Brief Notes on the US Economy
• Big Recovery in Job Market – The expected gain in the job market was somewhere around 400,000 but the actual number was far higher and something of a shock. The gain was 531,000 and the rate of unemployment fell to 4.6%. The news has already surged through the markets as there had been worry about the recovery last month when the job gains were so low. Three areas of the labor force made dramatic gains. Hiring for leisure and hospitality soared (at last). This was the surge many had expected to see in September when the unemployment benefits expired but seems to have been delayed. The fact is that service sector employers were still hesitant regarding demand but now they are engaged. The second observation is that sectors most affected by pandemic worries are growing again and hiring. Finally, there is the fact that some of those that had retired are being lured back in with flexible schedules and other concessions.
• Imminent Decisions on the Fed – There has been a lot of speculation regarding the fate of Jerome Powell as the progressive wing of the Democratic Party wants him gone. Biden just had a meeting with Powell as well as Lael Brainard. She is a current member of the Board of Governors and seems to be favored by the progressives to some extent. There is more than just this decision to be made and the White House seems eager to hit all of them at once. There is still a vacancy at the Board level to fill. The Vice Chair (Richard Clarida) reaches the end of his term in January and the Vice Chair for regulatory issues (Randy Quarles) has already come to the end of his term. If Brainard is not made Chair in Powell’s place she will very likely be asked to fill one of those two Vice Chair positions. The Fed is facing some critical adjustments as the threat of inflation is now much more present than even a couple of months ago and the Fed could be looking at higher interest rates as soon as mid-2022.
• Vaccine Mandate Enforcement – Businesses with over 100 employees have two months to enforce the vaccine mandate that has been imposed by the government. These fines for non-compliance could add up to $130,000 per violation ($13,000 for “minor” violations). The business community has strenuously objected to the mandate as long as there is no protection for the company should employees choose to sue. The anti-vax community is gearing up for these suits and these threaten companies with millions in damages. The reality is that companies will have to weigh which option is the most expensive – paying the fines or getting sued. In the end this all affects the competitiveness of these companies as they will have to pass these costs on to the consumer one way or the other.
Brief Notes on the Global Economy
• Placing Blame in Colombia – The President of Colombia is calling out the rampant hypocrisy of those who engage in recreational drug use while preaching concern for the environment. It requires the destruction of two hectares of Amazon forest to clear space for one hectare of coca production. The demand for cocaine in the US and Europe fuels the deforestation of the Amazon directly. Those that preach so passionately for the preservation of the jungle need to look closely at the behavior of their cohorts and ask which is more important – saving the jungle that has been described as the “lungs of the planet” or getting high. Then there is the issue of the drug gangs and their murderous ways. Last year alone there were over 40,000 people killed by drug gang violence. Seems a very high price to pay for snorting white powder up one’s nose.
• Virus Surge in Europe – The numbers have been improving as far as the pandemic is concerned but that progress may be short lived. Europe is getting hit with a surge similar to what they went through earlier this year. The cause is not hard to determine. Colder weather has forced more people inside, there are still millions that refuse to get vaccinated and the ones that vaccinated earlier are starting to see the effectiveness wear off if they have not received a booster.
Long Lasting Crisis Number One – Supply Chain
The supply chain collapsed in 2020-2021 – that much is obvious to anyone who has waited months and months for the delivery of some item, part or assembly. The reasons for the collapse have been less obvious. The current narrative has been that all of this can be attributed to the pandemic and its impact on ports in Asia as well as in the US. The inference is that everything will tilt back to normal in the coming year as the virus threat fades. The reality is that these supply chain strains have been manifesting for years and only accelerated during the pandemic. The supply chain crisis is not temporary and will be with us for years. This has been forcing companies to develop long term strategies and solutions that will alter many current patterns.
Analysis: The threats to business from the supply chain include constant congestion at various points in the transportation system. It is not just at the ports. The levels of highway congestion affect local delivery times, shortages of warehouse space force deliveries to more distant locales, air cargo has been affected by reduced routes. The ports have been unable to expand as they have been locked in by development and so on. There are also consistent shortages of key workers. There are not enough truck drivers – estimates indicate a deficit of over 100,000 drivers due to retirement and expanded need. There are not enough longshoremen or warehouse workers or pilots for cargo planes or railroad workers – the list goes on and on. Then there is the role of inflation as commodity prices have kept rising throughout the crisis. The producers are behind in their efforts to meet demand. You get the idea. There is no single culprit as far as the supply chain crisis is concerned and the majority of the efforts thus far have been band-aids. Forcing ports to function 24/7 did not address labor shortages or backlogs – all it did was pull freight off some ships so it could stack up on the dock. Now there are plans to allow the stacks to go higher despite the fact this will cause more damage to containers.
The solutions will have to go far beyond these emergency measures. At this stage there are three strategies emerging. The first is a short-term reaction and involves buying as much as one can get hold of. This is either hoarding or stockpiling according to how polite one wants to be about describing it. There are dangers in this approach as the demand may not support all this extra buying. The second and more permanent strategy has been to shift suppliers away from areas that have been hit by the supply chain breakdown. Companies are leaving China is search of other partners but there is nothing to suggest that these new arrangements will be any more stable over time. That leaves the third and most involved strategy. The number of companies considering reshoring has increased dramatically. The estimate is that $1 trillion will be spent on reshoring and onshoring in 2022 and some have asserted this number could be as high as $3 trillion. The decision to reshore also means a strategic shift away from the idea of outsourcing in general. Companies have been instructed to stick to their core competence and outsource everything else but that carries risks. Control over both upstream and downstream activity is lost when there is outsourcing and now companies are seeking to regain that control by doing their own production of ancillary parts again.
Long Lasting Crisis Number Two – Labor
This is another of those issues that has suffered from incomplete analysis. The narrative has been all about the employment crisis in 2020 and the assertion that millions of people just don’t seem to want to work. The fact is the evidence does not support that assumption. The issue is really pretty simple and is rooted in demographics. The warning signs have been about as obvious and inevitable as time itself. The Baby Boomers were born between 1946 and 1964. The first of the Boomer retirements started in 2011 and the tail end of the generation will hit 65 in 2029. There have been around 10,000 Boomers hitting retirement every day for years and that has added up. Those Boomers that had been putting off retiring reconsidered during the pandemic and this has left a major gap in the workforce that will not be addressed for many years.
Analysis: There are only a few ways to address a reduced labor force. The current approach has been to find ways to keep that older worker engaged but there are obvious limits to how long this strategy can be deployed. There can be an attempt to get more people to have families but this is no instant solution unless we also plan to radically alter child labor laws. That leaves immigration as the only option and it has traditionally been the approach the US has engaged in. The challenge now is that the US needs skilled, experienced and educated arrivals and these are the same people that every country wants to attract. The US is no longer the chosen location for the people with the skills needed.
This puts even more emphasis on improving the productivity of our existing workforce. The fact is that training has always been very haphazard in the US. The education system pays very little attention to what the business community wants or needs. The emphasis has always been on educating the “well rounded citizen” and choice has been left to the students themselves. There are far too many getting educations that do not translate well to long term employment. The business community is not capable of doing all the training itself as most businesses are small to medium sized. They need a pipeline of people with some knowledge of the job they have been hired to do. The business response has been to substitute robotics and automation for people whenever possible.
The labor shortage is destined to get worse and worse as the rest of the Boomers step aside. There are not enough people arriving from other nations and training is always a slow process. The result is chronic labor issues and that translates into wage inflation as the needed workers will have more leverage than ever.
Trade Deficit Worsens Dramatically
There is always a great deal of hand wringing when the trade deficit numbers are released. There is something about the word “deficit” that connotates something undesirable. Surely a deficit in trade has to be bad. In truth there is nothing inherently bad or good about the amount of goods and services bought and sold around the world. Business in the US makes money by exporting to other nations but just as many businesses make money by importing from other nations and in the great scheme of things the exporter can’t sell to other nations if those nations aren’t making money selling to the US. It is a cycle. Countries trade with one another for two basic reasons. The first is that they need a product or service that is not available in their own nation. The US buys the vast majority of its bananas because there are few places in the US that can produce them (Iowa is not banana country). The other and more common reason to engage in trade is that business communities in different nations have different levels of expertise and in general one wants the businesses to engage in what they are best at. The US is fully capable of producing t-shirts and socks but why? Those workers could be employed producing higher value goods.
Analysis: The latest trade data shows that imports are up far more than exports (although both have risen). The reason is simple enough – US consumers have been on a tear as they spend their accumulated savings and have been resuming their previous consumption patterns. The deficit rose by 11.2%. The increase in the deficit was the widest since the pandemic scorched year. The 288.5 billion was a new monthly record. The travails in the global supply chain have also contributed to the deficit.
The three drivers as far as the expansion of the trade deficit include consumer demand, reaction to the supply chain crisis and the desire on the part of other nations to sell their way out of their own slump. The consumer has been aggressive all through the year as they shake off the restrictions of the pandemic. They have also had more money to work with as they have all that stimulus cash. The world is still sitting on some $5 trillion in excess savings and it burns a whole in the pocket of the average consumer. There is also the reaction to inflation to consider. If people expect prices to rise, they will be likely to buy ahead to beat that increase and that ends up boosting the impact of inflation. The concerns regarding the supply chain also drive that desire to buy ahead and perhaps more than is actually needed (does anyone really need 12,000 rolls of toilet paper?). The insecurity of the supply chain has caused many businesses to engage in hoarding of their own and that prompts a higher level of import activity. Finally, there is the fact that other nations are desperately digging themselves out of their own slumps by selling to the US. There are thousands of export promotion efforts around the world and all of them are aimed at the world’s most consistent consumer.
Is this deficit bad? Not really. It simply means that consumers are getting access to products and services at a good price and that allows them to pursue their lifestyle of choice. The company that competes with the imports is not as happy as they are losing market share and there is where the balancing act begins. What should government policy protect? The vast number of consumers or the businesses that struggle to compete with the imports?
At the time of this writing the jobs report was not yet released. The expectation was that some 450,000 to 500,000 jobs were created in the last month which is far better than the number created last month. This would still remain short of the boom that was seen earlier in the year but still signals that jobs are on offer. This is not much of a surprise given the plethora of help wanted signs seen in every establishment. As discussed in the piece above the real issue in the labor market is the number of people who leave the workforce every day.
Analysis: In the days to come the jobs data will be assessed carefully to determine what is happening with some key parts of the labor market. One question is how many women have been able to return to the labor force. It has been suggested that as many as 7 million women have not been able to get jobs as they still do not know what will be available as far a childcare is concerned. The schools are open again but kids are getting sent home when there is a quarantine imposed. The childcare facilities were never plentiful enough and they are even rarer now and far more expensive. This has locked many mothers out of the system. Another group that has struggled to resume old employment patterns have been those that came from the service sector as these jobs have not resumed their former levels due to lingering restrictions imposed by the pandemic.
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 reality is that there have been a large number of jobs resuming since the pandemic collapse. The most significant acceleration was in the months after the lockdowns but the data continues to show recovery.
What We Are Watching – From the Black Owl Report
Russia COVID Deaths Accelerate. Russia is being hit hard by COVID. There were more than 39,000 new confirmed infections and nearly1,200 new deaths in just the last 24 hours. The country is under their fourth day of mandatory “nonwork period” in which people are
being asked to just stay home and relax. Russia’s vaccination rate is just 35% because of worries about the Russian vaccine. Russia was one of the first to have a home-grown vaccine option for citizens, and some believe that it might not have gone through the same rigor as other pharmaceutical companies may have followed. That aside, cases are rising and deaths are following based on this latest data.
Fix for “Long-COVID”? Doctors at Mount Sinai have found some linkages between patients with Long COVID and lack of CO2 in their bodies. It is almost as if they are hyperventilating. This makes you feel dizzy, weak, and your muscles can feel heavy. It can lead to the brain fog that many discuss as a side-effect and lethargy. The good news is that Mount Sinai is now treating patients with “therapy” that includes simple breathing exercises and some cognitive therapy to get them to think differently about their condition. For those of you familiar with anxiety, it can present itself much like anxiety symptoms (shallow and rapid breathing, dizziness, headaches, etc.). Again, there is hope. About 11.1 million people have been diagnosed in the US with “Long COVID”, and that figure could be very low based on some estimates.
Go to www.armada-intel.com/trial for more.
More Observations from the Front
The road warrior routine has taken some getting used to – turns out I have been spoiled by all that time at home with my lovely bride and the feline crew. I really have missed the opportunity to interact with actual people as every speaker likes an audience of more than black squares with names. More to the point, there is a lot of opportunity to gather information to flesh out the charts and graphs and this week has been no exception as I have been meeting with bankers – one group from Kansas and the other from Illinois. Three issues stood out for both groups.
The first is that banks have started to leave the horrors of 2008 behind. That was the recession that painted banks as the culprit and ushered in reams of regulation and punishment for transgressions. The fact that the crisis was really attributable to a handful of big banks and not the vast majority of small and community banks seems to have escaped the media and the politicians. This time the banks have been the heroes as they were saddled with the heavy lifting of stimulus. The second observation stems from this switch as banks are now reporting their business customers have become more reliant on the banks and are better at accepting help and advice. The third observation is that banks are among those that have struggled the most with remote access. This is a relationship business at all levels and that has been hard to maintain in a zoom call.