Brief Notes on the US Economy
• Benefits from Infrastructure Investment – There are many misnomers regarding the economic impact of infrastructure investment. There is still the lingering belief that this kind of spending is a major job creator. The truth is that infrastructure work demands the kind of high skilled construction worker that has been in short supply for years. It is not going to drag millions of people on to the employment rolls – at least not directly. What this spending will do is create demand for machinery and technology and that is very good news for the manufacturers in the US. The vast majority of this equipment is produced in the US and the surge in spending will have an almost immediate impact on demand. The second major advantage from infrastructure spending is the potential to ease some of those persistent supply chain bottlenecks. Apart from the recent crisis, there has long been an issue with inadequate seaports, airports, roads and other transportation sectors.
• Race to the Bottom? – Over the last decade or three there has been a process emerging as far as human resources are concerned. The emphasis was on weeding out applicants as quickly as possible. There was a very long list of requirements as far as education and experience. References were important and there were batteries of tests for everything from drugs to aptitude. The job of the HR manager was to get the list down to a small number of choices. Those days are gone. The shortage of available workers has meant that most of these demands have been dropped by many companies. It is not quite to the level of “does the applicant fog a mirror” but education requirements and experience requirements are being dropped, medical issues ignored as are drug offense and other minor crimes. The fact is that nearly anyone with any desire at all can land a job and a decent one.
• More Bad Inflation News Expected This Week – There have been some idiotic statements coming as regards inflation – assertions that the US is on the precipice of hyperinflation or stagflation. There is no evidence whatsoever for either of these developments. The focus on these ludicrous statements only obscures the fact that inflation at over 5.0% is a problem enough. Later this week there will be new data on the inflation rate and the expectation is that it will have climbed a little more in response to the latest surge in energy prices and the fact that supply chain issues continue to drive costs. The Consumer Price Index will rise and so will the Producer Price Index.
Brief Notes on the Global Economy
• Peronists in Real Trouble in Argentina – The leftist Peronist government is in deep electoral trouble and the election is just a few weeks away. The center right opposition now has a 10-point lead and looks set to take control of the Senate. This turns the current President into a lame duck for the remainder of his term (set to expire in 2023). The government of Albert Fernandez took power after the population grew weary of the austerity budgets of the center right and the voter welcomed the promised largesse. What they got instead was inflation, loss of jobs and a spectacularly inept response to the pandemic. The lockdowns were incredibly strict and long lasting but that only encouraged people to flaunt the rules and protocols. The virus spread anyway and at the same time the economy collapsed.
• Really Short Honeymoon for Guillermo Lasso – Just a few months ago the new President in Ecuador was enjoying 65% to 70% support as he was making good on his promises to get half the country vaccinated while securing a major loan from the IMF. After years of wallowing under the rule of a leftist government that nearly cut the country out of the global market it seemed things had turned. That all started to fall apart when he was caught up in a scandal involving his offshore investments (the Pandora Papers). His other more serious misstep was to radically hike fuel prices. The fact is these subsidies were not sustainable and the IMF was pressuring for their reduction but the action has provoked widespread protests.
Has The Recovery Been Worse than the Recession?
There have been all kinds of recessions over the years but none have been as odd as the one we dealt with in 2020. This has been repeated many times but I suppose it merits another mention. It was an imposed recession, a reaction to the pandemic as opposed to some kind of “organic” economic breakdown. There was no warning, no opportunity for anyone to prepare and the reactions on the part of government were confused and contradictory as there was too little information regarding the virus or the threat these responses posed for the economy. This has been the year of rebound and much of this recovery has been welcome but this recovery has brought a host of problems that have proven just as destructive as the recession and perhaps more long lasting. The policymakers now face an even more difficult path – how to react to the new challenges while still dealing with the aftermath of the old ones.
Analysis: The pace of recovery has varied considerably through the course of the year. At the start of 2021 the consumer came bursting out of the gate as if they were on fire. At one point the growth in the second quarter was ripping along at a 9.5% pace and ended up at 6.5%. This is extraordinarily fast for an economy the size of the US and that pace brought on a whole host of issues that have been affecting the economy ever since. The supply chain chaos can be traced to this surge in demand (along with the complications that came with the pandemic). The surge in inflation also started during this surge in demand. One can add the labor shortage crisis to the list of maladies that accompany growth at a breakneck speed. Then the economy stalled again in the middle of the summer as the threat from the virus emerged again. The growth rate for the third quarter was expected to slow down but few expected the extent of that decline. From a pace of 6.5% the rate fell to 2.0% and now all eyes are on Q4 to see if there is any kind of a recovery or a further slowing (the bet is on the former).
Now the issues have changed drastically from those of 2020. It isn’t recession the economy faces but high inflation. It is not a massive set of layoffs and higher levels of unemployment but shortages of workers in almost every sector. It is not a collection of moribund consumers cut off from their usual outlets to spend in the service sector but impatient spenders wishing to resume their old patterns and habits. Many of the systems put in place to deal with the recession remain in place and now have to be reduced and unwound without creating hardships for those that still need some level of assistance in recovering from the recession. Many of the service sector businesses are still struggling to get back to normal and those that worked in those sectors are still facing financial issues. At the same time the perils of fast growth are manifesting – everything from shortages and inflation to overwhelmed systems and altered behavior on the part of consumers and businesses alike.
A great deal of attention gets focused on the Fed during these periods and there has been extensive speculation regarding the potential for an interest rate hike but it is important to understand the Fed has limited power when it comes to controlling growth. They can do next to nothing about high prices for commodities and they have little influence over wages. They are in control of monetary policy and that is always indirect at best. They can dry up the supply of money in the system through hiking rates, changing the reserve ratio, altering rates that banks are paid for deposits and so on. This slowly withdraws access to cash and ultimately reduces the threat of inflation but it is a process that takes as long as 12 to 24 months. If the Fed starts to alter interest rates in the next few months it will be aiming at 2023.
The rest of the economic reaction to the crisis will have to come from the private sector and Congress to an extent. The supply chain has to find a new balance between supply and demand with producers deciding what they really expect to sell and consumers deciding what they really wish to buy. The inflation that has been seen at the commodity level has been driven by demand that has exceeded supply and eventually that balances out. The inflation at the wage level will be far slower to settle as once wages go up, they do not go back down. The only way that higher wages are dealt with later is for companies to lay off the older experienced and higher paid workers in favor of the younger and cheaper but these are also likely to be inexperienced and less skilled.
Not So Transitory
The Fed has been insisting for much of the past year that most of the current inflation has been transitory as it has been driven primarily by commodity prices and by the supply chain fiasco. The fact is that commodity prices are always transitory, they always trend up and down and the only real question is when. Thus far they have been stubbornly high. The more vexing issue is the supply chain and the bottlenecks that have created shortages and thus inflation.
Analysis: The “hawks” in the Fed system have been pointing out that these inflation issues are more persistent than expected – especially the ones related to the supply chain. The expectation was that suppliers would catch up with demand and that the transportation providers would work through these delays quickly but that has not been the case. Suppliers still do not trust the demand they are seeing as the consumer has been fluctuating from week to week. Ferocious growth in the first half of the year was followed by a deep slump. The transportation sector has not recovered from the shift in consumer focus as people went from buying services to goods. Add in the many inhibitions that came with the pandemic protocols and there have been persistent delays at every level of transportation. To put yet another burden on the system there is the issue of labor shortages – too few truck drivers, too few crew members on cargo ships, too few pilots, longshoremen, warehouse workers and so on.
Another Climate Change Bust?
The latest meeting over the issue of climate change has been taking place in Glasgow and it is winding up the same way that all of the others have. There has been a non-stop litany of dire warnings and assertions that time is rapidly running out if there is a desire to slow down the pace of climate change. The evidence is (and has been) overwhelming. There has been significant climate change and significant warming of the planet due to the accumulation of greenhouse gas. The impact has been obvious for years – everything from drought to severe storms. It is equally obvious that human action has contributed to the issue and at an increasing rate. Furthermore, it is evident which nations have been at the top of that list. This is where the agreement starts to break down. The options available to deal with the threat are limited and controversial.
Analysis: From the start of this most recent conversation there have been two pressing questions. How is climate change action to be engaged in without crippling an economic rebound that remains pretty shaky? The second is how all these efforts will be paid for. Regardless of what approach is taken – adaptation or prevention – there are steep price tags. The Biden team had hoped to come to the meeting armed with a commitment by Congress to move forward on the issue but that is not going to happen as there is still intense controversy over what can and should be done and how it will all be paid for.
The cost of amelioration will show up in two ways. There will be direct payments to stimulate the development of alternative sources of energy production such as solar and wind (and others). These moves have always required subsidy and support and will continue to for many years to come. There are the also the indirect costs that come with restrictions on fossil fuel use. There have been reductions in the development of pipelines and restrictions on oil development and these efforts drive the price of this fuel higher. This is a deliberate strategy as it is based on the assumption that people will shift to alternatives when the price becomes too high for using the fossil fuels. The former will have to be funded by government and this where the bulk of that $500 billion in the infrastructure plan would be going. The indirect costs get dumped on the consumer and the business community.
If there is a decision to adapt to the climate change impact rather than to try to halt it there will also be costs. The most obvious expenses have come from the damage done by weather events and the slow impact of drought and rising seas. These are borne by the people in the most vulnerable areas and by governments trying to repair the damage. The climate shifts force people and businesses to move and that is extremely costly. Some parts of the world have become uninhabitable and even in the US there are regions that can no longer support the activity that once took place there.
The bottom line is that there will be costs and significant ones – regardless of the strategies employed. It becomes a matter of who bears the brunt of these costs.
Spain Falls Further Behind
As the European states return to some semblance of recovery, there have been those that have prospered and those that have fallen behind. Italy has been the surprise star and there has been significant progress in France and Germany as well as many of the smaller economies but Spain is still in deep trouble with slow growth and high inflation (5.5% and higher than it has been in over three decades). The GDP has been at 1.4% below the levels set in 2019 and there are few signs of recovery. It has not yet manifested but talk of real stagflation has been heard as the nation has slower growth and higher levels of inflation.
Analysis: The reasons for this decline are pretty easy to spot but doing something about these issues has proven to be extremely challenging. The consumers of Spain have not responded as consumers in other parts of Europe – they are still hesitant to resume their old activities. The fact is that people are very nervous about their financial future and their security. The majority of the new jobs added in the last year are seen as temporary and that convinced people to save more than usual. The country has one of the lowest infection rates in Europe but that has not resulted in active consumer activity. Spain is very dependent on tourism and that has been slow to recover. The inflation that has hammered Europe has struck Spain hard – especially in the price of energy. That has further inhibited spending and the final point is that Spain has not yet received the money that had been promised to it by the EU. The government in Spain has been somewhat resistant to the strings that come with that cash and that slows its allocation.
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 surge in global inflation has been far more dramatic than expected. Even as some of it has been identified as transitory it has taken longer for the prices to start falling. The supply chain breakdown was more serious than expected and it has been hard to find the balance between supply and demand.
What We Are Watching – From the Black Owl Report
WHO Expects 500,000 More Deaths in Europe from COVID by January. Germany recorded 34,000 daily COVID cases in a 24-hour period, the UK is currently seeing about 37,000. Death rates are also climbing (of course, as case counts go up). Cases in general across Europe are up 55% despite some vaccination rates that are approaching 80% in Spain and 66%-68% in France and Germany. Russia has recorded 8,100 deaths in the past week, Ukraine has had nearly 4,000. Romania is experiencing its highest 24- hour death counts since the pandemic started. And the stories continue with states of emergency being issued across many Eastern European countries. Countries that have high vaccination rates are still seeing a surge in infections. Many are calling it “Europe’s 4th Wave”. Unfortunately, the US has typically followed Europe by 30-90 days when it comes to COVID experience. The vast majority of those that have been affected are falling into three categories: 1) unvaccinated, 2) elderly and 3) those with underlying health issues such as diabetes, heart disease and pulmonary issues.
For more go to www.armada-intel.com.trial
There HAS Been Progress (really!)
It is very easy to look around the world today and sink into some level of frustration and despair. So many issues to address, so many problems. It is easy to lose perspective. Over the last few weeks, I have wrestled with these feelings but I need to take a step back (as we all do). In the last few days, I have been reminded of how far we have come on many crucial issues as I look back at not-that-distant history. Not that we have solved all of these and it is obvious we have more to do but watching recent episodes of Grantchester reminded me of the incredible bigotry endured by people as recently as the 1950s and 1960s. I grew up in a world where nuclear annihilation was an imminent threat, where women were essentially second-class citizens, where hatred of different races and ethnicities and orientations was widespread and acceptable. Reading history provides even more insight – the suffering endured during the Great Depression, the lives lost to two “wars to end all wars”. It is a long list.
This is not to say that these battles are over and that we can’t do better today. It is simply to point out that we have made progress. Much has improved for people around the world and much will continue to improve if we manage to keep our eyes on that better future. We just have to allow ourselves some credit for having done what we have thus far.