Brief Notes on the US Economy
• Charging for Usage – There is a dramatic difference of opinion when it comes to whether this is a good idea or not. Logic would hold that people who use something should pay for it – rather than spreading out the costs among those that do and don’t avail themselves of that product or service. In most things we pay for usage as we buy that which we want but broader service offerings are trickier. Should people who drive more pay more than those that don’t? This is the idea behind a mileage tax. Should people who drive in congested locations at peak times be required to pay for that choice? The economist will point out that costs are what control usage. If it is more expensive to drive at certain times and in certain places there will be fewer that choose to do so and congestion is reduced. If taxes are assessed on distance, it will be likely that people will try to reduce that distance. The problem is that usage burdens are far from equal. There may be alternatives for those who can access mass transportation but others will be hit far harder by distance taxes and efforts to reduce congestion.
• More Bad News on Semiconductor Shortage – The latest wrinkle in the global semiconductor system is in Malaysia where the rapid expansion of the pandemic has rippled through the economy. This is the country that plays a major role in the assembly and testing of semiconductor-based products and the virus has decimated the working population. Many operations have been shut down and the government has added restrictions that affect many others. There had been some optimism regarding production increases in key nations but the supply chain is complex and there are still numerous bottlenecks that will extend the shortage into next year.
• Banks Lowering Lending Standards – There is a great deal more competition in the banking sector as the economy has started to perk up. There is a new urgency to the bank’s activity as there is concern that these positive developments may not last all that long. The sense is that the economy might start to flag by the end of the year and there is also a sense that the end of the loose money policy is at hand. Fully 25% of banks have lowered their lending standards in the last few months as they seek to land as many loans as they can while the environment is favorable. This has applied to consumer loans as well as commercial loans but the emphasis seems to be on those business loans. There are sectors that are attracting more interest than others – construction, manufacturing and logistics at the top of the list. There has been less interest in the more vulnerable service sectors.
Brief Notes on the Global Economy
• German Election Up for Grabs – There are several alternatives in play as the election nears. The original expectation was that the Christian Democrats would hold on to their superior position but Armin Laschet has proven to be a very weak campaigner and even the CDU faithful questions supporting him. Polls suggest that many still want Markus Soder to be the candidate but it is too late for that to occur. The question is whether these voters will hold their nose and vote Laschet or opt out altogether by supporting the AfD or just abstaining. Suddenly the Social Democrats are within shouting distance of forming a government in combination with the Greens and Free Democrats. The future German government is now in the hands of these two as they have become the kingmakers.
• Chinese “Corruption” Drive Accelerates – It appears that the Chinese interpretation of corruption differs significantly from that of western states. The fact is that high level bribery and influence peddling is rife and there has been little or no effort to deal with this. Those that get “caught” are basically political enemies of the regime. The recent emphasis on corruption has been a culturally based attack on the wealthy and the celebrity. The growth of social media has been just as dramatic in China as elsewhere in the world and that has made the “influencers” a concern to Beijing. There is now a full-scale attack on these celebrities that has included criminal accusations.
Some Positive, Some Negative and Some Open to Interpretation
There is the usual collection of data pieces this week and to some degree these will provide some insights into the state of the economy. A month or so ago these would have all been pointing in a positive direction as the economy was still barreling ahead -prompted by a consumer that was returning to what was once considered normal. There was renewed interest in travel, going out to eat, attending events and shopping. Not that all of this has stopped but the pace has certainly slowed in reaction to the renewed threat of the virus and issues such as supply chain collapse and a serious lack of workers. Some of this economic angst will be on display this week but there will also be signs that growth continues in certain key sectors.
Analysis: The week will start with some of the not-so-good as the latest Purchasing Managers’ Index numbers will be released and they are expected to show decline. In July the reading was 59.2 and that was down from the 60.6 noted in June and considerably lower than the peak of 64.7 that was reached in May. This is certainly not the trend that anyone wants to see but the fact is that 59.2 is very solidly in the expansion zone (anything over 50 is expansion) and the numbers this month will likely drop some more but still stay in that growth category. The reasons for the decline are no mystery and that is both good and bad. It is obvious that supply chains remain unreliable and that has created massive backlogs. It is also obvious that a chronic labor shortage continues to vex manufacturers as well as service sector businesses. The aspect of the labor shortage that doesn’t get a lot of attention is a somewhat delicate topic. In an environment like this there are many people getting jobs who would not have been hired before. Many are ill-trained and many lack much desire to work at all. There have been consistent complaints that business has had to scrape the bottom of the employment barrel and tolerate attitudes they would not have previously. On top of this there is the virus and the impact its resurgence has had. There have not been the mass lockdowns this time (at least not yet) but there is plenty of consumer trepidation to contend with again.
Another indication of shifting economic priorities will manifest with the latest trade deficit numbers and those are released on Thursday. The expectation is that the level of imports will have fallen a little as consumers have started to shift back to the patterns of pre-pandemic life. As we have pointed out repeatedly – the US consumer used to spend the bulk of their disposable income dollars on services (65%). This spend includes everything from attending events, traveling, eating out, paying people to do tasks one doesn’t want to do and so on. Those in the upper 20% of income earners spend as much as 80% on those services. The shutdown denied the consumer the bulk of that spending opportunity and that essentially forced people to spend on things – many of which were imported from all over the world. The slowdown in the rest of the world dug into the ability to export the kinds of technically advanced manufacturing the US specializes in and thus there were major trade deficits. The data this week will likely show that the deficit has started to narrow again as people move back to paying for services. There will still be one but slightly less dramatic.
The big data release for the week will come on Friday when the latest unemployment data appears. This is anticipated to be good news as there has been solid demand for workers and there are millions of people newly available for that work as the extended unemployment benefits expire on September 6. There has been an assumption that all these millions will suddenly show up and take all those available jobs but the reality is that most of those that have been out of work lack the skills, education and experience to take the jobs on offer. There are 10.3 million jobs available but over 80% of these require specific skills and abilities. The people that lost jobs during the lockdown will soon discover that most of those jobs are gone for good as 90,000 restaurants closed and tens of thousands of service-oriented businesses are nowhere near their previous levels of hiring. Even after September there will be major labor shortages and millions of people unable to fill the need.
Jumping to Conclusions
I have remarked that the bulk of my exercise seems to come from jumping to conclusions. The truth is that this behavior is the curse of the economist due to the expectations faced. It has been remarked that economists are most skilled at predicting the past. This is true as when we get a chance to look back, we have data that can be examined and trusted. The reality is that few want assessments of the past – the demand is for forecasting and that introduces a lot of guesswork, assumptions and interpretations of incomplete data. So it is with assessments of the pandemic, vaccines and other measures.
Analysis: The latest set of arguments circulating assert that the vaccine is already wearing off and losing its ability to protect. As it turns out this is not actually true. The initial reports stemmed from the fact that vaccinated people in Israel seemed to have lost protection but further study indicated there were other factors at work. It seems the first people to vaccinate were significantly different from those who got the jab later. They were older and more affluent. They were thus both vulnerable (due to age) and they had greater levels of exposure (as they traveled and circulated more). The vaccine has never been touted as 100% effective (they never are). There will always be those whose bodies don’t react. Beyond that basic fact there is the way that vaccines actually work. They prompt the body to produce antibodies that fight the virus and that means that some people will have more to work with than others. There will be some that never get the virus, some that get a version with no symptoms at all and some that get mild versions. Then there will be those that get extremely sick and die. It all comes down to whether one can produce the antibodies needed. The real data on the vaccine suggests that it remains highly effective and for an extended period of time.
Threat of a “Taper Tantrum”
The remarks by Fed Chair Jerome Powell were about what were expected and the reaction of the markets demonstrated that the future plans are about as many anticipated – at least for now. The basic message was that the overall progress of the US economy was sufficient to allow a retreat from the aggressive stimulating that has been in place for the last few years. The fact is the Fed has a lot of options as it starts to pull back and Powell made it clear the pace will be slow. There is still no serious talk of raising interest rates before 2022 and maybe not until 2023. The focus now is on moving away from bond purchases – both T-bills and the mortgage backed securities the Fed has been buying. These purchases have been funneling money into the economy on a monthly basis through the banks the Fed uses to handle these purchases. In the last decade the Fed has run up a rather large balance sheet due to these purchases. In 2008 the balance sheet was at around $800 billion but today stands at close to $8 trillion. Most of this additional activity has taken place in just the last year. There is still not much of a clue as to what the Fed intends to do to work that level down but there is discussion regarding adding less to it.
Analysis: There are many groups that would like to see that loose money policy remain in place for years – the investors that have been able to borrow cheap money, put it in the markets, reap a quick reward, pay the loan back and do it again. The hawks in the Fed have worried for years that this is risky behavior and threatens monetary stability but it also meant there was money in abundance to pull an economy out of recession. The other group of critics includes the emerging market nations. The US and Europe may be seeing a rebound in the making but that is hardly the case for the majority of the world. The emerging market nations have not been “emerging” for years. They were in financial distress before the pandemic and have been flattened in the last year. They still need all the money and investment they can get. A tightening by the Fed and the other central banks will mean that investors will reduce their exposure to risky ventures and that would include just about anything in these less developed nations.
In 2013 there was a “taper tantrum” as the Fed pulled back on stimulus sooner than most had expected and they were certainly not the only ones. The worry at the time was that all this stimulus would trigger a serious inflation threat and that is exactly the concern expressed now. Thus far the Fed has asserted that the inflation is transitory and doesn’t require a radical response but critics point out that in the long run all inflation is transitory – it just depends on how long one’s horizon is. If the inflation pressures ease by the end of the year as expected the Fed will not feel compelled to react but what if the commodities continue to rise and wages start to accelerate and prices stay high? Does this prompt the Fed to start that anti-inflation strategy sooner than later? This would be very bad news for those nations that still need that access to cheap cash.
Once again New Orleans is getting hammered and hard. The news from the region remains spotty but the damage noted has been severe. The only good news at this stage is that there does not seem to be the flooding that came with Katrina but wind damage has been intense and there have been power outages and flood prone areas are in trouble again. The chief concern is the population of the area but there are always the big economic issues. There has already been a reaction in the oil markets as the storm forced the closure of offshore facilities. It is not clear when these will be coming back to operational status but the storm has been fast moving and has already cleared the Gulf. The Colonial pipeline idled much of its operation and 12% of the US refining capacity has been shut down. The expectation is that it will take four to six weeks to resume normal operations but this is still an estimate as there has not been time to assess the damage.
Analysis: The longer-term issues are as they have always been. New Orleans and many other coastal communities along the Gulf and the eastern seaboard are vulnerable to these storms. Every year brings episodes like this one and there are costs that linger for years. It took New Orleans almost five years to recover from Katrina and now that process begins again. There is little that can be done to avoid these natural disasters – just as there is little to done about tornados and earthquakes and other events. There is preparation to handle the aftermath and there are contingency plans that have to be put in place but the reality is that an economy has to be resilient and that requires more than government assistance. People and businesses that are in high-risk areas have to be prepared for this and many are. There was swift reaction to the impending storm by many but there were also many who have consistently ignored the threats. They are in dire straits now.
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.
The supply chain situation is not getting any better any time soon. The chart above shows the level of congestion at the west coast ports. As of yesterday, there were 44 container ships outside Long Beach/LA and that beats the record of 40 set in February. The wait time is now over a week (7.2 days as compared to 6.2 in mid-August). The months of August and September are the peak months for goods coming from Asia.
Supreme Court Backs Property Owners – The Supreme Court has struck down a provision issued by the CDC that prevents evictions on renters that are behind. Estimates suggest that there are more than 11 million people behind on rent. But a growing risk of bankruptcies among
property owners have increased the risk of them failing. The Supreme Court has ruled that moratoriums on evictions are not constitutional.
Congress has set aside $45 billion in funds to help renters that are behind on their rent – if they can meet certain stipulations. They have to apply for the funds and have to know that they exist. The Supreme Court has said in their ruling that Congress still has the ability to create
legislation that could reimpose the eviction moratorium, but there isn’t likely enough support to make that happen, especially with otherdistractions currently looming for the legislature.
Go to www.armada-intel.com/trial for more stories like this.
Yet More Observations
After nearly a year and a half of being mostly limited to what I can see from my desk at home it has been nice to get out and see more of the world. Not that the antics of the feline five have not been entertaining but there is a certain routine about them. I can’t say that everything observed these days can be classified as a delight. I am currently at a very nice resort hotel on the Florida coast and the view of the ocean has been impressive. The view of those hanging around the pool has not been quite so welcome. I have to confess to a certain amount of modesty in my old age. This body is not what it once was and really never did rock those speedos. There are those that do not fret about these things and I may never get that image out of my head.
One of the things I missed the most was the opportunity to chat with people – especially the Uber and taxi drivers. Yesterday I had a driver who was born in Iran but has lived in KC for years and it was interesting to hear his take on what had changed in my own city – good and bad. The driver in Florida was interesting – works for the airlines and has traveled a lot. His Brazilian girlfriend provides the opportunity to visit Rio a lot and that sparked a desire to introduce shaved ice to the local population. I was surprised that this Hawaiian staple had not made an appearance on the beaches there – he is likely to do pretty well with this idea. I chatted with the woman making up the rooms and she was very glad to see people again. She likes the ones coming for the conferences as they are generally much neater than the vacation crowd.