Short Items of Interest—U.S. Economy
Big Jump in Inflation
The percentage that the consumer price index jumped has not been seen since 2014. It is now 2.1% ahead of where it was a year ago. This is the first solid indicator of what many had been expecting to see in the next few months. Inflation is back and building. It can be expected to continue heading in that direction through 2017. Prices are rising in response to some hikes in commodity prices and raw materials as well as a wage rise. The gains overall have been slight—about 2.6%, but in select areas, the costs of labor have soared in response to a labor shortage. Those costs will be what drives the inflation numbers that much higher.
Biggest Challenges for Trump
These are at least the biggest challenges from an economic point of view. The good news is that he will inherit an economy that is in better shape than it has been in the last eight to 10 years. Not that everything is perfect, but the trends have been positive for the last several months. The challenges that will develop first will be due to the strength of the dollar and the impact that will have on exports as well as imports. There will also be the issue of productivity and the aging workforce. The labor shortage is more acute than ever as skilled workers are retiring and there are no ready replacements. These are the factors that will make the promise of 4% growth hard to pull off.
Puerto Rican Governor Shifts Mood
In November, the Puerto Ricans elected Ricardo Roselló to the post of governor in hopes that he could find a way to work with the creditors and get the country out of the immediate threat of economic collapse. His predecessor had taken a belligerent position and complained that PR was being forced into crisis. There remains some reason to assert this, but the reality is the island territory is at the mercy of those it owes money to and angering them is not working well. Rosselló wants to start negotiations anew and with a more cooperative tone. It looks like the creditors are going to go along with the plan—at least for a while.
Short Items of Interest—Global Economy
Desperate Pleas in Gambia
Leaders from all over Africa have descended on Gambia trying to convince the current leader to step down and recognize that he lost the election. Yahya Jemmeh had been indicating he would bend to the will of the electorate. Then abruptly changed his mind and decided to hang on to power he took in a coup in 1994. The key issue seems to be what happens to him, his wealth and his followers in a new government. He wants guarantees that he will face no investigations, that none of his wealth will be appropriated and that none of his family or friends will lose anything. That has been too much for the new leadership to stomach given the way he has exploited the country for the last few decades. A civil war is expected to erupt at any moment.
Socialist Party in France Strives for Identity
Should the Socialists return to the days when it was the party of left firebrands dedicated to the fight against corporate France or should it maintain its position as the center-left alternative working with the system? This is the battle taking place in the party now that François Hollande has stepped aside and essentially abandoned the fight. The far-left is making gains in response to the growth of the far-right (Marine Le Pen and the National Front).
China and Trump
One signal as to how the Chinese plan to handle Trump is their decision to heavily censor the inauguration taking place today. Any mention of China or trade policy will be expunged or radically interpreted. The Chinese are assuming a hostile relationship starts today. In contrast, the Russians will be broadcasting the ceremonies live and in their entirety for the first time ever. The media in Russia and in China could not be on more different pages.
Report from the Job Shops
Each quarter, we produce an analysis of the information collected by the Fabricators and Manufacturers Association in their Forming and Fabricating Job Shop Consumption Report (FFJSCR). It is one of the few surveys or studies that are aimed at the small manufacturer. If you want to see the whole report, go to their website.
The manufacturing and fabricating world is preparing for the next stage along with the rest of the economy. It already looks like things are starting with a bang. The trends that will likely matter most in the coming months started earlier in 2016 and will gain some momentum in the coming year. These are the factors that were not influenced much by the election and will not be affected all that much by the transition. Other factors are closely tied to the change of leadership and the outcomes are not quite as secure.
We knew that interest rates were headed up and they did indeed rise in December. The word from the Federal Reserve has been more consistent of late. The assumption is that rates will come up at least twice in the coming year as the Fed has concluded that the economy really doesn’t need any additional motivation. The dollar has been steadily gaining strength in part due to the rising rates. That increased value will have a negative impact on the export sector in the U.S. The farm community will be profoundly affected, but so will manufacturers that are aiming at the global market. Finally, we have the return of inflation which started to show up at the end of the year. This is being driven by wage hikes more than by the increased costs of commodities, but at some point, it is expected that commodity prices will start to move up as well.
In the last quarter, there was movement in terms of capacity utilization in the FFJSCR and in the greater economy as well—a good sign. The majority of the respondents reported that capacity use was either increasing or stable. For the survey as a whole, there was 66.9% usage. The national numbers show capacity utilization at 76%. This remains short of the ideal position between 80% and 85%, but the numbers are heading in the right direction. That translates into more buying of machinery and more hiring as companies start to see their capability maxed out.
One of the more important indicators for the coming year is the level of new orders. These are the more predictive aspects of the survey as they suggest what kind of business can be counted on in the coming months. The percentage of respondents that see a gain in new orders is 28.9%. Those that are seeing stable numbers account for 48.6%. This is a solid gain over the data in the previous quarter and also tracks very well with the new orders data that is coming from the Purchasing Managers’ Index. The overall sense is that more business is expected in the months to come than was the case in the first part of 2016.
The employment numbers are also positive with most employers standing pat as far as hiring is concerned. The percentage that indicated employment was stable is 68.6%, 19.1% thought they would be adding to their staff as compared to 12.1% expecting to see reduced numbers of employees. There is a great deal of evidence collecting that suggests that inflation this year will be driven by wages. It is costing more to get the people needed. Companies are increasingly worried about poaching and are paying people more so that they don’t lose them to some other employer.
There has generally been a spike in some commodity costs, but these have been primarily in sectors where the producers have been able to cut production. Oil prices have not budged all that much despite the calls from OPEC and Russia suggesting they plan to reduce output. On the other hand, the price of steel, aluminum, copper and other industrial metals have been going up. Over half (51.2%) of the respondents report that these prices are going up for them. Another 44.2% says that these prices are stable. That leaves a very small number (4.7%) seeing costs come down. This is a pattern that will be seen all year. The producers are just starting to see additional demand. They will be slow to meet it as they stand to make some extra money if they wait for that demand to start to peak.
Logistics costs are essentially stable—as 66.0% are reporting them to be about where they were the previous quarter. There were about a third of the respondents (31.6%) reporting that these costs have been going up. It appears that this is related to some in the trucking sector. Rail prices have been more stable, but trucking lost a lot of capacity in the last 10 years and bottlenecks are showing up in heavy traffic sectors of the country. This is made that much worse by an acute shortage of drivers—estimated at close to 300,000 by the end of this year.
There has been a little more enthusiasm for capital equipment purchases, but the fact is that capacity numbers are still far short of the normal range. There is not the demand that would accelerate purchasing decisions—at least not yet. The number of respondents that assert that plans are on track hit 52.8%. Only 21.7% are planning to delay by a quarter. That leaves around 18% postponing indefinitely. The sense is that there remains a wait-and-see attitude towards the year. If there really is the commitment to infrastructure, deregulation and tax reform, there would be the burst of growth that would justify more capital investment.
The most important predictor of the coming year is the overall confidence level. It appears that it is getting better. The percentage of respondents looking forward to a better year is up to 51.6%. Those seeing a year about like the last one are 37.5%. Only 10.8% expect the year to be worse. This is a strong statement, one that seems to suggest that few are anticipating anything like another recession.
Many questions remain as far as the new leadership is concerned, but the first 100 days of any administration is key. By the end of that “honeymoon” period, it will be easier to tell what the last two-thirds of the year will provide.
Where Might There Be Change under a Trump Administration?
The transition comes to an end today. There are definitely mixed feelings in the country and the world—as there always are when one leader departs and a new one arrives. The curiosity is more intense than has been the case in most other transitions as there is much that is not known about the intentions of Trump and his team. One feature of the transition that is most unusual is that Trump’s picks for the Cabinet and inner circle often disagree with his statements and are not the least shy about contradicting him. The latest was Steve Mnuchin’s declaration on maintaining the strength of the dollar. What sort of policy shifts can really be anticipated?
Analysis: Trade has been a high-profile issue and was a big part of the campaign. Some clarity has been offered by potential Secretary of Commerce Wilbur Ross, but there remains much that would break from traditional GOP positions. Trump has indicated that the Trans-Pacific Partnership is dead, that renegotiating NAFTA will be a top priority. His attacks on China have been pointed enough to make the possibility of a trade war possible. The trade issue is something a president can act on without Congressional approval. It could be a place where Trump tries to assert power quickly. This has allies around the world deeply worried and will affect the U.S. business community given that exports account for 14% of the U.S. GDP.
Foreign policy in general is becoming a controversial issue with statements that suggest radical shifts in the U.S. position. China is emerging as the No. 1 target while Russia is emerging as the new best friend (unless you listen to many of his advisors). There is support for both Japan and South Korea to develop nuclear weapons. There is also suspicion of NATO. He has questioned the Iran nuclear deal and bashed both the EU and Angela Merkel while supporting the various populist movements in Europe and elsewhere. His hostility towards Mexico and Latin America in general has been demonstrated many times. Most of his advisors have been working overtime to blunt the impact of his statements. This calls proposed policy into question.
Based on the campaign, it was assumed that major changes in immigration policy would be pursued quickly as there were calls for building a wall along the border of Mexico and a total ban on the immigration of Muslims to the U.S. The rhetoric has been watered down somewhat. The wall became a fence (which we already have) and the total ban on Muslims morphed into a stronger process of vetting new arrivals (which was already in development). The real stance on immigration is now a little harder to identify. It appears that much will fall to Homeland Security to determine.
Perhaps the biggest change as far as the global community is concerned is the shifting position on climate change. Under Obama, this was a high priority issue and led to policy shifts in everything from energy production to the way that people drive and consume fuel. Trump has been described as someone who believes the whole issue is a hoax and intends to reverse many of these policies. His pick to head the Environmental Protection Agency is the former Attorney General of Oklahoma. In this capacity, he sued the EPA many times. In his confirmation hearing, he asserted that he did not believe that climate change was a hoax issue and acknowledged that some of the problem is man-made. This is another issue where Trump is not getting full support from those he is planning to put in positions of leadership.
The big question is what Trump will actually do once in power. In most respects, he is still in campaign mode, issuing statements that play to different constituents even as he no longer has to. He is the president for four years and really doesn’t need to court votes right now.
ECB Intends to Keep Rates Lows
The Germans are clearly losing patience with the ECB. They have been pushing for an end to the monetary stimulus of low rates for many years and have been continually getting more insistent. This is a nation of savers. They resented the policy decisions that made saving less than productive in order to make life easier for the struggling states in the south. The assertion is that these nations have had plenty of time to get their act together and have simply refused to face reality. The fact that many have abandoned the austerity plans they had been pursuing irritates the Germans even more.
Analysis: Despite these objections, the ECB has decided to leave interest rates at low levels. Mario Draghi has suggested they will stay low through the bulk of this year. There will be a little less attention paid to the bond buying programs and the other strategies, but the sense is that Europe is not ready to lose its crutch.
Nice Compliment but Not One I Can Take Credit For
This has been the week of the local talk. In the last five days, I have presented eight times to different groups in my town. They have ranged in size and focus—some were for specific companies and others for service organizations and professional associations. At the conclusion of a program yesterday, one gentleman pointed out that he had seen me talk four times in the last two weeks as he is involved in a wide variety of groups. After offering my condolences for his suffering, he paid me a nice compliment. He said that he was impressed that no two talks were the same, each of them tended to focus on something new and different than the last. I accepted that congratulations, but in my mind there was a big caveat. It really isn’t me—it is the subject matter.
The truth is that economic data changes daily—hourly to be honest. The interaction of 330 million Americans, 400 million Europeans and 1.3 billion Chinese as well as millions in other parts of the world creates a dynamism that is unparalleled. It is nearly impossible to know what I am going to say right up the moment I open my mouth as there will be some new development somewhere that affects us all. It is what makes all of this so interesting to me. The economy is never static—it reacts to everything and anything. It is up to us to try to snatch some order from this activity. I change what I say because the world I study changes. All I can do is to try to keep up.