Friday, May 26, 2017

Strategic Global Intelligence Brief for May 26, 2017



Short Items of Interest—U.S. Economy

Told You So
When the first quarter GDP numbers were released a few weeks ago, we reminded readers that this was only the first pass and that it was not something to get all that excited about. The first iteration of the GDP total was 0.7% and that was pretty awful, but this was only the first effort and revisions are generally better—so they were. The revised GDP numbers released today show the economy growing at 1.2%. Not that this is cause for dancing in the streets as 1.2% is still anemic as compared to the longer-term trends. The  U.S. economy has been growing at around 2.3% for the last decade and that makes the current level half of what has been seen as normal. Don’t despair, as there will be more revisions down the road and they might look better as well. The really important news is that Q2 numbers already look far better than Q1 did.

Durable Goods Numbers Down
Again, these are not numbers that should cause much alarm, although there have been headlines declaring that this signals a slowdown in manufacturing. The fact is that most manufacturing is holding its own. The durable goods numbers are volatile and we have pointed that out many times. This month has been no exception as the major factor pulling the data down has been aircraft activity. Every month the durable goods data has to be parsed so that the sales of airplanes can be factored out to some degree. A good month for the likes of Boeing makes the numbers look great and likewise a bad month for sales makes the durable goods data weak. Outside the aerospace sector, manufacturing looked pretty solid.

Divisions Emerge Over Tax Plan
The tax reform plans are certainly a work in progress as they are going to have to run the gauntlet of the Senate sooner or later. The problem at this stage is that many in the Trump team are at odds over what the plan should ultimately look like. The debt and deficit hawks want far more cuts to spending and generally oppose higher taxes. The issue is whether there are some areas of compromise and it looks unlikely these will emerge before the plan actually hits Congress.

Short Items of Interest—Global Economy

Domestic or Foreign is the Issue in the Philippines
The president of the Philippines has asserted that the Islamist extremists in Mindanao are foreign and recruited by ISIS to fight in the country. The local press has disagreed and asserts that these are domestic insurgents and part of the long-term rebellion in the Islamic part of the country. The Duterte assertion is the justification for the declaration of martial law, but he has been challenged by the former president of the country, General Fidel Ramos. He was the head of the country in the late 1990s and asserts that Duterte is now more dangerous than was former dictator Ferdinand Marcos.

Divisions Emerge Over Response to Manchester Attack
In the wake of the latest terrorist atrocity, the country is splitting into two broad camps. One side has become angry and is demanding a radical response to the threat, some even referencing terminology from Nazi Germany with talk of a “final solution.” The other side is urging caution and patience so that innocent people are not dragged down. The frustration level is very high and there has yet to be a response that satisfies either group.

Violence in Brazil
The government of Michel Temer may be removed sooner than anybody expected. The anger and frustration in Brazil has not abated and his links to the same corruption that felled Dilma Rousseff has the average person in Brazil ready for anything new. The street riots provoked calling up the army and now they have been required to stand down for fear of making the situation worse. Temer has little credibility left and there is political chaos at the highest levels. A new election remains months away, but it isn’t clear the population will wait that long.

Still Facing “Secular Stagnation”?
The phrase was brought from the depths of the Great Depression by Larry Summers in a speech over three years ago. Summers has been Treasury Secretary and was considered for the head of the Federal Reserve at one time. The Harvard economist has carved out a reputation as something of a gloom merchant and the secular stagnation comment is one of the reasons why. There have been assertions that his prognosis has been off the mark as there have been some palpable improvements in the economy’s performance in the last year. He doesn’t share that opinion and asserts that the issues he was concerned about three years ago are still threats.

Analysis: The basic idea behind the notion of secular stagnation is that there is a chronic shortage of demand worldwide along with a paucity of investment opportunities. There is no interest rate level capable of turning this situation around and allowing for healthy and consistent growth. Given the number of years of very, very low rates, it has become obvious that interest rates alone are unable to stimulate growth. He expects an extended period of low rates, slow growth and very low inflation. This is a situation that could persist for years and create an economy that is suffering from what one could compare to a chronic disease. There is unlikely to be another severe recession—no economic version of a heart attack. Instead the economy will be sick and weak for years, always falling short of potential.

He blames much of this stagnation on policies pursued by central banks around the world as well as by the governments of most of the industrial states. They are far too preoccupied with keeping debt and deficit levels down and the banks continue to be focused on inflation. Not that these are unimportant issues, but timing is everything. Summers has repeatedly called for increased investment at both the public and private levels. Most everything that has been tried as far as public investment has been anemic, just enough to help make the debt burden worse but not enough to really stimulate growth. It is obvious that low interest rates alone are not enough to boost growth so the fiscal side has to bear more of the burden. The thinking is that extensive public sector activity will bolster the private sector investors as well. The key is ending the period of weak recovery that was described in the 1930s by economist Alvin Hansen as “secular stagnation.”

There are lots of variations on the theme but the essence of the idea is that 1) the economy is growing far too slow, 2) interest rates are very low, but they have not created additional private sector demand, 3) governments can take advantage of the low rates to push public sector projects, and 4) these projects stimulate additional private sector investment. The fear that runs through the opposition to additional debt loads is that obligations are already very substantial and paying these off will be increasingly difficult. There is an argument made regarding government spending that is similar to that made with an individual and his or her debt. If a person goes into debt to buy a house or pursue education and training this would be a good use of debt as it means that they will stand to gain later. If he or she goes into debt to gamble in Las Vegas it is a poor use of debt. The assertion has been that the government has been spending too much time at the gaming tables and too little on long-term investment. The suggestion has been that social welfare programs are not very good at economic development, but the biggest issue is that entitlement programs and the military account for the bulk of the federal budget. These are sacrosanct and it is unlikely that any money will be taken from these sectors; that doesn’t leave all that much for the development projects that would push greater growth.

Low Wage Challenges
There are many challenges that have an impact on those who have low-paying jobs; this much is pretty obvious. One that is sometimes overlooked is the lack of predictability. The most important factor as far as future growth and development is concerned is routine and predictability. This means knowing what one is going to be earning and when one is going to be working. Low-wage jobs offer very little of that predictability and that creates a situation in which planning for the future is nearly impossible. Saving is predicated on expectation: one saves with the intent of using this money for something in the future. It may be retirement or school or just to buy something big. If a worker has no idea how much money he or she will earn in a month or a year, he or she tends not to save—even if they have the ability to do so. Spending is immediate and rarely advances their fortunes. The erratic nature of their working hours makes planning tough as well.

Analysis: The bottom line is that poor wages become a trap. People struggle to escape the situation as they are forced into day-to-day survival mode and can’t do much to alter their current situation. There are no easy solutions to this dilemma. The low-wage job is by its very nature temporary and ephemeral. The positions are easily filled by the next person with limited skills and that erodes whatever leverage the current employee has. It is unrealistic to expect business to make promises as far as these jobs are concerned.

The worker ends up bearing the brunt of the challenge. In simplest terms, they have to wrest control over their work lives and that is far easier said than done. The goal has to be getting a job with regular hours so that there is an opportunity to gain the training and education needed to get a better job. The complications of life abound. The worker with a family will have fewer options, and lack of income means that moving to another community for a better job is likely out of the question. There is a role for government in all this, but it has to be integrated into the needs of the private sector if training programs are to work.

European Leg of Trump Tour Did Not Go Well
The visit to the Middle East went better than many expected as the president seemed to temper many of his remarks regarding Islam and the positions of the Arab states. The Saudi response was very positive and some big trade deals were completed. The overtures in Israel went well as the government of Benjamin Netanyahu has been supportive for months and is frankly relieved that Barack Obama is gone from the scene. The visit to the Vatican was a bit awkward at times but was overall better than many had expected. To be fair, Pope Francis makes almost every world leader uncomfortable as he relishes his role as global conscience. The trip to the heart of Europe for the G-7 meeting has been very different and there is far more antipathy between the  U.S. and the EU now than was the case earlier. The European papers are now convinced that Trump actively dislikes the majority of the European leaders and their states and it is fairly obvious that many of them dislike him as well.

Analysis: The speeches and comments from Trump centered on several issues that were part of his campaign. There were comments on NATO as he asserted that European states are not paying their fair share of the costs of the alliance. This has been a sore point for months and both sides bristle. The Trump position has been that the Europeans “owe” the  U.S. money for the support the  U.S. has provided and the Europeans point out that this is not the way it works. They counter with the assertion that NATO has supported U.S. endeavors in such far-flung places as Afghanistan and assert that this kind of activity has very little to do with European interests. Trump refused to acknowledge the core of the NATO mission and that has angered many in Europe.

There was also a contentious exchange on the issue of trade, with Trump claiming that trade flows between the  U.S. and Europe were unfair. He took a very strong position on German exports and asserted that he would like to ban the import of German cars among other things. The enmity between Angela Merkel and Trump has become intense and obvious, they can barely be in the same room together. That same enmity is now developing between Trump and the new president of France. The now-famous handshake was more akin to a death match as Macron seemed to be determined to crush Trump’s hand. The French leader deeply resented the tacit support that Trump gave to Marine Le Pen and is obviously in no mood to forgive.

Other issues that divide include the attitude towards Russia and the whole issue of climate change. The majority of the European leaders have a very negative opinion of Vladimir Putin and Russia and count this country as a major threat. They want expanded sanctions on Russia for its intervention in Ukraine and worry that other states are going to be targets for Russian expansion. The close relationship that seems to exist between Trump and Russia worries them a great deal. There are also deep divisions over climate change and the Paris accords. The antagonism has made every move Trump makes a source of controversy. He has been accused of shoving the prime minister of Montenegro aside when it is not all that clear whether he was simply clumsy or making a deliberately dismissive gesture.

The gains made at the end of this trip are minimal and one can expect ratcheted tensions between the Europeans and the U.S. This is not a close alliance any longer and it is all that these leaders can do to keep their anger and contempt in check. Trump does not like these leaders or Europe much and the feeling certainly appears mutual.

Italian Economy Improves a Bit
As the Italians host the G-7 summit there is news that economic conditions are improving. This hardly means that the Italians are out of the woods, but this has allowed the Italians to assert that they are participants in the recovery that has been building in the eurozone over the last year. The data shows that house prices have finally started to stabilize after months of free fall. This decline was putting a lot of Italian homeowners in a bind, but that slide seems near an end. Part of the reason for confidence is that many of the Italian banks are closely tied to the property market and these nonperforming loans have been a big issue. There have been gains in production and export activity as well. That has allowed the job market to stabilize.

Analysis: Even with this good news, the projected GDP growth for Italy will remain the lowest in Europe—no more than around 0.8%. The long-term issues are still holding the country back—lack of global competitiveness in most industrial sectors and a very weak banking sector. The banks are just not up to the task of supporting economic growth, as they have far too much debt on their books and no real sense of how it will be cleared.

Computer Arrogance
One of our more alert and grammatically correct readers (Pat Lee, I am talking about you) pointed out that yesterday I wrote “Font of Wisdom” as a title and that is obviously incorrect. It should have been “Fount of Wisdom” as this is a reference to the fabled Fountain of Wisdom. I actually wrote “fount” but was apparently overruled by my machine as it auto-corrected to “font.” I didn’t catch the error. The problem is that my computer thinks it is smarter than I and I beg to differ. Not that I am not capable of making plenty of my own mistakes, but it drives me nuts to get these “helpful” suggestions.

I also have a deep distrust of my GPS after following some very odd routes. I have an ordinary vehicle, not something out of a James Bond movie. I can’t drive into a lake and expect to do anything other than sink, despite the confidence that Siri has in my ability. Likewise, I didn’t get the stair-climbing option and can’t set off on that route either. My favorite moments are when the directions dump me into a shopping center or some other locale and then I get the chirpy suggestion to “proceed to the route.” What route? Am I expected to drive right through the storefront?

Soon, we are told, we will enter the brave new world of drones and self-driving cars and the like. I can’t honestly say I am looking forward to this. If Siri is driving that car, I will be sure to pack my scuba gear every time I go for a drive—just in case.