Short Items of Interest—U.S. Economy
Black Wage Gains Accelerate
It is a good news, bad news situation. The pace of wage growth for the black worker in the U.S. has accelerated faster than for any other group since the recession, but there remains a very wide gap between what the black workers make and the pay received by whites and other ethnic groups. The pace of improvement was 15.7% for blacks, Latinos grew at 15.5% and whites grew at a pace of 13.3%. There remains a stubbornly large disparity between what people make per week—blacks are earning $624, whites are earning $820 and Latinos are paid less yet, at $602. The gains made by the black community have been among women more than men. There is also a significant difference according to where one lives.
What Impact Will Taxing the Rich Have?
The Clinton tax plan would levy a whole series of new and higher taxes on those who make more than $250,000 a year—and for those who make lots more, the taxes are far higher. Never mind the fact that getting this kind of tax package passed will require Congressional approval. What would this mean to the economy as a whole? The overall conclusion is that it will slow growth significantly. That has been asserted by economists from the left and right. They all agree that growth slows, but they don’t agree on whether this is bad. For some, the trade-off is slower growth for more “equitable” spending. Others assert that slower growth is in nobody’s interest.
Why Doesn’t Duterte Like the U.S.?
The president of the Philippines will go down in history as the most controversial leader this nation has had since Ferdinand Marcos. His attack on “drug dealers” has turned into mass vigilante attacks on anybody whom someone has a dispute with. The death toll is now close to 6,000. Duterte has elected to side with China and is now an avowed enemy of the U.S. Why? It stems from the fact there has long been an uncomfortable reliance on the U.S. and deep resentments within the population. Given the amount of aid the U.S. provides the Philippines, it will be interesting to see how long this position stands.
Short Items of Interest—Global Economy
End to Spanish Gridlock?
Spain has been without a government for the better part of a year as the elections have failed to provide a clear winner in parliament. No party has been able to gather enough seats to form a new government. Thus far, they have been unable to work out a coalition system that would permit a permanent government. That impasse may be disintegrating as the Socialists have indicated they are ready to throw their support behind Mariano Rajoy, the past leader and the current interim leader. This has not been an easy decision given the status of the Popular Party as the leader of the center-right.
ISIS Tries to Distract the Kurds
The battle over Mosul has been going very badly for the ISIS forces. The most damage is being caused by the Kurdish Peshmerga. The Kurdish fighters have routed the ISIS fighters in every battle and have pushed further than expected. The ISIS response has been to attack the Kurdish city of Kirkuk in the hope this will distract the Peshmerga and cause them to pull troops to defend their city. Thus far, the defenders of Kirkuk seem to be accomplishing that on their own.
National Front Wins Support in Blue Collar Cities
There are several things that Donald Trump supporters have in common with National Front supporters beyond the obvious. Both groups espouse the fiery rhetoric of the populist, but the bigger issue is that both are tapping into the fear and anger of a population that feels on the edge of destruction—no job prospects, no cultural security, no sense of the government caring about what happens to them. Regardless of what happens in coming elections, these fears and concerns will not fade.
The State of the Job Shop
Every quarter we prepare a report with the acronym of FFJSCR—the Forming and Fabricating Job Shop Consumption Report. While this is the most unpronounceable survey ever devised, it is very useful for gauging the status of the small manufacturer. It has been tracking very consistently with other surveys and reports and gives some insight into the world of the job shop.
It has been a tumultuous year. That is an understatement akin to noting that the approach of a hurricane was a little windy. The election year theatrics would have been enough to make for an unpredictable year, but there has been more to worry about, everything from Brexit to sluggish growth in China, continued declines in the prices of some commodities (mostly oil) and reactions to technical change. As we get close to the end of the year, there may be some emerging signs of stability, but it is almost too soon to predict what follows from here.
There have been significant improvements in the readings for both the Purchasing Managers’ Index and the Credit Managers’ Index. They are both in the expansion zone and some of the sub-categories have not seen numbers this good in over a year. Industrial production numbers have improved and consumer confidence is trending up despite the damper that elections tend to provide. The results of the FFJSCR are following in that basically optimistic pattern.
Capacity utilization remains one of the most-watched indicators for the manufacturing sector. When usage is between 80% and 85%, this is considered ideal. It means that there is enough engaged capacity to provoke some thoughts of expanded buying and hiring, but usage is not so intense that there will be shortages and potential bottlenecks. The smaller business is often below the national norm as the job shop is required to have machinery that is not needed all year long. The usage of that capacity varies. At the national level, the capacity level is at 75.5, about 4.5% below normal levels. The rate for the FFJSCR is at 64.9. This seems to be running about as expected as the smaller business consistently falls about 10% lower than the national average. The majority of the respondents reported that usage levels were stable as compared to last month.
One of the more predictive elements of the Purchasing Managers’ Index is new orders. These are what will keep the manufacturing and fabricating pipeline open. Generally speaking, the new orders index has been performing better than the index as a whole. The data from the FFJSCR reflects the same pattern as more companies are seeing gains in new orders than are seeing declines. The data shows that 35.6% are registering gains in new orders and 21.8 are registering declines. The rest have seen stability in terms of new orders as compared to last month. When less than a quarter of the companies reporting see declines, this is a good thing.
The employment numbers tend to reflect national norms as well. The vast majority report no change in the size of their workforce—71.6 are reporting stable numbers unchanged from the month before. Unlike in previous months, there were slightly more reporting that they had reduced the number of employees than reported adding staff. The percentage reducing was 15.0% and the percentage increasing was 13.2%. The rationale behind these decisions seems to square with what is being said nationally. Not only is there some trepidation about what to expect in the coming year, there are those ongoing issues of finding the right people with the needed skills. Companies appear to be more interested in keeping who they have than in finding new hires.
Costs are rising—that much has been clear nationwide. For the first time in well over five years, there are clear indications of inflation—in terms of commodities as well as with wages. The percentage that report that steel and aluminum prices are going up is now at 28.4%. The number that is seeing a decline has slumped to just over 11%. That leaves 60% that have not seen much movement either direction. The demand for the steel, aluminum and other industrial metals has not sparked these hikes; it has been decisions by the producers to cut their output in response to that weak demand.
There is a similar rise in the cost of logistics as the transportation companies are looking at some capacity issues of their own. They have little alternative to reducing the size of their fleets during bad times and that leaves them without capacity when conditions improve. The biggest capacity issue in trucking is the availability of drivers. There are many companies that would be doing more business if they had anyone to drive the truck. The FFJSCR reported that just over 26% were reporting higher costs and only around 5% reported declining costs.
Perhaps the best news out of the FFJSCR is the assessment of capital equipment purchases. The number that report that their plans are on track is 48.2. Those that have delayed their purchase plans amount to the remaining half. The even better news is that most of those that have delayed are planning only a temporary halt of a few months. The percentage that has elected to delay indefinitely stands at 27.3%. On a national level, there is the same pattern—lots of intent, but no interest in immediate delivery or activity.
Finally, we see reports on business outlook. They are surprisingly upbeat with 47.4 asserting a positive expectation and 39.3 asserting that they expect stability. That only leaves 13.2% expecting worse. The consumer is reflecting that same kind of future optimism and many of the other manufacturing surveys are saying the same thing. It seems that most expect a wave of pent-up demand to emerge after the election when everybody starts to settle down and realize that the world has not come to an end with the election of the next president.
Each quarter of the FFJSCR over the past year has been slightly better than the quarter before—especially in terms of business confidence and willingness to invest in new capital equipment. This is not to say that all is well in the world of the small manufacturer, but there has been clear growth and some reason to assume this will continue for the next quarter or two and perhaps longer.
Putin and Russia Constitute a Real Threat to the U.S.
It is probably a good idea for me to issue a disclaimer at this point as it tends to color my assessment of the country and its leader. I had fully intended to spend my life as a Sovietologist. I learned Russian, got the degree in Soviet and East European Studies and everything. Imagine my shock and disappointment when the Evil Empire collapsed and I suddenly possessed a history degree. I have moved on and metamorphosed into a more traditional economist, but my attitude to the Russians hasn’t changed all that much. I never was very impressed with the argument that Russia was changing into a modern European state with respect for democracy and the western economic system. This country remains under the dominance of an autocratic ruler with his own agenda, one that doesn’t coincide with the U.S., Europe or the bulk of the rest of the world.
The debates between Trump and Clinton have often veered towards Putin. Both have accused the other of being either in thrall to the Russian strongman or too weak to counter his moves. The fact is that both of these are very dangerous positions. Trump seems to admire the forceful nature of the Putin regime and conveniently seems to ignore the “force” that has been used to attack Ukraine, extend the fighting in Syria and threaten the border states that were once part of the old USSR. Clinton asserts that she has the diplomatic experience to contend with Russia, but for the past several years, the U.S. has been made to appear utterly impotent when it involves Russia. It is not clear that she would elect to do anything differently. The U.S. objected to the invasion of the Crimean Peninsula, but Russia called their bluff before going ahead and essentially seizing the eastern half of the country. Russian-backed militia with Russian weapons shot down a civilian aircraft and killed all on board. The U.S. can’t get the Russians to even talk about the Syrian mess.
Russia is engaged in a cyber war on the U.S. that is designed to influence the elections in some way. We make vague promises about retaliation and nothing happens. The Russians work to peel Turkey away from the western states and the U.S. reacts very weakly. The fact is that Russia has become a disruptive factor in global politics and there seems no urge on the part of the U.S. to respond. This means that Putin will test, test and test again—trying to see just how much he can get away with.
Analysis: At the end of the day, the job of the president in the U.S. system is as chief diplomat until the time comes to be commander-in-chief. We have been pointing out for months that the economy is largely out of the hands of the president regardless of how many speeches are given. Monetary policy is the job of the Fed and fiscal policy belongs to Congress. The place where the president is uncontested is foreign affairs. Right now, the U.S. faces some very clear and present dangers from some old enemies as well as some new ones. The confrontations between the U.S. and Russia are every bit as threatening as they were during the Cold War. While the Chinese are just as challenging. Reacting to these threats will require a level of skill and dexterity unlike any seen in recent years. Barack Obama was not all that comfortable in the global spotlight and that has been costly to the U.S. The next president will need an abundance of skill and determination as well as a deft touch if there is to be a policy that protects U.S. interests without creating more open conflict.
U.S.-China Comparison is Idiotic
During the latest debate, Trump asserted that the U.S. should be very worried that U.S. growth is just over 1% (actually it is expected to be at 2.2% in 2017), while growth in India is 8% and China is at 7% (actually 7.6% for India and 6.2% for China next year). The real issue is that comparing a developed economy with a developing economy is comparing apples to hammers. The reality is that wealthy and developed countries already reaped the early rewards of technology and productivity—the laws of diminishing returns apply. The developing states grow faster initially as they are coming from much lower bases.
Analysis: China is already experiencing this diminishing return problem. It was not that long ago that growth of 6.2% would have been considered catastrophic. This was the country that was barreling along at double-digit rates. Now staying close to 6% is considered an accomplishment. The U.S. is in recession when its growth rates are zero for two consecutive quarters, but China hits recessionary conditions when growth is 6% or lower for that same period of time. The fact is that a declaration of recession is somewhat arbitrary—it is when a nation is not growing fast enough to create enough jobs for the population. Right now, China is very close to that position (and India is not all that comfortable either).
Technology is NOT Always Our Friend and Neither Are Bad Decisions
I could doubtless write a column every day on the challenges of travel, but after a while the rants sound pathetically similar. Travel is humbling as it proves categorically that one has no control whatsoever over one’s life. In truth, there is little that can be done about the vagaries of weather and machines do have a habit of breaking down. On occasion, there are issues that really boggle the mind.
Yesterday was a day full of odd delays due to really nutty decisions and equipment failure. The flight from California was delayed by about 40 minutes. That was causing a fair share of angst given that about 15 of us needed to make a connection and had only 50 minutes to do so. I overheard the gate agent arguing with somebody in operations as the plane was being delayed because they were waiting for a late connection at the departure airport. “Let me get this straight,” she said. “You are holding a flight for five connecting passengers even though this is going to strand 15 passengers who will miss their connections. That’s real bright.” As it turned out, the connecting flight was also held up and we made it. The reason the connecting flight was delayed? Someone forgot to plug in the laptop the pilots use to compute fuel, weight and other factors and the battery had gone dead. We essentially waited 40 minutes for it to get charged back up.
Through all these technical fiascos, I just keep asking the same question. What would possess a person to trust their life to an autonomous vehicle? I feel exceedingly lucky if I can actually make a cell phone call when I want to. I am not prepared let the robocar fling me over a cliff.