Brief Notes on the US Economy
• $4.5 Trillion Spending Effort Gets Closer – The plan to spend $3.5 trillion on “human infrastructure” and $1 trillion on more traditional infrastructure moved closer to reality but it is far from a done deal as there will have to be 100% support from every Democrat to get through the Senate. There is no GOP support at all for this plan. The last-minute compromise with ten House moderates allows the infrastructure plan to be voted on by September – even as the larger budget conversation is taking place. The Biden position had been that both would be addressed together as it was thought it would be easier to secure support. The position of the centrists has been strengthened by this process as neither of these efforts will be successful if there are defections. This is likely to weaken some of the more liberal positions that have been staked out as far as the “human infrastructure” effort is concerned.
• Brace For High Food Prices – The summer of 2021 has been anything but kind to the farmer. The heat waves that continue to dominate almost two thirds of the country have devastated millions of acres of important cash crops such as corn, wheat and soybeans. Most of the key farm regions have been slammed by extreme drought that has all but ruined the entire harvest for the year. This comes on top of the 2020 collapse in food prices due to the pandemic impact. The farm sector now faces the threat of two straight years of disaster and survival is in question for many of these farmers. The inflation threat for the consumer is made worse by the fact that many other parts of the world have been facing the same issues and that has reduced reserves to the lowest levels in over thirty years. The expectation is that inflation will be up by between 10% and 15% on key crops such as wheat and corn and these prices cascade through the food chain.
• No Tapering Expected This Week – The world’s central bankers are meeting at their annual Jackson Hole retreat and Jerome Powell will be giving a much-anticipated speech on Friday. There have been hints for several weeks that the Fed would start to scale back the stimulus efforts that have been undertaken in the last few years. There is no chance that interest rates will rise but there are steps that can be taken before that move is considered – namely a reduction in the Fed’s bond buying effort. This “taper” would mean the Fed would limit both its purchase of treasury bonds and its purchase of mortgage-backed securities. With renewed concern regarding the pandemic and its impact on the economy, the sense is that Powell will not make an announcement regarding the pace of purchasing at this meeting but will probably outline what the Fed will be watching.
Brief Notes on the Global Economy
• Labor Shortage in China – It would seem unlikely that a nation of 1.4 billion people would find itself short of workers but that is the situation China faces. There are not enough people willing to work in the factories that have underpinned the export sector. Most of the educated young people want nothing to do with these factory jobs and there has been a sharp drop in the levels of internal migration due to the pandemic fears and the restrictive protocols that have been put in place. There are longer term issues as well. The Chinese population is aging and fast. There are over 167 million people over the age of 65 (roughly 12% of the population). China still has a younger population than Japan (28% over 65) or the US (16% over 65) but India is much younger (6% over 65).
• Japan and Taiwan Team Up on China – Japan has long been concerned about the Chinese and their threats directed at Taiwan but the government has resisted formal objections or commitments to Taiwan. That may be about to change as the two nations have started talks regarding security. The Japanese are now warning China that Taiwan’s security is inextricably linked with Japan’s and that suggests that Japan would be willing to engage diplomatically and economically – if not militarily. A series of economic sanctions directed at China would damage that economy.
Weakening Manufacturing Reports
At the end of each month there are some important manufacturing releases coming from several of the regional Fed districts. These are based on surveys and other data collection tools and are designed to get a sense of the sector in these districts. They have been coming in quick succession and the expectation that they would be less than stellar has indeed played out – not a full-blown slide into recession territory but a definite slowdown is in evidence. The first of these was the Mid-Atlantic report and it showed weakness as it dipped to a reading of 19.4 after one of 21.9 in July. This is the lowest level seen since December of this year and was far lower than expectations. The report from the Richmond Fed verged on the disastrous with a reading of 9 compared to July’s 27. The expectation was a mark of 25. In the days to come there will be reports from the Kansas City Fed (August 26) and Dallas Fed (August 30) and better news is not expected.
There are no mysteries as far as these readings are concerned as there has been only one significant change since July that would have an impact this dramatic. These declines are related to the pandemic. The pace of vaccination has stalled with only about half the population gaining protection. The hospitals are filling up again and the vast majority of these patients are unvaccinated. There is growing concern regarding the efficacy of the vaccine when half the population shuns it, giving the virus ample opportunity to spread. Thus far there have been few calls for another shutdown on the order of what took place in 2020 but the protocols are back and that has affected consumer mood. The driver for the economic recovery that took place over the last several months was the return of consumer spending – especially in the service sector. The prior assumption was that consumers would spend heavily during the holiday season, travel more and resume their prior activities but now that assumption is in question. The forecasts for the last half of the year are being revised by the day and they have been reduced. At one point it was thought that annual growth would be as high as 6.0% or even 7.0% but now there are assertions of 3.0% and even lower.
Analysis: Throughout the last year the manufacturing sector has been somewhat healthier than the service sector as consumers shifted their spending to buying goods. As has been pointed out repeatedly the US consumer is a service oriented spender – some 65% of disposable income is devoted to activities such as going out to eat, travel, entertainment and the like. Those that are in the upper 20% of income earners spend as much as 85% of their disposable income on these services. When much of that sector was denied to the consumer, they substituted buying things for services and there was an explosion of demand for everything from vehicles to electronics, furniture, sporting goods and so on. This boosted the demand for factory goods as well as durable goods and imports (the trade deficit worsened over the last year even as exports went up). Unfortunately, not all manufacturers are aimed at the consumer – at least not directly.
Aerospace manufacturing slumped as travel was affected. There were declines in demand for food service equipment and the gear used in the hospitality and entertainment sectors. The biggest challenge facing manufacturers was the breakdown in the supply chain and that problem has worsened as the pandemic has surged. Ports all over Asia (especially in China) have been shut down for weeks. Even air cargo has been affected as major airports have been closed due to the infection. We have all become aware of the issue of chip shortage but thousands of items are unavailable and few even know when they might reach their destination. The demand for manufactured goods is there but the ability to satisfy that demand is not. This leaves the consumer in a very awkward position. They would be spending more on goods but much of what they seek is not available. They would be willing to switch back to service spending but now they are facing those pandemic protocols and partial shutdowns. To top this all off the ability of governments to blunt the impact of this latest downturn is very limited. There is no money available to resume sending checks to people again and no support for extending unemployment benefits. There is likewise no support for bailing the business community out as this time the issue is not closure by edict but consumer reluctance that forces businesses to reduce operations or shut down altogether.
There has long been a tradition of hopefulness in the US but there are signs that this has eroded considerably in the last year. To be honest there has yet to be a real study of this and much of the “evidence” is anecdotal but there has been a palpable change in the attitude of the Gen-Z population – especially the educated. The last few years have heaped one breakdown on top of another and the prospects for this generation seem to have dimmed. The most obvious collapse has been due to the pandemic as the country has floundered for over a year – unable to make significant progress. But there have been other issues ranging from Afghanistan to climate change to social cohesion.
Analysis: The most common response from those that have lost confidence in the system is to become radicalized and it has been apparent that many have turned sharply to the left and the right. The populist reaction is far more oriented to criticism of the existing order than suggesting alternative courses of action. The room for cooperation on an issue rapidly diminishes as confrontation becomes the goal. The fact is that many of the current issues defy any sort of easy solution, whether it is turning the viral tide or impacting climate change. To deal with these issues requires a willingness to work with those that have differing opinions and priorities but there is very little to suggest that this level of cooperation is possible right now.
To be honest we all long for the day when we can go a day without some reference to the pandemic or the vaccine but that day still looks pretty distant. In the last few weeks, we have once again learned that we do not know nearly enough about COVID 19 and once again there is a considerable level of backtracking and reassessment. This process should really not be all that surprising given the fact we were not prepared for this virus and still do not have the information we need from China. Somewhere along the way it seems that the world has given up holding China accountable for this pandemic but the fact is their obfuscation and secrecy makes it all the more difficult to anticipate the progress of the pandemic. The woeful ignorance on the part of the public has been a major inhibition as well. The economic data of late shows clearly that the resumption of the threat is creating another downturn. Whether this becomes as bad as 2020 remains to be seen but the hope for a 2021 return to “normal” is in jeopardy.
Analysis: In very general terms there appears to be three things we “know”. The first and perhaps the most important and obvious is that the virus behaves like every other virus that has ever existed. It changes and adapts. Every effort to attack a virus of any kind faces the fact the virus is 100% dedicated to survival and will endlessly change to thwart attempts to eradicate or even control it. The very best that can ever be expected is a modicum of control and the minimization of the impact. This means finding ways to make people less susceptible (vaccines), limiting opportunities for the spread (masks and distancing etc.), finding effective treatments to ensure that most people survive. The Delta variant is the current worry but there will be others. There is already discussion of the Lambda variant.
This leads to the next thing we “know”. What works today will not necessarily work tomorrow. The vaccine has been very effective but it was never touted as the ultimate cure-all. There were always people for whom it would not work and now we know there are “breakthrough” infections to deal with. The point of a vaccine is both to offer protection and to limit the ability of the virus to spread. The vaccine process has been very effective as far as protection is concerned as the vast majority of those that have gotten the jab have remained healthy. The process has been a complete failure in terms of limiting the spread as 50% of the population has refused to get vaccinated. That means the virus has over 150 million opportunities to infect and morph and change. If every other person is a potential host there is little hope of containment.
The third thing we “know” is that failure to deal with this threat will create massive social, political and economic damage. We have seen it already. The economic collapse of 2020 destroyed hundreds of thousands of businesses in the US alone, cost upwards of 40 million jobs and forced the government to run its debt up by over $7 trillion. Another economic collapse in 2021 or 2022 will do as much or more damage. The political divisions have become as bitter and angry as any seen in decades and major social changes are underway.
In the end there are only two responses available. We can either unite in an effort to eliminate this threat by doing the “right” thing for ourselves and others or we can wait and watch the government demand these reactions. We can either decide to wear a mask and get vaccinated (or self-isolate) as responsible people or we can watch mandates imposed that will require our compliance at the risk of punishment or restriction. It would seem the former course of action would be much preferred.
Setback for Mexican Oil Production
The fire on one of Mexico’s larger offshore oil platforms has killed five people and reduced oil output by over a quarter of normal capacity. The fire lasted for nearly two hours and all 125 wells that fed into that platform have been shut down. This is just the latest and most serious of the problems that have beset the oil sector in Mexico in the last few years. There have been consistent complaints from the workforce and even the executives at Pemex that assert the government has been neglecting upkeep and has been refusing to allow foreign investors to engage in attempts to modernize the operations. Pemex has always been treated as a “cash cow” for the government and this has led to shoddy maintenance and failures to expand. Under Andres Manuel Lopez Obrador the problem has worsened as he has fought further foreign investment every step of the way.
Analysis: There has not been an immediate reaction in the oil markets but one is expected in the days ahead as there is no signal as to when normal production will resume. The price per barrel had been falling over the last week and had settled into the mid-60s for both Brent and WTI. There had been a rally in the price over the last day or so as the dollar had weakened a bit and there had been more demand manifesting in China. Both measures had seen drops of around 8.0% but these are starting to reverse and the incident in Mexico will add impetus to that shift.
Armada Strategic Intelligence System Starts to Show Some Weaker Numbers
The most recent data from the Strategic Intelligence System is showing some signs of weakness as the pandemic threat reignites around the world. This is consistent with many of the global economic assessments released lately. The projections are still showing progress but it is not as robust. Check this out for yourself, the latest issue has been released. Your two-month trial is absolutely free – no obligations at all. Simply go to www.asisintelligence.com and engage with us. We continue to tweak the report with every issue – adding the content that readers have requested.
Flash Manufacturing Reports. Several early manufacturing reports are coming in for August and the general theme is that month-over-month sequential performance is decelerating (some slight contraction MoM). But, when we compare it to levels of activity that we’ve seen over the past 5-10 years, manufacturing demand and activity is generally near the top of the historic range. You are likely getting sick of hearing it, but shortages of materials and labor along with supply chain bottlenecks are still chronic and holding back potential output. We keep looking for hints that some of that trend is turning, and there could be some of the earliest signs showing up in lumber and iron ore prices, some slight softening of copper prices (although they remain high), etc. Even petroleum prices are bouncing more on demand-side impacts, less on supply side abundance.
Go to www.armada-intel.com for more stories like this.
The level of port congestion has rarely been this intense at this time of year. There are no major ports in the world that are not jammed and few are functioning at anything near normal. The pandemic has shut some down; there have been shortages of containers and container ships as well as intense labor shortages. There are too few seafarers and too few longshoremen and the congestion extends into the rail and trucking operations that service these ports.
It is not all that clear that there was ever a “simpler time”. Even a casual student of history notes that there has been a near infinite supply of crisis situations – wars, natural disasters, economic collapse and so on. What, then, is meant by this assertion that a simpler time once existed? I happened to catch a program that was examining the creation of a TV series called “All Creatures Great and Small”. I eagerly devoured the new version and I was similarly enthralled by the first series as well as the second. I read the books. The focus of this latest examination of the show was its fealty to the books and its ability to evoke those “simpler times”.
The reality is that there was nothing simple about these lives. There are daily struggles to take care of sick animals, the challenge of running a farm in the 1930s. There is heartbreak in this series and tragedy. The point is not that people somehow live in bliss, it comes down to how people coped with all this. The show makes it clear that people are very, very different from one another and have their strongly held opinions and beliefs. They also have the ability to respect one another and they will be there for one another when needed. The things that bind them together are more important than the things that divide. Maybe it is that people needed one another more in these “simpler times” but I think we all need each other as much or more than we ever did. We just tend to forget that. The life I lead and the work I do would be impossible without the efforts of legions of people I will never meet or get the opportunity to thank. I try to show my appreciation when I get the opportunity but there are not that many. Today I just want to send out an expression of appreciation for all those workers and craftspeople who can do the many, many things that I can’t. I wouldn’t have the life I lead without them.