Economy

Four Issues Likely to Define 2020

December 17, 2019

By Chris Kuehl, managing director
Armada Corporate Intelligence

Just like seeing Santa setting up at the local mall in August, it is never too soon for an economist to start looking at the coming year – as if the changing of a calendar has any real bearing on economic performance. The truth is that most of the issues that will vex and concern next year are the issues that are vexing and concerning now. The challenge is determining which of these are likely to fade from view and which will continue to build in significance. The four concerns that seem destined to shape the majority of the economic conversations in the coming year include 1) the ongoing trade and tariff war between the US and China, as well as other nations; 2) the potential for a recession in the US; 3) the ongoing crisis in terms of workforce development; and 4) the influence of politics on the overall mood of the consumer and how that affects the economy.

Factor 1: Trade and tariffs

The trade and tariff war between the US and China has transcended its origins and metamorphosed into a much more comprehensive confrontation that will determine how the US and China will coexist in the future. What started as a relatively simple demand that China reduce the trade deficit the US runs by buying more from the US has become a battle of economic systems. The US now demands that China stop subsidizing its business community, cease attempting to steal US technology, end its currency policy, stop oppressing the Uighur and Tibetan communities, accede to the demands of the Hong Kong protestors, leave Taiwan alone, withdraw from the South China Sea, etc. The list goes on and on. From the 1950s to the ’80s, the US considered China an enemy, but in the ’90s, that started to change, and China became a trade partner – as well as an economic rival. That shift has not worked out as well for the US as hoped, and there now is a move to return to more of a Cold War relationship. It is significant that none of the Democratic candidates are assailing Trump for his hostility toward China – they only object to his methods. The trade war will continue throughout the next year, with ups and downs as both sides experiment with agreements and truces.

It is not just the US contest with China that will affect trade. The US is rethinking its entire role in the global trading system, as much of that policy has been rooted in reaction to previous wars. The US granted extraordinary access to its market to help Europe recover at the end of the World War II, and this access remains in place. During the Cold War, nations received trade access to the US in return for supporting the US position against the Soviet Union. Even though the USSR ceased to exist in 1989, these trade agreements remain in place. The US now is examining all of these deals through a much more nationalistic lens, and the goal clearly is to shift more activity back to the US. With this come the threats of slower global growth and more expensive consumer goods. The trade-offs will come under intense scrutiny in the years to come.

Factor 2: Recession potential

The second major issue to play out will be the potential for a recession in the next 12 to 24 months. There are arguments to be made for an imminent recession and arguments suggesting that the worst-case scenario will be a slowdown that takes annual growth to between 1.5% and 2.0%. The current data show a developing weakness in the manufacturing sector with contraction readings from the Purchasing Managers’ Index, reductions in capacity utilization, slowing demand for durable goods and consistent reports suggesting manufacturers have become cautious. It has been pointed out that the yield curve has been inverted for an extended period of time and, in the past, this has pointed to a recession in the next 12 to 24 months. The global economy has not been this slow in decades, and estimates of its health continue to weaken every month. Germany already is in recession, and much of Europe is not far behind. It is indeed worrisome.

At the same time, encouraging signs have suggested the expansion still has some life left in it. Recovery from the recession in 2008 has been very slow, but that has been a bit of an advantage as it often is the rapid rebound from a downturn that sets up the next downturn. The fast recovery usually brings inflation and provokes the Federal Reserve to intervene with higher rates. Inflation also slows bank lending. This time around, there has been little inflation to contend with – as a matter of fact, there has been more concern regarding deflation.

There will be three crucial indicators to watch as far as an impending recession is concerned. The first would be any sign of a deteriorating employment situation. If there are mass layoffs and the jobless rate starts to climb, there will be an immediate impact on the consumer’s attitude – even if the overall rate stays traditionally low. A rate of 6.0% unemployment still is considered normal, but if the jobless numbers go from 3.5% to 6.0% there will be real panic. The second thing to watch is consumer confidence and its impact on retail sales. Consumers can shift attitude very quickly if they feel spooked by something and, if that translates into a sharp reduction in retail activity, the economy will feel it. The third area will be inflation. Thus far, the Federal Reserve has not had to worry about inflation and instead has been able to focus exclusively on stimulus. A sharp hike in commodity prices (such as oil or food) will make the Fed nervous, and there always exists the possibility that wages will start to rise. The Phillips curve holds that this should have happened by now, but for a variety of reasons this reaction has been delayed.

Factor 3: Workforce

Crisis number three is workforce related, and it is not a new problem. There simply are not enough people with the appropriate skills to fill the jobs available. In manufacturing alone there is a need for 3.7 million new workers in the next three to five years, and the estimate is that the sector will be short by more than 2 million. There is a shortage of truck drivers – 80,000 are needed right now, and it is estimated that future need will top 180,000. Too few construction workers and healthcare workers also are a problem, and now the professional positions are not being filled. Part of the issue is that Baby Boomers are retiring at a rate of 10,000 a day, and part of the issue is that too few are being trained and educated appropriately.

In the short term, not many options present themselves as far as acquiring the needed workforce. Option one is extending people’s working lives, and that has been taking place as fewer people retire when they would be expected to. The problem is that staying on the job in one’s 60s and 70s is hard, given everything from retirement rules to age discrimination. There are efforts to retrain, but this is expensive, and there has been little help from the federal government. Instead, states and cities have shouldered this responsibility. Immigration has long been the most common option, but the people that are coming to the US now (legally and illegally) are not generally skilled, and it is the skilled worker the US needs.

Factor 4: Politics

Finally, there is the impact of a political year. Elections tend to depress voters/consumers for a variety of reasons. The first issue is that campaigns invariably focus on problems. The litany of woes is relentless, and the candidate implores the voter to pick them, as only they can rescue the country from certain destruction. The voter hears nothing but gloom and doom and begins to believe that nothing can be done. In the end, there will be many disappointed voters, as they will not be on the winning side. This year promises to be more contentious and intense than in previous years, as emotions will run very high. People are very deeply invested in either liking or disliking the candidates on offer, and this will affect mood profoundly.

To make matters a little worse, the fact is that politics will take over the attention of the politicians, leaving them little time to address any of the issues outlined above – resulting in lackluster policy activity on trade, infrastructure, workforce or anything else. It will be political infighting every day of the week.

These are not the only issues that will affect the 2020 economy. As always, there will be unexpected developments involving wars and natural disasters in addition to ongoing issues, such as health care, education, climate change, technology and so on. Any one of these can (and will) suddenly lurch into prominence, but the four outlined above can be counted upon to be factors all year – just as they have been factors in past years.

Chris Kuehl is managing director of Armada Corporate Intelligence. Founded by Keith Prather and Chris Kuehl in January 2001, Armada began as a competitive intelligence firm, grounded in the discipline of gathering, analyzing and disseminating intelligence. Today, Armada executives function as trusted strategic advisers to business executives, merging fundamental roots in corporate intelligence gathering, economic forecasting and strategy development. Armada focuses on the market forces bearing down on organizations. For more information, visit www.armada-intel.com.

Election Watch: It’s the Economy, Stupid

September 12, 2019

by Chris Kuehl, managing director
Armada Corporate Intelligence

As far as elections are concerned, “It’s the economy, stupid” has been the refrain for a while now. It essentially asserts that, when it comes right down to it, the only thing voters really care about is the economy. That may not be as true for the election in 2020 as it has been in past years, but the topic still will command a lot of interest as the focus shifts from attracting the hard-core primary voter to influencing the vast middle of the voting population. At this point in the campaign, it is a little hard to pinpoint exactly what the field of Democrats have in mind as far as economic policy, but some themes are emerging. In fact, there appears to be a substantial difference between the two wings of the Democratic party – progressives and moderates (or traditionalists).

Thus far, little attention has been paid to the issue of economic growth or any of the currently pressing issues affecting the economy: No focus on the labor shortage that has hampered many businesses as they try to expand, no attention to the trade war or tariff issue, no mention of what to do with US trade partners, no discussion of how to address the nation’s infrastructure needs, no comment on R&D needs … and so on. It is likely that some or all of these issues will start to emerge as the election grows closer, but it has been hard to argue that the economy under Trump has been faltering. The key issue now is whether the economic weaknesses that have started to appear will merit more concern a year from now.

The four most discussed economic issues among Democrats involve health care, education, minimum wage and equal pay. A related issue is taxation, as there will have to be additional revenue to support the programs that have been suggested. There also has been some attention paid to regulation as a means by which to address other issues, and these will have an impact on business and the economy as well.

Health care

At the top of the list is health care, and the mantra from some in the Democratic field is “Medicare for all.” There are a range of suggestions that vary from a totally government-funded medical system to some hybrid between public and private, but the focus of the entire conversation is how to pay for medical care. There are essentially three players in the system – the patient, the health care provider and the entity that pays for the care. Ultimately, the patient pays, but the question is how. Currently, a complex system exists that revolves around private insurance – which each person is responsible for acquiring. Once a person reaches retirement age, the Medicare option appears, and the government pays the health care provider while the patient pays through their role as taxpayer. Most Medicare recipients also carry private insurance as a supplement. Medicaid is offered to those who have no means to acquire their own insurance. To expand Medicare/Medicaid to all means that private insurance either vanishes or is drastically curtailed, and the government pays all the bills – meaning, the taxpayer pays all the bills. The obvious economic issue is where the additional funds will come from, and there are only two options: Raise revenue with new or expanded taxes or cut funding from other programs to finance health care. Neither of these options will be popular, and it is very doubtful that either option would pass through both Houses of Congress, although some hybrid plan might have a shot.

Education

The second issue that has attracted early attention has been education. One issue is access, and the other is student loan debt. The origins of the problems are similar. Over the last couple of decades, education has become very expensive, as state legislatures have steadily reduced their financial support, and the schools have been developing bigger budgets. Tuition has skyrocketed, and now there are many people who have been priced out of higher education and millions more who are dealing with paying off the debt they incurred. The solutions offered by Democratic candidates have varied from offering free university education to everyone to forgiving all student debt. There are economic implications involved with either plan. The offer of free education would overwhelm the current education system and would demand very swift expansion, a challenge that would be hard to meet, given the limitations on qualified instruction. More salient is the issue of devaluation. Should the college degree become as ubiquitous as the high school diploma, it loses most of its influence and provides no advantage to the holder of that degree.

The issue of student debt has been affecting the economy negatively for years. Those who have taken out a significant amount of debt have been limited later, finding themselves unable to buy homes as easily or engage in other economic activity. They have been slow to start families and often find their employment options limited. Granted, the majority of those who finished their college education and chose a major with economic upside have had little problem paying on their loans, but there are thousands who have been struggling. The potential of a government offer to pay off these loans would be an expensive proposition and – once again – the issue becomes the source of the revenue. The other issue is fairness. Those who have been paying their loans or have already paid them are not getting any break at all – only those who are not meeting their obligations. It seems to be sending a rather awkward signal that one is better off refusing to honor one’s obligations while demanding that somebody else pay for it.

Minimum wage

The third major issue has been the minimum wage. The current federal minimum is $7.25 an hour and, if one assumes a 40-hour work week, that adds up to $290. If one works all 52 weeks of the year, that equals an income of around $15,000. The poverty rate for a family of four is $25,750, and the median household income is $65,372. It is obvious that $15,000 a year is insufficient for a family. If the rate was moved to $15 an hour, the annual income would be around $31,000 – but that assumes a 40-hour work week for all 52 weeks.

The questions are complex. It starts with who the minimum wage is for – is this designed for the teen just starting to gain job experience or the casual part-time worker? That was the original intent, but today there are thousands of people who are raising families with these low-paying jobs. The bigger question is how the business community will react to the higher wages. They face the reality that all of their employees will be demanding a raise. The guy that was making $15 an hour will demand more if a new and inexperienced worker now is getting $15. The business knows that its labor costs will approximately double, and that will require a response. The vast majority will reduce the size of the labor force through the addition of machines and technology, and that will mean less opportunity for the low-skilled or inexperienced worker.

Equal pay

The last of these issues is equal pay. The average pay for women still lags that of men doing the same job. It is estimated that women working full time make 80% of what men make. There are many factors in play – everything from the jobs that are being performed to longevity – but even the most optimistic estimates have women paid around 90% of what men make for the same jobs. Addressing the pay gap is hard to do legislatively, and that means more reliance on the regulatory system. It is unlikely to have a major impact on taxpayers but could add to labor costs for businesses that would need to address the gap.

The ideas that are being discussed by the Democratic candidates thus far are painted in the broadest of strokes and clearly are aimed at galvanizing the base. At this point, the contest is between the two wings of the Democratic Party, and economic issues largely have taken second place behind more emotional issues, such as racism and immigration. The one constant thus far is that these policy suggestions will cost a great deal of money, and this burden falls on a country that already has a record level of national debt and a record deficit that constantly require the raising of the debt ceiling.

Global Economy in a State of Flux (Again)

June 12, 2019

by Chris Kuehl, managing director
Armada Corporate Intelligence

The International Monetary Fund certainly is not notorious for its upbeat forecasts. The institution began life after the Second World War as the lender of last resort – created primarily to give the shattered European nations an opportunity to rebuild their economies with borrowed money. It worked like a charm as these were mostly modern industrial states with the know-how and ability to compete once they had an opportunity to rebuild that shattered infrastructure. As that mission was completed, the IMF turned its attention to the developing world with the same basic plan – cheap loans to build infrastructure – but the outcome was not quite so positive as these states often lacked the background and skills to take advantage of this kind of support. Pretty soon, the IMF was the institution that set about correcting these bad habits through direct intervention – teams of IMF economists that virtually seized control of entire economies. This essentially set the IMF as the arbiter of good and bad economic policy, and its periodic reports on the state of the world are generally seen as very accurate – but they do tend to lean in a more negative direction.

The latest edition of the World Economic Report is characteristically blunt as it outlines the factors that have been dragging the global economy to the slowest period of growth seen in the last several years – nearly as slow as was seen during the recession that gripped the US, Europe and the world in general. The report cites an “environment of increased trade tensions and tariff hikes between the United States and China, a decline in business confidence, a tightening of financial condition and higher policy uncertainty across many economies.” More than in past years these are all man-made issues that have been made more serious by political positions and the growth of populism as a political/economic motivator.

This would seem to fly in the face of recent data collected in the US. The Q1 growth rate exceeded expectations with a reading of 3.2% when most were expecting no more than 2.5%. The US unemployment rate remains near record lows as it wavers between 3.8% and 4.0%. The level of capacity utilization has been getting close to the normal range, between 80% and 85%. With all this positive data, why is the IMF so bleak? And for that matter, why have there been equally downbeat projections from the World Bank and the Organization for Economic Cooperation and Development?

The growth expectation for trade now is for a rate of 3.4% in 2019 – and that is down from a previous estimate of 3.8% and way down from the nearly 5.0% that was notched in 2018. The growth spurt that was led by the US in 2018 faded quickly, and the corresponding surge in Europe was even more short-lived. The tax cuts in the US, coupled with additional European stimulus, provided an unsustainable boom – but from the start that surge was undermined by other policy decisions. For every step forward, there was a step or two back and the global economy ultimately started to falter. Growth estimates for the world economy are down by an average of 70% and almost every nation is looking at dramatic reductions in their GDP. Germany is expected to be down by 0.5%, Italy also is expected to be down by 0.6% and the UK will fall by another 0.3%. Mexico is down by 0.6% and all of Latin America is looking at around 0.7%, with big drops in Brazil and Argentina. The Middle East will see a decline of 0.9%. Even the once high-flying US economy will be coming back to earth with growth at perhaps 2.3%, as compared to the 3.2% noted at the start of 2019. The challenge is that some of the factors that sparked that high growth at the start of the year in the US are fragile and subject to major change. The two most important motivations for first-quarter growth were a surge in exports and a more active consumer than had been anticipated. The export surge only will continue if the rest of the world is in a position to buy the US output. The predicted slowdown in Asia and Europe and Latin America will affect demand for US exports, as the majority of what is sold by the US is high-value manufacturing.

Of the issues cited by the IMF, the ones that seem to be causing the most concern revolve around uncertainty – and this confusion is firmly rooted in politics. The erratic nature of US trade policy has been attributed to the fact that there is no real policy in place. Tariffs are imposed and then lifted. Threats are made and then they are not followed up with action, but then the threat reappears at the time that most assumed the issues had been resolved. The policy is directed entirely by the White House.

The agony of the Brexit process has taken everybody by surprise and has all but destroyed the British reputation in the world. It was assumed that cooler heads would prevail and an orderly and mutually acceptable deal would be thrashed out. Now the betting is that the UK will crash out of the EU in a chaotic mess that will set the economy back by years, taking a big chunk of Europe with it. At the same time that British isolationism and populism lead the UK toward this train wreck, there are similar elements in Europe with Italy at the forefront of populist crisis. The economy of Italy is in shambles and all the leadership can focus on is immigration.

The IMF is not very enthusiastic about the situation in Asia either. China has shown some signs of life of late as the manufacturing data has improved, but there still are major headwinds due to the trade fight with the US and the slowing economic growth in Europe – a market that is more important to them than even the US. Japan remains mired in slow growth patterns, and India has not been in a position to exploit the market opportunity that has been provided by China’s struggles. Latin America is at near panic level over the mess in Venezuela and the bombastic leadership in Brazil. The hope for Argentina has faded as old problems have come back to haunt and it now appears there is support to bring back disgraced former President Cristina Fernandez.

The US has been on the edge of a deal with the Chinese for many weeks, but it always seems to slip away at the last minute. The issues that once were seen as the most divisive have largely been worked out – issues such as intellectual property protection and forced technology transfer. The problem now is unwinding from the tariffs that have been imposed by both nations on the other. Which will be removed or reduced and in what order? Will some stay in place? This is part of that uncertainty situation again.

Oil has been a rapidly shifting business as well. For most of the last 50 to 60 years, there was one economic development that could generally be counted upon. Anything that spiked oil prices would inevitably lead to some kind of economic calamity. Higher priced oil would usher in a recession of one kind or another – and often this downturn was brutal and lasted a long time. The price of oil has jumped by around 45% in the last few weeks and has hit levels not seen in many months, but thus far reactions have been muted. The issues that have affected the oil markets would have turned the sector inside out a few years ago – production cuts from OPEC and Russia; political chaos in oil producing nations like Venezuela, Libya and Algeria; the imposition of new sanctions on Iran and those that buy oil from them. Any of these would have been expected to have an impact, but this time around the impact has been minor.

The reality is that US oil production has changed the rules. The production can expand more or less at will and oil markets assume the US will kick into high gear when those prices finally hit somewhere in the 80s. Beyond that, there is confidence that global growth is robust enough to sustain demand even if the prices approach $100 a barrel – at least for a while.

It often is asserted that the global economy is in flux, and it nearly always is to one degree or another. This time, that uncertainty is at maximum levels – and it serves to almost paralyze business decision making.

Reconciling the Stock Market with the Real US Economy in 2019

March 11, 2019

by Robert Fry, chief economist
Robert Fry Economics LLC

The S&P 500 stock price index has declined 14.5% since its record close on September 20, 2018. While the financial press focuses on the stock-price decline itself, economic forecasters like me are more concerned about what the decline means for real (non-financial) economic activity. The stock-price decline could reflect a slowing in US economic growth that is already underway. It could signal or even contribute to a coming slowdown. It could reflect or signal a slowdown in earnings growth due to something other than a slowdown in US economic growth. Or it could simply reflect a change in stock-market valuations due to higher interest rates or increased risk aversion (and a larger equity risk premium).

Residential construction has declined, and business investment has stagnated, but most of the US economy continues to grow. Retail sales excluding food, autos, gasoline and building materials – the “control group” used to calculate consumer spending in Gross Domestic Product – rose 0.8% in November 2018, the biggest increase of the year, and October sales last year were revised up. The Federal Reserve Bank of Atlanta has reacted to the reported strength in retail sales and implied strength in consumer spending by boosting its GDPNow estimate for Q4 2018 GDP growth to 2.9%.

That’s a lot of cars

While analysts and auto companies have been talking about declining vehicle sales, light vehicle sales have surprised on the high side for three straight months, coming in above a 17-million seasonally adjusted annual rate. Sales for 2018 will come in about Reconciling the Stock Market with the Real US Economy in 2019 by Robert Fry, chief economist of Robert Fry Economics LLC where they were in 2017 and will exceed 17 million for a fourth straight year, something that has never happened before. Reports of declining vehicle sales are exaggerated and/or premature.

New claims for unemployment insurance, the best weekly measure of economic activity, seemed to be signaling a slowdown when they spiked in late November, but they’ve since fallen back toward cyclical lows, suggesting that the spike might have been due to difficulties in seasonally adjusting data around the (early) Thanksgiving holiday (see line graph at left). Less positively, industrial production in US manufacturing was flat in November, and October’s 0.2% gain was revised down to a 0.1% decline. However, a big increase in the Institute of Supply Management’s manufacturing index (and, specifically, in the New Orders component of the index) suggests that most US manufacturers continue to grow.

More serious slowdown ahead?

Even though the American economy has slowed only slightly so far, the stock market could be signaling a more serious slowdown ahead. The stock market sometimes sends false signals – hence Paul Samuelson’s quip that it has predicted “nine of the last five recessions” – but it still is a useful leading indicator that should not be ignored.

Stock prices could be forecasting that growth will slow in response to interest-rate hikes (past or future) and/or tariffs. Stock prices turned down after hawkish comments by Federal Reserve Chairman Jerome Powell on Oct. 3, 2018, and fell sharply when the Fed raised its federal funds rate target on Dec. 19 and suggested it would raise rates further in 2019. Prices have repeatedly fallen/risen on bad/good trade news. Regardless of the reason (or lack thereof), a stock-market decline can cause economic growth to slow by reducing consumer spending and business investment.

Declines abroad reflected here

I believe the decline in stock prices primarily reflects slower growth in corporate earnings resulting from slower economic growth outside the United States. S&P 500 companies get almost half of their earnings from outside the United States. Economic growth outside the United States had been slowing all of last year.

Real GDP declined in Japan, Germany and Italy in Q3 2018. While purchasing managers’ indices and auto sales remain solid in the United States, both have plummeted in Europe. Perhaps more concerning is the ongoing slowdown in China and the realization that US companies will never make as much money in China as they thought they would. (Some of us realized that two decades ago.) China reported on Dec. 14 that year-over-year growth in retail sales slowed in November to its slowest rate since 2003. Growth in industrial production, at 5.4%, matched its slowest year-over-year growth rate since 2009. (Excluding January/February data, which are distorted by the variable timing of the Lunar New Year, growth in industrial production matched its slowest rate since the data series began way back in 1995.) Despite an announcement that China would reduce tariffs on US motor vehicles and the better-than-expected report on American retail sales, US stock prices fell sharply in response to the weak Chinese data on December 14, 2018.

Brexit and tariffs and oil. Oh, my!

Growth in Europe has been hurt by concerns about the United Kingdom’s “Brexit” from the European Union this March and by the new Italian government’s rejection of fiscal discipline. The slowdown in China reflects a shrinking working-age population (the result of the single-child policy), excessive government debt (the result of repeated fiscal stimulus) and slower growth in exports because of slowing in the rest of the world. US tariffs have had little impact … so far.

But, perhaps the biggest reason for the slowdown in global growth is the increase in oil prices. The average monthly price of Brent Blend crude oil rose from $46.37/barrel in June 2017 to $81.03 in October 2018. For many developing countries, whose currencies have depreciated vs. the dollar, local-currency prices rose even more. Because of higher domestic oil production, high oil prices don’t hurt the American economy as much as they used to, but they hit oil-importing countries with little or no domestic production very hard. The sharp decline in oil prices since Oct. 4 will hurt oil producers, including those in the United States, but will provide some relief to most economies in the world.

Fewer interest-rate hikes likely

US infl ation already was declining before oil prices peaked. It will fall further in coming months. This will allow the Fed to slow (or halt) interest-rate hikes until inflationary pressures build again. At its September 2018 meeting, the Federal Open Market Committee’s median projection was for three quarter-point hikes in the federal funds rate this year. FOMC members now expect two rate hikes. (I also expected three; I now expect just one.) As the forecasted number of rate hikes has declined, so have long-term bond yields and mortgage rates. This should help end the recent decline in home sales and housing starts.

Despite the lower expected trajectory for oil prices and interest rates, I’ve lowered my forecast for US real-GDP growth forecast to 2% in the first half of 2019 in part because of the damage done by lower stock prices but mostly because of the continuing threat to the economy from tariffs. My forecast assumes US tariffs on Chinese goods either rise to 25% for only a few months or remain at 10% indefinitely. If tariffs go to 25% and stay there, growth will fall below 2% and the risk of a recession will rise. If a successful trade deal is reached and the 10% tariffs are removed, growth will stay near 3% through 2019, especially if businesses respond to trade policy certainty, tax reform and tight labor markets with productivity-enhancing investments in plants, equipment and software.

Robert Fry is chief economist of Robert Fry Economics LLC. To subscribe to Current Economic Conditions and receive every monthly issue as soon as it is published, contact robertfryeconomics@gmail.com.

Hello Darkness, My Old Friend

September 4, 2018

by Chris Kuehl, managing director, Armada Corporate Intelligence

Somehow, I’ve always wanted to connect my musical past to economics. Well, maybe I just decided this minute to make that link, but it seems appropriate to reference this when talking about an economic issue we have not faced in a long time. A cloud has been on the horizon for quite a while, but of late it has started to look a lot more menacing and imminent. We are heading toward an inflationary period of significance, and this is not something that many of us have experienced over the better part of the last two decades – we have been busy contending with a recession and then a very slow recovery from that recession.

It would be a good idea to review what inflation actually is, how it is assessed and why it worries economists far more than a recession does. Simply stated, an inflationary period is one in which prices of most everything rise – and generally sharply. These price hikes vary and rarely proceed in lock step: There may be inflation in one sector and even deflation in another but, as the problem worsens, the inflation broadens. The deepest concern among analysts is when there is inflation in the most basic of commodities, as these prices soon course through the entire economy.

The rate of inflation is measured by noting the change in pricing from one period to another – an annual rate, monthly or quarterly. The annual measure is generally the most reliable, as it limits the impact of volatility in pricing. There are generally two types of inflation measures – core inflation and real or headline inflation.

The measurement of core inflation often drives people nuts, as the economic analysts who do these numbers do not consider the price of fuel and food. These are arguably two of the biggest factors in a given family’s budget, and it doesn’t seem to make any sense at all to not consider the price change. The measure of real (headline) inflation does indeed count both food and fuel. The reason they are not considered as part of the core rate is that these prices are extremely volatile and can change radically within a few weeks. That makes it very hard to make comparisons over a few months or a year. It also is assumed that these price hikes will show up in other ways through the course of the year – higher transportation costs, higher air fares, more expensive restaurant meals and so on.

When it comes to driving up prices, the two most important factors are commodity prices and labor. When there is a rise in the price of oil or natural gas, there is a sharp response in utility costs and the price at the pump. Drivers feel it, transportation providers feel it and consumers feel it when they pay more to heat and cool their homes. Industrial metal prices, plastic resins, chemical compounds, lumber and cement are among the many other commodities that form the basic building blocks of the economy.

Then, there are wages. For the last year or so, the expectation has been that wages would go up at any minute, as all the conditions were right for such a hike. There is a theory called the Phillips Curve, which has been in place since the 1950s, that made the connection between low levels of unemployment and higher wages. Naturally enough, it was assumed that when there were fewer people available to hire, the business community would have to pay people more to get them to take the jobs on offer. It also was assumed that companies would poach from one another to get the people they needed – and, that also meant higher wages to lure people to change jobs or higher wages to get people to stay right where they were.

Some movement in commodity prices did occur, but not all of them rose as quickly as expected. Commodity prices have been increasing for both natural and artificial reasons. The natural reason is that producers reduced their output when demand faltered, and output has been slow to return to prior levels. The artificial motivation has been the tariff and trade war launched by Donald Trump. This has driven up the price of steel and aluminum, and various threats directed toward the Iranians and others have pushed the oil markets to hike prices.

Wages did not go up as predicted, as those looking for work lacked the skills and training needed. If they did get hired, it was with the understanding they would need to be trained and would not be making much more than minimum wage until they had the needed skills. Businesses have started to give up on finding qualified people and are hiring attitude and assuming the need to do their own training.

One very important factor we have not talked about yet is the role of the Federal Reserve. The job of the Federal Reserve is to manage monetary policy, which means intervening when there are recessions and inflationary periods. In truth, the central bankers are far better equipped to deal with inflation than they are with recession. The only weapon the Reserve has to goose the economy along is to make money cheaper by lowering interest rates and finding other ways to get banks active. This has been referred to as “pushing a string,” because banks can’t be compelled to loan – they have to want to and, during a recession, they often don’t. Controlling inflation, on the other hand, is far easier. All the Fed has to do is make money harder to get by hiking interest rates and reducing the availability of bank assets, which is accomplished by setting the reserve ratio or changing the interest rates the banks get for depositing money at the Fed.

In the most general of terms, the Fed is made up of “hawks” and “doves,” but the designations are highly flexible depending on how the data are trending from one month to the next. The hawks want interest rates higher and worry far more about inflation than do the doves, who think the recession threat is the more damaging.

Right now, the hawks seem to hold the majority position within the Fed’s Open Market Committee (FOMC) – the body that is charged with setting these rates. The members this year include Jerome Powell as Fed Chair and John Williams as the head of the New York Fed and Vice Chair. They are joined by the other seven permanent members of the Board of Governors and four of the regional bank heads who rotate for annual terms. Right now, there are only three members of the board: There have been some resignations and retirements, and the replacements have not worked through Congress. Of the three, Powell, Randall Quarles and Lael Brainard are swing votes – hawkish on inflation now but shown to be more dovish in the past. The four regional heads that are on the FOMC this year include the very hawkish Loretta Mester from the Cleveland Fed, John Williams from New York, Raphael Bostic from Atlanta and Thomas Barkin from Richmond. The last three named have been both hawk and dove at times but are hawkish now.

All this means the Fed will be quick to raise rates to contend with any sort of inflationary threat. Obviously, it has already started with the rate hikes this year and the stated desire to raise them again in September – and, likely in December as well. The assertion is that rates would go up four more times in 2019. The Fed Funds Rate now is 2.0% and will likely be at 2.5% by the end of the year. If current thinking prevails, the rate at the end of 2019 will be between 3.0% and 3.5% – but that assumes inflation stays below 2.0% at the core level, and many are suggesting this will be a hard line to hold.

Our fearless forecast holds that core inflation will climb to at least 3.0% in the next 12 months, and this will provoke the Fed to hike its rates faster than anticipated. We are looking at interest rates between 3.5% and 4.5% by the end of 2019.

The Economist’s View: Steel Tariffs – Good, Bad, Both?

June 12, 2018

by Chris Kuehl, managing director, Armada Corporate Intelligence

There are few things more certain than death and taxes, unless it is a debate over one or the other. The plan to impose stiff tariffs on steel imported into the US has been discussed and considered and argued over for years – decades even. Once upon a time, the US was perhaps the world’s biggest steel producer, but many things changed in that industry and there was too often a delay in responding and too many strategic mistakes.

It has never been a single-issue problem. It is true that labor costs have been a factor, and it is true that environmental laws have been a factor. It also is true that many other countries have sought to bolster their own capabilities when it comes to steel output, as this commodity has long been wrapped around a host of other issues. Nations do not want to be vulnerable to others when it comes to steel supply; this is an industry that still accounts for a lot of jobs – but not as many as in the past. It is a point of national pride to have a thriving domestic steel sector, and many governments have been subsidizing and protecting that sector for many years.

Over the last decade or two, the US steel sector has been under a great deal of stress for a variety of reasons. The costs of production are higher than in rival producer nations; there has been a steady decline in the amount of available scrap; and steel users have started to shift to other products (aluminum in cars and the growth of plastics). The recession hit the steel sector hard, with declines in many key steel-consuming sectors, such as vehicle manufacturing, construction and the like. That demand is only now starting to come back.

Right now, there are nine operating integrated steel mills in the US – down from 13 in the year 2000. There are about 112 mini-mills in the US, which use scrap metal as opposed to iron ore. The mini-mill sector accounts for about 60 percent of all the steel produced in the US, and the sector’s greatest challenge is that scrap is a harvestable resource – and one that is dwindling. There is less metal in vehicles to begin with, and they are not being scrapped as aggressively as in the past. The slowdown in construction activity has meant fewer tear-downs, and severe restrictions remain on scrapping ships in the US, as there are all manner of environmental hazards with which to contend.

These are the factors that led steel companies to seek some kind of shelter from global competition. The current drive to impose tariffs would not be the first time this tactic has been explored. Under George W. Bush, a 25 percent tariff was imposed on imported steel, but the effort was abandoned just two years later, as it was doing far more harm than good to the US economy. The two-year experiment created a host of issues for the US and invited retaliation from the affected countries – most of which were and are US allies.

The current effort is grounded in national security concerns (and that was the rationale used in 2002 as well). The assertion is that a country’s national security depends on access to steel – its own steel. That assertion is grounded in the kind of industrial production a country would need to engage in should there be a major conflict. Steel would be needed for ships and tanks and trucks and all manner of construction. Of course, there are many other commodities that would require similar protection these days – everything from aluminum to lithium and cobalt and all those rare earth minerals that are key to electronics.

The majority of the steel that comes into the US is from nations that are either allies or at least friendly to the US. The top exporter to the US is Canada (17 percent) and then Brazil (14 percent), South Korea (10 percent), Mexico (9 percent), Russia (8 percent), Turkey (8 percent), Japan (5 percent), Taiwan (3 percent), Germany (3 percent) and India (3 percent). The top 10 exporters to the US account for 80 percent of the steel the US brings in. The other 20 percent is spread among nations that export just a little to the US.

China has ostensibly been the target as far as limiting steel imports to the US, and it is the nation that always mentioned is as an unfair competitor. It is accused of dumping steel and cheating on a wide variety of global steel rules, but the reality is that China is not even in the top 15 suppliers of steel to the US. The bottom line is that imposing a stiff tariff would affect US allies and friends far more than it would impact nations of which the US is suspicious.

The impact of a steel tariff on the US domestic economy

The rationale behind these tariffs is threefold: to provide a boost to the US economy, to create (or at least to preserve) jobs and to support the businesses involved in steel production. Questions exist as to how effective the tariff would be in terms of achieving these goals, but the bigger issue for the US economy is that this tariff would have a profound and negative impact on those industries that use steel.

Studies from a variety of think tanks and government agencies assert that for every steel-specific job in the US, there are 60 jobs in steel-using industries – automotive, construction, machinery manufacturing and the like. It is hard to estimate the impact of something that has not happened as yet, and those who have tried must make assumptions that may or may not be accurate. The proponents of the tariff assert the impact will be minor, and those who oppose it can come up with catastrophic numbers.

The best assessment is to look back at the 2002 tariff as guidance. Two of the hardest-hit states were Michigan and Ohio, which lost 9,829 and 10,553 jobs, respectively. Both states rely heavily on steel to manufacture a variety of products. It is likely that several thousand jobs were preserved in states such as Indiana and Illinois, where the steel operations exist. On balance, the data showed that five time more jobs were lost than were gained or protected due to high-priced steel.

There is no doubt that the US steel industry has been hit hard by waves of unfair competition over the last few decades. There are countries that overtly subsidize the production of steel, and others that deliberately overproduce with the intent of dumping that excess capacity. China has been at the center of these debates, but it is not the only county engaged in these tactics. China consumed the bulk of the steel it produced in the days of double-digit expansion and thousands of projects all over the country. Every region wanted its own steel operation, and China had no issue with this, as it needed the jobs and the steel. Since then, the construction sector has slowed, and China no longer needs the steel. This has not stopped these regions from producing, as they still need to preserve the jobs.

The tariffs have been a political football in the last few months, with exemptions based on whether the countries are helping or hurting the US effort to control China. The latest deadline was down to the wire and then extended for another month. The uncertainty has been taking its toll, and steel prices have risen sharply – despite the fact that 85 percent of the steel imports and roughly 90 percent of aluminum imports are still taking place. The steel makers in the US are hedging their bets to some degree and seem to expect the tariff regime to be in place at some point. Meanwhile, the latest data on manufacturing show a sharp slowdown based on higher prices for steel and aluminum, and lately of oil as well.

More information: www.armada-intel.com

The Good, Bad and Maybe Ugly Sides of the Tax Cut

March 19, 2018

by Chris Kuehl, managing director, Armada Corporate Intelligence

As readers must be aware, it is the job of the economist to point out the dark cloud that accompanies every silver lining. No good deed goes unpunished, and they don’t call us dismal scientists for nothing. Now that I have set the tone, we can discuss the impact of the tax cut and what the various phases will look like through the year and beyond. We can start with the good news.

The good

The tax cut has definitely stimulated the economy in a variety of ways. Consumers have more money to spend, as many saw their tax burden reduced and many also happened to work for companies that chose to share their tax reduction through bonuses and pay hikes. Businesses saw a reduction in their taxes as well – generally reducing rates from around 37 percent to around 25 percent. Some of the tax breaks that certain businesses had relied on have been eliminated – but not all that many. This leaves a lot more in the corporate coffers than before, and the money will be directed in a variety of ways – some more productive than others. There will be investment in new equipment, and there will be hiring (provided people can be found who are worth hiring). There also will be bigger payouts to owners and investors and money sunk into stock buyback, investments and purchases in foreign markets. These latter options are not as useful for the economy as a whole.

It is true that a stimulative tax cut like this would have been more effective when the economy was moribund, but there will be reasons to celebrate the windfall for the first half of the year in any case.

The bad

The timing of the tax cuts is what creates the bad scenario. The economy already was growing at a nice pace before the cuts, and now it is adding gasoline to a fire that already exists. This rapid influx of corporate and consumer cash can overheat an economy quickly.

Here is how a tax cut fuels inflation. The business community decides to use this money to expand. They start to buy machines, hire people and use more of the inputs they depend on – fuel, metals and the like. This new demand for these products is coming at a time when most suppliers have been ratcheting down output, and now they will struggle to keep pace with that demand and, almost inevitably, the price of all these inputs, machines and workers will rise. The faster the growth, the more urgency there is not to be left behind and that pushes those prices even higher.

Consumers play their part as well. They have money, and they will spend it. Right now, the savings rate for the US consumer is as low as it was at the start of the recession, and people are no longer reluctant to haul out their plastic. As they create demand, the producers have a reason to hike prices and the consumer starts to feel an inflationary pang. This propels them to spend even more – and faster – as they fear that the things they want will be even more expensive in the future. The natural reaction to inflation by a consumer is exactly the opposite of what would be preferred for the economy as a whole, but it happens every time.

So, now we have inflation. What is so bad about that? In the first place, it makes everything more expensive and creates a cycle that is hard to end. The person seeing higher prices for their basic needs and wants will try to get paid more, and the company that has to pay more will raise prices to cover these costs, and then people will want to be paid more so they can afford the price hikes.

Beyond that, inflation is the scourge of the financial community, and banks get very cautious. They do not want to lend money that inflation will rob of its value in the future, so access to capital is suddenly restricted. The big attitude change will be at the Federal Reserve as they will swing into action to blunt that inflation surge. Interest rates will climb quickly and consistently in an effort to shut off the advancing threat of inflation. We have been living through an extraordinarily long period of loose monetary policy as the Fed has been pulling out all the stops to goose the economy forward. That ends and is replaced by an equally aggressive attempt to slow things down. This shift in strategy could start as soon as the middle part of the year, as it often takes several months for a restrictive Fed policy to start working – especially if the economy is flush with cash. Much of the gain made at the start of the year could be lost at the end of the year if these rates ratchet up far and fast enough.

The ugly

This brings us to the ugly part. These tax cuts are going to balloon an already inflated deficit and debt. Somewhere along the way, the fiscal hawks all seem to have migrated elsewhere, and even the GOP seems more than cavalier about the threat of debt. The estimates hold that these tax cuts will add another $1.5 trillion to the debt and deficit and both of these are already far too high for any sense of fiscal comfort. Our national debt is close to 104 percent of the national GDP and, bear in mind, the US GDP is the largest in the world at just over $19 trillion. China is second, with a GDP of just over $12 trillion. We have states that have GDP numbers as large as major countries (France has a GDP roughly the size of California’s, and Texas compares to Canada). Adding to the debt burden is not a good thing and neither is adding to the deficit, which now is sitting at over three percent of the national GDP. This is considered well past acceptable levels.

In order for the US to handle these debt burdens now, annual growth of between five and seven percent will be required – and the US simply doesn’t grow that fast. We are getting very excited about three percent growth and are not sure we can even maintain that pace. If we cant grow fast enough to reduce the burdens, there are not very palatable alternatives, such as massive budget cuts and significant increases in revenue. Given that there was just a big tax cut, the likelihood of revenue enhancement is nil. That leaves those big cuts and that means taking a knife to the biggest US budget items. These are Social Security, Medicaid, Medicare and the Defense Department. Don’t hold your breath on changing any of these.

What happens if there are no cuts, no hike in revenues and not enough growth? We will keep doing what we have been doing for the last decade or longer. We will borrow more and more to be able to make the budget, which makes the problem larger later. This is the fundamental issue with economics as ruled by political expedience. As long as the crisis occurs on the next leader’s watch, it is all just fine.

What should the US be doing right now? The growth that we have experienced should be channeled into reducing our obligations and setting us up to handle future issues. Any businessman will tell you that having a rainy-day fund is crucial and that spending every dime from a good quarter or year is the height of folly. Consumers even know to save, but that message always seems to be lost on those that ostensibly lead.

The 2018 Economy and Print Markets

December 18, 2017

by Dr. Ronnie H. Davis, senior vice president and chief economist, Printing Industries of America

For 2018, will the US economy and print markets accelerate and pick up speed? Or will they break down and fall into a recession after over eight years of slow growth? Or, will they continue the steady but lackadaisical pace of the past eight years? A case can be built for any of these three scenarios.

A look at the economy

The biggest question mark facing the economy is everything going on in Washington regarding tax reform (corporate and individual), health insurance reform, postal reform and trade policy. The mix of these policy outcomes will shape the direction of the economy for the foreseeable future.

PIA’s view is that the economy most likely will continue to grow at a modest pace. However, if there were meaningful corporate tax reform, the economy would likely accelerate beyond the recent two percent growth trend – a 25 percent chance according to PIA’s outlook. On the other hand, continued political gridlock could combine with the aged recovery and cause the next recession – 25 percent likelihood in PIA’s outlook.

The trend scenario would mean a continuation of two percent growth in 2018 and 2019. A recession would mean a reduction in GDP of perhaps 1.5 percent next year and as much as two percent in 2019. The recession could be milder or more severe. The accelerated scenario calls for growth of around three percent next year and 3.2 percent in 2019.

Let’s look at each of these scenarios.

Breakdown: a 2018 recession

The primary case for an economic downturn in 2018 is the force of history:

The current recovery at eight years and two months (as of August 2017) now is older than all but three of the other 10 post-war recoveries. However, it also is the weakest of the other 10 recoveries in terms of average growth rate. Does slower growth mean longer growth? Perhaps, as there is a correlation between slower growth and longer growth. Also, it makes economic sense since slower growth could reduce the excessive exuberance and over-investment that can cause a downturn.
Another historical fact is that the second year after a presidential election has empirically been twice as likely to be a recession year as the other three years in the election cycle. Additionally, the second year after the election has an average variance from trend of 0.5 percentage points in terms of economic growth. However, these facts may be more coincidental than behavioral.

PIA’s assessment is that, although the chance of a recession is higher than it has been for the last few years, it still is an unlikely occurrence. On the other hand, remember the old adage to hope for the best but plan for the worst.

Breakout: accelerated growth

A strong case can be made for an economic breakout next year. The recipe for turbocharging the economy is as follows:

A healthy dose of regulatory and administrative reform conceivably could add a percentage point to growth.
Corporate tax reform with a significantly lower tax rate (15 or 20 percent), accompanied by reducing deductions and simplification, could add perhaps as much as a percentage point to growth.
Additionally, slightly more growth could be achieved with improved trade negotiations; anti-trust and competitive reform; and a return to monetary normalcy.

As indicated earlier, the first of these regulatory reforms already is happening. If meaningful corporate tax reform is enacted late this year or early next year, it is likely the economy will accelerate.

Although this scenario is scored at a 25 percent likelihood, there is a clear but political path to it happening. Also, the underlying fundamentals of the economy must cooperate as follows:

Productivity must increase after lagging during most of the current recovery.
Labor supply must demonstrate some elasticity with an increase in labor supply as compensation increases. At the current time, there are over six million job openings, so the economy needs workers to grow.
There are indications that labor mobility is declining. The number of households moving to other states has decreased even as the number of job openings has increased. A major issue appears to be the high cost of housing in areas with high labor demand compared to those with lower demand.

Continued slow but steady growth

The easiest forecast always is for more of the same. The following are key supporting factors for this view:

First, and most importantly, is the linear momentum of eight years of steady growth.
Global economic conditions are healthy but not accelerating or slowing, adding another dose of momentum.
The political environment remains messy, and any tax reform may end up too little too late or not that significant.

To sum up, the economic outlook is most likely slow but steady growth. However, there is significant chance of either a recession or an acceleration of growth.

Print markets in 2018

Print will, of course, generally track with the economy in 2018. Over the last few years, most printers that survived the Great Recession have seen their sales recover, although it has taken a few years. The typical printer that managed to survive the recession still took a severe hit in sales over the years 2008 to 2010 – a sales decline of almost $300,000. On the plus side, survivors’ sales swelled by over $500,000 in the recovery phase of the cycle.

Scenario 3 could result in accelerated growth.

On an annual percentage change basis, total sales of the average surviving printer (since many printers did not survive the recession) dropped by almost 10 percent in 2009 before stabilizing in 2010. Since the end of the recession, the average printer has experienced a single-digit positive sales increase each year.

As previously pointed out, there are six key reasons why print and printers have largely been healthy since the end of the recession:

Print has hit its sweet spot in the mature recovery phase of the economy.
Most of the severe displacement of print by digital media now is behind us.
Labels, wrappers and packaging print serves as an anchor on print sales as it generally tracks very closely with the overall economy.
Recenly, print marketing and promotion, particularly direct mail, has demonstrated its effectiveness as a premium marketing and promotional media.
Even the print sector most impacted by digital media – informational and editorial print (books, newspapers and magazines) – has been doing relatively well lately.
Printers themselves have adjusted their business models to take account of new industry trends and realities.

Although prints growth pace remains below online medi, it still attracts significantly more revenue than online media in traditional media: newspapers, magazines and books.

As of mid-year, print is growing and is in the middle-range of industries that are growing, according to the latest data from the Institute for Supply Management. The ISM Manufacturing Survey Report, covering 22 manufacturing sectors for July, shows the printing industry ranked number seven of 14 sectors reporting growth. Print also ranked number seven of 14 sectors reporting growth in production. Print’s rank was slightly higher for employment growth; it was ranked number five out of 11 sectors reporting growth.

So, how will the three 2018 economic scenarios impact print? In PIA’s view:

In the optimistic scenario, overall print shipments increase by two-plus percent next year. In terms of industry profitability, the average printer’s profit rate would likely increase by about 0.5 percent over trend to around 3.5 percent of sales.
The recession scenario would reduce total print and print-related shipments by around two to four percent next year. The typical printer’s profits would dip significantly until the recovery is underway.
The middle, most likely, scenario would result in stable or slightly growing overall print sales in 2018. In this scenario, printers’ profits remain relatively stable at three percent of sales.

Profits will trend by significantly different paths depending on the printers’economic scenarios:

In the acerbation scenario, profits would jump significantly to historic highs of 3.4 percent of sales in 2018 and 3.5 percent of sales in 2019.
If the economy falls into a recession in 2018, printers’ profits would be wiped out and turned into losses for both 2018 and 2019.
In the trend scenario, profits would remain at three percent of sales for both 2018 and 2019.

Hurricanes Storm in with Lasting Impact

December 18, 2017

by Chris Kuehl, managing director, Armada Corporate Intelligence

It’s an ill wind that blows nobody good. This Scottish saying was not directed at the impact of a hurricane, but the sentiment is one that can be universally shared. This year has been a roller coaster due to the storms and other natural disasters that have befallen the US.

On the one hand the toll has been very high both in terms of lives lost and the economic damage. The totals still are being tallied, and already the numbers are in the hundreds of billions. But, even as the assessments are being made, there is the silver lining (at least from the perspective of the economist). What has been destroyed now has to be rebuilt. This process also will cost hundreds of billions, but this will be money spent to bring the infrastructure back and to make people and businesses whole.

There have been several unique aspects of these storms and disasters. Hurricane Harvey took aim at the part of Texas that hosts almost 50 percent of the country’s total refinery capacity. This concentration of capacity is even more profound when one understands the variety of refined product produced in the US. The storm affected the production of vehicle fuel, to be sure, but the most profound impact was in the production of ethylene, as well as other petrochemicals critical to the plastics industry. Initial estimates held that these production facilities would be out of commission for many months and, in some cases, that estimate is proving accurate. The damage caused by the storm itself was significant, but the flooding that followed did the real damage.

At the time of the disaster, the price of basic plastic material shot up to levels not seen in years. These price hikes affected many of the basics, such as polyethylene and PVC. The price hikes were expected to last into November, and that has been the case for many categories. The shortages reverberated through the entire supply chain and will continue to be an issue into the coming year. It is that cascade of reactions that will cause the greatest concern. The entity that can’t source the commodity will miss opportunities to fill that order – and then that customer misses opportunities and so on.

Some attempt has been made to source elsewhere, but the US has played a dominant role in this sector for a long time, and switching to some other supply network is far easier said than done. The majority of the world simply has to wait for the US to get back to its former production levels.

The good news in all this stems from the fact the recovery will bring new technology to the damaged areas. As recovery and rebuilding get underway, the operations will avail themselves of the newest and most technologically advanced equipment. The good news is that Houston is a wealthy city in a wealthy country, and the affected businesses have the wherewithal to rebuild. In contrast, there has been Puerto Rico – a part of the US that is not wealthy. The reconstruction process there has been extremely slow, and even the basic recovery of power is still months away.

The impact on fuel has been more limited, and the price per gallon for gasoline and diesel remained somewhat more reasonable. The recovery has been swift enough, although there are still transportation issues stemming from the fact the colonial pipeline is old and under capacity – limiting what can be sent from the middle of the country to the Eastern states.

Will there be lessons learned from these disasters? There should be, but it is likely there will be far more talk than action. The hurricanes were very different and hit in very different ways. It would have been hard to anticipate the path or the damage. Hurricane Harvey was a flood event, and no scenario anticipated the amount of rain that fell in the Houston area. The preparations that had been made would have been enough to handle a normal situation. The path of Hurricane Irma went toward an area that had not been hit for almost 30 years. The path of Hurricane Maria was a direct hit on Puerto Rico, and that had never happened previously. Certainly, plans must be in place to better protect and prepare, but there are limits to what can be done and what people are willing to pay.

The other aspect of preparation concerns the supply chain, and there is abundant evidence that companies are setting up contingency plans to cope with future issues of this magnitude. These range from creating a more diverse supplier base to storing more material than might have been the case before. The limiting factor is expense. It sounds good to have multiple suppliers, but this means giving up some of the volume discounts. It sounds good to have more product in reserve, but that means inventory costs and running the risk of missing out on price declines. The notion of “just-in-time” was a reaction to the costs of storage and warehousing. What seems like a great idea in the wake of a severe disruption looks like an unnecessary expense after years and years of no incidents.

The best estimate is that rebuilding will be largely complete by early next year, and it is likely that very little will change as far as the current system is concerned. This will apply to the petrochemical sector, as well as the other sectors that have been affected. The fuel situation is unlikely to alter, and there will be no change as far as shipping is concerned. Once the infrastructure for an industry this large has been established, it is very hard to change it. The options that look good now will not look as lucrative once the damaged infrastructure is developed.

The storms had a profound impact on the economy as a whole, but this is another case of good news following bad. The initial damage to the employment market was severe – Texas alone lost 133,000 jobs, and the national totals dipped for a month – down by 33,000 jobs. The majority of these have already been recovered, and a surge in new jobs will be seen as people arrive to engage in the reconstruction.

By the end of the year, job creation will be back up. The third quarter GDP numbers shook off the storms for the most part and finished above 3.0 percent. It had been expected to crest at around 3.6 percent, but the dip from storm impact was far less than had been thought.

Several industries got a major boost from the aftermath of the storm. The most aggressive was the automotive sector, as there was an immediate demand for some four million cars to replace those lost to the storm. This was an urgent situation, as there was no real alternative to the private vehicle in these communities. That surge was good for some solid, but temporary, numbers in car sales.

A major boost has been seen in demand for building materials, appliances, furniture and all the other accoutrements of modern life, and now there will be hiked demand for infrastructure supplies – everything from steel to aluminum and lumber. Much remains to be done to return these areas to some sense of normal.

Chris Kuehl is managing director of Armada Corporate Intelligence. Founded by Keith Prather and Chris Kuehl in January 2001, Armada focuses on the market forces bearing down on organizations. For more information, visit www.armada-intel.com.

How is the Economy Doing? It Depends on Which One

September 8, 2017

by Chris Kuehl, managing director, Armada Corporate Intelligence

The most common query received by an economist is “how is the economy doing?” This generally sends me into a flurry of qualifiers and a certain amount of dissembling. There really is no adequate answer to such a question as there will always be parts of the country that are booming and others that are wallowing in recession. There are industries that are thriving and those that are in a decline, which may not have much to do with the economic conditions of the moment. Lately, an even bigger divergence has been seen, as far as the economy is concerned, and it is not all that easy to explain. The optimists are either deluding themselves and seeing things that may not exist, or the pessimists are overreacting and expecting disaster when there is little evidence of it.

As is often the case, reality may lie somewhere between the two. For the last nine years, the US economy has been more or less in recovery mode, with steady and unfortunately anemic growth. Normal conditions these days seem to be a growth rate of between 1.5 percent and 2.5 percent – it has been rare to be either under or over that rate. The puzzling part of the economic assessment is that there is evidence that would seem to point to a much more robust economy, as well as evidence that points to one that is starting to slow down considerably.

One factor that is consistently overlooked is the impact of government stimulus. In almost every other recession or downturn, the response from government has been similar. This response includes both big spending hikes and tax cuts, as the aim is to bolster the economy with a nice little shot in the arm. This time, there was one rather anemic and ultimately misguided attempt – an $800 billion spending effort in 2009. It was thought that states would spend that largesse quickly – remember those “shovel-ready” projects? The states didn’t do their parts at all and instead used the federal money to avoid making big budget cuts – and that allowed them to delay their response by a year. The cash was not stimulative and the economy has been trying to get itself in gear with the low interest rates and other policies of the Fed – an institution that is not designed to be the sole support for stimulation.

The markets have been on a tear for well over a year, hitting new records every week. The investment analysts keep staring at this like one looks at a balloon that is getting way too much helium. They just know this is going to burst, but it has been on the edge of that correction for months and just keeps on rising. Nobody wants to get off this ride too soon as leaving money on the table is as bad as losing it by staying in too long.

There are many reasons suggested for this enthusiasm. For instance, a record level of foreign investment is occurring as the markets in Europe and Asia have been so weak that these investors have been seeking better opportunities in the US. There is the usual frenzy that accompanies a growing market, and thus far the collapse is only an existential threat. Then there is the fact that many of the decisions being taken by the Fed and others are feeding the enthusiasm – namely, the Fed sees no reason to truly clamp down on the access to easy money provided by low interest rates. If one simply looks at the markets, the assumption would be that breakout growth is just around the corner.

The overall economic data of late is not telling such an optimistic story. We see that retail sales have been down for the last two months, and it is evident that consumers are returning to their cautious ways. This is partially motivated by the fact that wage growth has not taken place, despite the lower levels of unemployment. There also are growing concerns as far as economic policy change is concerned as consumers are no longer expecting any of the reforms suggested at the start of the year to take place. The gridlock in Congress is worse than ever, and confidence levels have remained low – 44 percent express no confidence in the legislature. This is as confident as people have been in five years – in 2016, it was at 52 percent. Confidence in the presidency has fallen to levels not seen since 2008, as 42 percent of those polled indicate very little confidence as opposed to readings in the 30s through most of the last decade. When half the consumers are less than confident, that is not good news as far as renewed vigor in the economy.

The job numbers have been decent but without the corresponding boost in wages. The indices, as far as manufacturing are concerned, have been strong but not quite as strong as they had been earlier in the year. Exports are doing better as the dollar has weakened somewhat and the economies of Europe and China have been improving. Inflation has been very tame, and that has been a little puzzling given the low rate of joblessness. The lack of overall wage hikes has been a factor and so has the low price of commodities such as oil and industrial metals. All of this adds up to a disconnect with growth twinned with decline. The question now is whether the stock market can pull the rest of the economy or if the economy as a whole starts to weigh on the investors.

The US economy will be depending on three developments as far as further growth is concerned, and only one of these is really under the control of the US. The US remains an export-oriented country – one whose GDP is 14 percent dependent on exports. If the rest of the world is not in recovery, the US will not be able to gain much traction. The second factor is inflation. The US could use just a bit more as this would allow some hike in producer prices and, therefore, wages. That has not happened thus far, and that is due to the consistent decline in the price of many industrial commodities, such as oil and metals.

The last motivator is more a matter of mood. The US is driven by consumers – they account for some 70 percent of the GDP and almost 80 percent of jobs. The consumer was in a great mood at the start of the year, but that has faded as people are less and less convinced that the big changes will be taking place. If there is a shot in the arm for the consumer, the economy would respond but at this point it is hard to determine what that would be.

Chris Kuehl is managing director of Armada Corporate Intelligence. Founded by Keith Prather and Chris Kuehl in January 2001, Armada began as a competitive intelligence firm, grounded in the discipline of gathering, analyzing and disseminating intelligence. Today, Armada executives function as trusted strategic advisors to business executives, merging fundamental roots in corporate intelligence gathering, economic forecasting and strategy development. Armada focuses on the market forces bearing down on organizations. For more information, visit www.armada-intel.com.

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Economy

By Chris Kuehl, managing director Armada Corporate Intelligence

Factor 1: Trade and tariffs

Factor 2: Recession potential

Factor 3: Workforce

Factor 4: Politics

by Chris Kuehl, managing director Armada Corporate Intelligence

Health care

Education

Minimum wage

Equal pay

by Chris Kuehl, managing director Armada Corporate Intelligence

by Robert Fry, chief economist Robert Fry Economics LLC

That’s a lot of cars

More serious slowdown ahead?

Declines abroad reflected here

Brexit and tariffs and oil. Oh, my!

Fewer interest-rate hikes likely

by Chris Kuehl, managing director, Armada Corporate Intelligence

by Chris Kuehl, managing director, Armada Corporate Intelligence

The impact of a steel tariff on the US domestic economy

by Chris Kuehl, managing director, Armada Corporate Intelligence

The good

The bad

The ugly

by Dr. Ronnie H. Davis, senior vice president and chief economist, Printing Industries of America

A look at the economy

Breakdown: a 2018 recession

Breakout: accelerated growth

Continued slow but steady growth

Print markets in 2018

by Chris Kuehl, managing director, Armada Corporate Intelligence

by Chris Kuehl, managing director, Armada Corporate Intelligence

By Chris Kuehl, managing director
Armada Corporate Intelligence

by Chris Kuehl, managing director
Armada Corporate Intelligence

by Chris Kuehl, managing director
Armada Corporate Intelligence

by Robert Fry, chief economist
Robert Fry Economics LLC