but the prediction has been reduced to no more than 2.7%. The sense is that famine and warfare will drag the whole continent down. Even the more successful economies will be affected by the lack of job growth.
Protecting an Industry—Pros and Cons
There are few industries that evoke as much nationalistic fervor as steel. That has long been the case and for every nation. Steel is the foundation of an industrial society and becomes a marker for industrial strength and independence. Every nation has announced their arrival as a modern state by developing the ability to produce their own steel. The image of belching furnaces and molten rivers of steel has been imprinted on the minds of millions of people—never mind that this is no longer the norm in steel production. Steel is at the heart of the auto industry (although less than was once the case) and it is fundamental to the construction sector in the U.S. and elsewhere. Steel has been protected in various ways over the years. The clashes between the unions and steel company owners have been among the most epic of struggles. There is now a proposal from the Trump administration to launch an investigation of the steel sector and the imports of steel into the U.S. This is a law that was used a great deal in the 1970s and 1980s as a means by which to promote domestic production and limit imports, but it has not been used much since. The motivation is ostensibly to protect national security.
Analysis: In the past, the issue of national security was interpreted fairly narrowly. If the intent was to protect the U.S. from being dependent on potentially hostile nations for its steel, the solution was to ensure that most of the imported steel came from allies such as Canada, South Korea and Japan as opposed to states such as China and Russia. Over the last few years, these two nations have developed their steel sectors aggressively and sell a lot of steel to the U.S. and other nations. The U.S. has already put in place restrictions on steel imports that have resulted in a reduction from 34.7% imported steel to 29.9% in 2016 alone. The study that has been authorized by Trump could have an even more profound impact.
The real battle is not between the domestic producers of steel and the foreign exporters. The tensions in the U.S. are between the users of that steel and the producers. The three sectors that dominate steel usage in the U.S. are construction (averaging 50% to 60% per year), machinery (accounting for around 20% to 25%) and automotive (6% to 7%). Within the construction category, the dominant user is the public sector as steel is heavily used in road and bridge work as well as buildings. The commercial construction sector accounts for most of the rest as residential housing is a very light user. The added costs that would accompany steel import duties would hit some very vulnerable sectors.
The makers of machinery fear that their costs would rise by as much as 10% to 20%. It would all depend on the kind of steel they demand and how much. They assert that even a small hike in their costs would drive prices up to the point that sales would falter. The auto sector is acutely sensitive to price hikes, but so are the makers of farm machinery or construction equipment. The desire to cut government expenses will run straight into the need to pay more for the steel needed to pursue all those infrastructure plans. It has been pointed out by the steel-consuming industries that for every person employed in the steel industry there are 60 who are employed by industries that use steel. If they can’t get access to less expensive steel, they may become incapable of remaining competitive. The U.S. has indicated that it wants to emphasize exports and to reduce the overall trade deficit. It is feared that higher steel costs will blunt that effort. The U.S. will never be in a position to successfully export steel—the exports will be the machines that are being made with the steel used in the U.S.
When it comes down to it, the U.S. is primarily concerned with the steel imports from China and Russia. The Chinese sell steel more cheaply than any other nation as they have supported this industry for years. All that state support has allowed overproduction. Now that domestic demand in China has slowed dramatically, the Chinese steel makers are trying to get rid of it on the global market.
Automation—Threat as Well as Opportunity
Over the next decade, the most dramatic changes in the global economy will be as a result of the advance of technology and robotics. It has already had a profound impact on the developed industrial states as many of the jobs once performed by people are being done by machines. The most vulnerable have been those with low skills. This is why there are mounting concerns regarding the impact of automation in the developing world. At the recent meeting of the World Bank, it has been asserted that over 60% of the current population of these states will be rendered jobless by these advances. It has always been assumed that these states would be competing in the global market based on the low-cost labor supply available, but even in countries that have very low labor costs, the use of technology has been expanding.
Analysis: The call at the World Bank was to expand efforts to address poverty and lack of education, but it is not at all clear what that education should look like. Is it practical to try to train the global labor force to work with advanced technology? There are simply not enough jobs to accommodate that large a number of job seekers. The current thinking is that people will have to be equipped to develop their own small-scale businesses—everything from service offerings to small-scale retail and manufacturing. The projects pushed by the World Bank and others have long relied on big efforts designed to spur major development. Now the emphasis may have to shift towards the micro business designed to provide a living for just one person or a family. This has been the approach off the various micro-loan efforts, but more is needed beyond just the small loan.
Terror and the French Election
The polls have suggested that the race for the French presidency is very close and the attacks in the last few days have made them even tighter. France has been under a state of emergency for over two years due to the terror threat and attacks. This latest incident has served to ratchet tensions further. The more that is known about the attacker, the more politically volatile this has become. The assailant was killed in the exchange, but not before killing a police officer and injuring others (reports from France have indicated that one of those injured has now died). The man was known to police and had been considered a threat. He had even been in prison for a time after shooting at police. The question on the minds of many voters now is why he was not still in prison or otherwise dealt with. The mood in Paris is angry and there is considerable fear—all feeding more support to those candidates who would advocate a much tougher position on terrorism and suspected assailants.
Analysis: Going into the weekend poll, the two front runners are still Marine Le Pen and Emmanuel Macron—the margin between them is razor thin. In the last weeks, Jean-Luc Mélanchon has surged, but the terror attack may have affected his campaign the most as he has had the weakest response of the four candidates. Much support has been directed towards Mélanchon from the poor suburbs that house the majority of the immigrant population. They fear reprisals from the greater population and they worry about increased security. Mélanchon has been echoing these concerns. That has not done him any favors with the greater population. Meanwhile, there appears to be some support growing for François Fillon as he has taken a hard-line position on terrorism. He also asserts that he is the only candidate with actual experience in governing. There are signs that voters are less concerned about the financial scandals that have dogged Fillon since he won the center-right Republican leadership battle.
Regardless of who emerges from the first round, it is now clear that terror will be a major issue for the second round. France has struggled with the balance between security and freedom. It has been as complex for them as for any democracy. There are hundreds of people who are suspected of supporting the aims of ISIS and other terror groups. There are those who would demand they be in prison or forcibly expelled, but France also values freedom of speech and thought. The majority of these people have committed no crime at all. Those who have engaged in illegal activity have been subject to punishment, but there is resistance to meting out more than another criminal would receive.
The grim fact is that democracies are vulnerable to those who would abuse the freedoms provided and the population has little choice but to accept the threats to a degree. Even if an effort is made to attack these terrorists aggressively, there is no assurance that it would be any more effective as even repressive regimes have been victimized by these terror attacks.
Iran’s Electoral Contenders Selected
Iran’s Guardian Council has control over who is allowed to run for office in Iran and they have routinely blocked reformers from standing for office. The six who have been approved to contend for the presidency include three that could be termed reformers. That includes current President Hassan Rouhani. Those who were advocating an even more a reform-oriented regime were rejected and so was former President Mahmoud Ahmadinejad. The two dominant contenders will be Rouhani and Ayatollah Ebrahim Raisi who is said to be the favorite of the Grand Ayatollah Khameini. It is expected that the other two moderates will soon throw their support to Rouhani, while the other two hardliners do the same for Raisi.
Analysis: The most potent risk to the process may be Ahmadinejad. He has claimed only he can really represent the conservative position and he has plans to try to subvert the election in some way. His movements are now being restricted and he could well end up in jail, but that may make his position even stronger. The rural conservatives support him still. There is general frustration with the lack of economic progress under Rouhani. When he was elected, he claimed that he would be able to break the global stranglehold that Iran has been suffering, but that has been far harder to accomplish than expected—especially since Trump has come to office.
The recent comments by the Trump administration may be a benefit to Rouhani as it appears the U.S. is not yet ready to abandon the nuclear deal. This could give Rouhani an opportunity to point out that his reform approach is still capable of bearing fruit. On the other hand, the comments from Trump have been hostile. That may give hardliners an edge as they can claim the U.S. remains an enemy.
Have We Lost Our Minds?
I like to think that we as a population have made progress, but sometimes that is a hard position to maintain. I have to remember that we live in media-saturated culture now; every incident that takes place anywhere is soon making the rounds of social media. I like to assume that things must have been worse in the past—we just didn’t know about them. I certainly hope so.
In just the last week, it feels like my town has boiled over. A man stalked a pilot off an American Airline flight and assaulted him in our airport. A day or so later, national cameras caught a fight between two fans at a baseball game. The man clearly belted a woman and claimed that she started it by spitting on him. Twice mushroom hunters found dead bodies in a field and there have been daily accounts of shootings. I don’t think I live in Beirut, but these stories make one wonder. I am also aware that I have lived in this city my entire life and have never even come close to this violence. The odds are clearly in favor of peace and quiet, but the stories keep coming and they are very unsettling.
The fact is that the vast majority of us will go about our business every day and will not encounter anything untoward. However, I know that we are privy to everything now, which did not used to be the case. We have to keep these incidents in perspective, but at the same time, we have to find ways to take the hate and anger and fear out of our lives.