Brief Notes on the US Economy
• Another Apology for a Tardy BIB – As alert readers have noted, I am back on the circuit. Today I started in Napa and am now on my way to Houston for the Houstex manufacturing show. From there I am on to Chicago to present on Wednesday and finish with a presentation in St. Louis on Thursday. Finding the required time to keep up with the BIB can be a challenge! This is why you are seeing an evening edition today. The one good thing about being back on the road is the opportunity to learn what is really happening in the world. I confess to being a major eavesdropper and am always starting conversations with my Uber drivers, hotel clerks, wait staff and the like. The basic message is that people are starting to get back to some semblance of normal but with a key difference. There is a distinct sense of unease and even anger. Tempers are short and people are sensitive. The anonymity of masks has allowed people to be far ruder than before. I notice this as well and can only hope that fades down the road.
• Treasury Loses Patience – One of the more contentious parts of the assistance programs trotted out in 2020 and 2021 was the rent relief program. The shutdown in 2020 affected renters far more than homeowners as the majority of the people losing their jobs came from the lower paid service sector community. They were in crisis right away and there was a $47 billion effort to address the problem. Almost a year later the majority of that money has yet to be distributed. The thinking at the time was that letting local groups handle the effort would speed things up but that has not been the case. This was the same issue in the 2008 recession with the effort to find “shovel ready” projects through the states. It turns out these institutions are not equipped to deal with these complexities and now Treasury has become fed up with the delays and will be taking control of this program. Unfortunately, there are millions of people who have faced eviction already.
• Extension of Trump’s Trade Policy with China – It can be said with a great deal of confidence that Trump and Biden do not agree on much and that their policies are vastly different. There is one notable exception and that is China trade policy. The Biden administration has indicated there is a desire to resume trade talks but the US continues to demand the same things outlined under Trump. There is no move to reduce tariffs and there are even suggestions that more be considered. The US has the same stated aim – reduce Chinese imports to the US and expand US exports to China. Given the mounting tension between the US and China there is little chance of improved relations anytime in the near future. These talks will essentially be drawing the battle lines.
Brief Notes on the Global Economy
• The “Rational Germans” – On the one hand the elections in Germany failed to deliver a government and sentenced the Germans to perhaps months of coalition wrangling. On the other hand, the four parties that will be part of this debate are all sober, rational and pragmatic (for the most part). The Christian Democrats are led by a mini-Merkel who has been in government for years, the Social Democrats are led by the current Finance Minister. The Greens are led by their pragmatist and the Free Democrats are their usual intellectual, moderate selves. The party that didn’t do well in this contest was the populist and right wing AfD. The Germans are simply not responding to the brand of populism that has affected Italy, UK, France and the US for that matter.
• The Rush of the Unqualified – As companies struggle with the chronic lack of trained people there has been a surge of unqualified people seeking those jobs. The UK has reported that over 90% of those applying for truck driving jobs lack the necessary license. The manufacturing sector is awash with fake certifications and bogus claims. The problem is that companies lack the ability to ferret out the fakes and are often desperate enough to take these applicants regardless.
There is Inflation and Then There is Inflation
It would be so much simpler if there was some universal measure of inflation or if all the prices went up or down at the same time but that is certainly not the world we live in. Inflation is never universal and even when many prices are rising there will be others that are falling. The most common differentiator when discussing inflation is the contrast between the “real” or “headline” rate and the “core.” The difference is volatility. The Fed and many other analysts want to be able to make comparisons between the inflation rate from year over year or quarter over quarter and that requires some stability. It does no good to make these long-term comparisons when you might have chosen a period of exceptionally high or low pricing. Core eliminates some of those more volatile prices such as fuel and food. The “real” rate includes these but even here there are significant differences in terms of how data is gathered. There is the Consumer Price Index and the Producer Price Index but these have a weakness. They are computed based on what is described as a typical basket of goods but what is typical for a Boomer isn’t for a Gen-Z consumer and this can skew the results. The Fed and others prefer the data from Personal Consumption Expenditures but this is after the fact data and there is an inevitable delay. So, with all this, what do we know about inflation at the moment – are we seeing it or aren’t we?
Analysis: There are a number of alternative indices that many analysts rely on for more accurate and detailed assessments of the inf inflation threat. These are now showing a distinct rise in underlying inflation but not quite as dramatic as the readings that have been coming from the CPI. One of these is the trimmed mean CPI put out by the Cleveland Fed. It tries to eliminate outlier readings by discarding the most extreme price changes on the assumption these are generally caused by some event whose impact will fade quickly. They combine this with the use of a median CPI to capture fundamental changes. A good example of something that would be tossed out by the trimmed mean would be lumber prices earlier this year. They hit absurd levels and crushed construction for several months but they were always going to come back down as the surge was related to temporary production issues.
Another measure that has started to show some inflationary gain is the one developed by the San Francisco Fed which examines inflation from a historical perspective. They take the personal consumption expenditure data to regroup into a cyclical and acyclical index that is more sensitive to labor market conditions and other longer term pulls and pushes. These two cycles are usually pretty distinct from one another but they are both trending in the same way and both showing a more consistent inflation threat.
The third of these alternative tools comes from the Atlanta Fed and is referred to as the “sticky price index.” This is the ultimate non-volatile index as it only looks at prices that change very slowly. It certainly doesn’t look at those rapidly shifting prices such as fuel and food but also eliminates a host of other prices that change fast (everything from airfare to entertainment). What is left is categories such as health care or education – prices that shift over a year or so but not every month. If these prices alter it is generally because other underlying prices have changed and lately there has been an inflationary trend showing here as well.
What is the conclusion from all this? The data shows that there is real inflation appearing across the board – not just in the immediate data but it also shows that this underlying inflation has not been as dramatic as some of the more immediate and volatile data would suggest. That is good news to a degree but also indicates that the inflation we have been observing over the last few months has settled in and will be with the economy for the coming year. It is still not enough to trigger a radical Fed response but it certainly reinforces the notion that interest rates will climb by the end of 2022 or early 2023. The Fed assertion that much of the current inflation remains transitory is still accurate as much of the recent drama over prices has centered on the fact that demand has outstripped the ability (or willingness) of producers to respond. The fact remains that production remains off as business is unsure what to expect from the consumer if the virus becomes as big an issue this winter as some assert. The recent behavior of the consumer suggests they are handling the recent outbreaks but the future is still murky.
The longer-term concern as far as employment is concerned is the number of people in the workforce and that rate has been falling for years. It is now as low as it has been in decades – 61.7%. That means that close to 40% of those eligible to be in workforce are not. Granted the vast majority of those that are no longer in the workforce are retired but there is a growing number of people out of the system for other reasons.
Analysis: The biggest motivation for stepping out of the workforce has been the pandemic and there is hope that some of these workers will return once the situation becomes more “normal.” The majority of the people who have stayed out are women and they have been required to stay at home with children as the schools have not opened as expected in many locations. They are also taking care of elderly relatives and others at risk. In addition, there are many who worry about their exposure to the disease and have been unwilling to resume their old positions. The extra unemployment aid has expired and that prompted many to look for work but there has been a surge in “off books” work and there are also many families that have elected to return to the single wage earner arrangement so that the other spouse can remain home. The most worrisome aspect of the decline is also the most natural – millions of people retiring. The fact remains that over 10,000 Boomers retire every day and that adds up to nearly 3.5 million people a year leaving the workforce.
What Happens With Oil Production?
This surge in oil prices was not expected to happen so soon. There was universal agreement that the price per barrel for crude would recover from the extreme lows seen in 2020 but this climb back from under $20 a barrel was expected to take a while – perhaps the whole of 2021. The assertion has been that normal consumption had not recovered in the US and without that motivation the producers were not compelled to add to their output. The key was the daily commute – as long as many millions of workers in the US were simply shuffling into their home office rather than jumping in the car there was reduced demand for fuel. The fact is that many are still working from home and commuting is still less than it was. There have been a number of other factors that have started to play a major role in the price of oil and the question now is what the producers are willing to do about it.
Analysis: It is not the only issue that has driven the price per barrel up but it has been a major factor – the natural gas crisis in Europe. This situation has been a combination of geopolitics, weather, demand and supply. Perhaps the biggest issue has been Russia’s refusal to supply the gas it has promised and delivered in the past. The Russians want Europe to approve the construction of Nordstream 2 and are now employing pressure tactics to get what they want. Europe still depends on Russia for the vast majority of its gas and thus far the US has not stepped in as had been promised. The US was going to ship LNG to Europe in quantities sufficient to offset the Russian gas but the Asian market has been so lucrative that US LNG is heading there instead. To add weather insult to injury the wind power that had been counted upon to reduce dependence on gas has not lived up to its potential as this has been the year the wind has not blown. These fields are producing less than 20% of what was expected.
Then there is the challenge of demand. The US is growing faster than had been expected and that has meant more consumption. The Europeans are now also growing at a rapid clip and that adds to the pressure on suppliers. The OPEC nations plus Russia agreed to open the taps a bit earlier in the year but are now balking at stepping up output again. They see the current demand but don’t really trust it. They think the pandemic will cause more damage later this year and that the economies of Europe and the US will slow again. There is an incentive to keep prices below $80 a barrel for these producers but they certainly don’t want them to crater. At $80 a barrel many of the world’s marginal players get in the game and start to erode the market share for the larger producers. The decision now is based on whether this current surge in demand will last and producers are betting that it will not. This means that oil prices will stay in the $80 to $90 range and could jump further if there is some other event that affects production. That could be a misplaced hurricane, another geopolitical crisis or even just a surge in consumer activity in the face of the pandemic. As of this writing the price pe barrel of oil had hit a high not seen in over seven years and that surge may not be over given the reluctance on the part of OPEC to increase their rate of production.
Chinese Aggressive Response
The exchanges do not indicate an imminent break out of another war but every time there is anything the Chinese could interpret as a provocation there has been an immediate response and usually it is out of proportion to the original perceived affront. The US has been taking steps to ensure that countries in Asia understand the US remain committed. This has especially been the case when Taiwan is the issue. The naval exercises put together by the US were designed to show the flag but were careful to avoid Chinese air or naval space. The Chinese have responded with a show of force that has deliberately violated the air space around Taiwan and other contested areas.
Analysis: A total of 56 Chinese aircraft entered Taiwanese air space. 36 were fighter jets and 12 were bombers capable of carrying nuclear weapons. It is impossible to determine what these payloads were but it was a very clear signal that China has the capability to inflict devastating damage. The US condemned the acts and China’s response was to claim that it was in self-defense given the US exercise with several allies. The Chinese have been very upset over the newly created alliance between the US, UK and Australia. This has been interpreted as a direct challenge to China and that would be a pretty accurate assessment given the objections the US has registered regarding the development of the South China Sea and the threats that have been issued against Taiwan in recent months. These exchanges are basically posturing at this stage but the potential exists for an accident or the actions of a renegade. There have been attempts to calm the situation but these have not had the desired impact. Nobody really trusts diplomacy to make much difference at this stage. The US has been trying to assert more financial pressure but this has been tough to pull off as well.
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 Chinese interventions in Asia are not new and they have escalated before whenever the Beijing authorities have been pushing point. The latest episode is just the latest and perhaps the most serious.
What We Are Watching – From the Black Owl Report
Global Energy Crisis in the Offing? We have a much longer article about this in today’s brief, but there will need to be some significant policy changes or other dramatic steps taken to safeguard consumers and corporations this fall/winter because of a pending energy crisis. The hardest hit markets will be in Asia and Europe as energy shortages have already started to flare up. But this “contagion” could spread around the world based on a variety of factors that have perhaps created the energy equivalent of the “perfect storm”.
Things I Miss
By now you have heard all my whining and complaining about the world of travel and you have doubtless asked yourself – “isn’t this the same guy that was complaining about all those webinars and longed to be back in front of people”? Yes, you are correct and I am often reminded that one should be careful what one wishes for. Travel has always been more ordeal than it should be but that is the way it has been for years. Now that I am back on the road, I realize that I miss things that used to be more routine. Let’s start with the vast offerings on the airplane as alcohol has been banned. I am not sure I understand the connection to a virus but these days I am asked to waggle a finger if I want one of five options. Not that I drank much on these flights but the occasional glass of wine or beer on a long flight was welcome. I also miss the once friendly and joking flight attendants – today it is all too reminiscent of Mrs. Smith’s 6th grade class and that ever present ruler.
In hotels I miss food. Many have abandoned room service altogether and many have not opened their restaurants yet. One place that used to offer a nice little hot meal in the morning now provides a bag with instant oatmeal and a cereal bar (no hot water mind you – just a cup of dry oatmeal). I now pack enough food to open my own convenience store. Most of the eateries in airports have also been shuttered. I know I need to diet but had not planned to give up eating on the road altogether.
To be honest the thing I miss most is faces – it would be nice to see smiles again and it is always useful to see when somebody is scowling – at least one can be forewarned.