Brief Notes on the US Economy
• Job Report Disappoints – Progress towards a return to some semblance of normal has ceased. The strides that were being made only a month or so have been replaced by a near universal stall. The latest job numbers are yet another indication that trends are reversing and fast. The expectation had been that another 725,000 jobs would be added and instead employers increased by a paltry 235,000. More layoffs have been noted as well. The millions that decided to wait until their benefits expired before hitting the job market are in for a very rude awakening. They assumed the recovery would mean plenty of available jobs but now the renewed viral threat has many businesses expecting another downturn and they no longer plan to hire. There are going to be a great many desperate people in another few weeks.
• Weather and Infrastructure – In the wake of the last couple of major hurricanes the cost estimates are piling up and fast. The impact on New York alone will be over $60 billion as the floods affected the subway system as well as numerous facilities. The impact on homeowners was nearly as expensive as was Hurricane Sandy. The damage in Louisiana has been even more severe and now there are massive clean up issues from over 100 chemical and oil spills. There is abundant evidence that climate change has added to the severity of these storms but to be honest it doesn’t really matter what the cause is in the short term. There will be no instant fix that reduces storm impact and that leaves adaptation as the only immediate answer. These options are also limited and that basically means that future storms will be just as expensive. That has implications for the insurance business as well as the budgets that have to be set aside for infrastructure repair.
• Tapering Plans Delayed? – Will the less than impressive job numbers mean the Fed will abandon its plan to reduce its activity in the bond market – the tapering? It will certainly be a factor for consideration as this clearly signals the economy is no longer growing at the pace experienced just a couple of months ago. It may not be enough to convince the Fed to stay heavily engaged in stimulating as the issue of inflation remains a serious motivator. The price of commodities fell a bit as demand has slackened but the supply chain crisis still affects pricing and there are still sectors that are setting records for price hikes. The labor shortages in many areas will not be alleviated by the influx of people whose benefits have expired and those with skills and training are still commanding higher wages. The Fed is likely to stay on the current course and tapering is still on the agenda.
Brief Notes on the Global Economy
• Taliban’s “Charm” Offensive – If the Taliban is to have any hope of actually governing the country, they will have to reassure the population that this version of the leadership will not return to the brutality of past years and there is extremely deep skepticism. Ironically, the violence of the last few weeks may bolster the Taliban as the majority of these attacks came from elements of the Islamic State terror organization and not from Taliban itself. The Taliban leaders have disavowed these other groups and have started to attack them – setting themselves apart from these extremists. The Taliban has to make common cause with the dozens of militias and warlords that really govern the majority of the nation and it will be no easier for them than it has been for any other group or government.
• Health Mandates – There have been reactions to the pandemic ranging from neglect to intrusive intervention. Increasing numbers of companies are requiring employees to be vaccinated as a requirement of employment on the grounds that the health of other employees and customers can be put at risk. Some are going even further on the grounds that unhealthy behavior costs the company in lost productivity as well as health care costs. Nomura Securities is now banning smoking by those working at home. Basically, smokers will be no longer have jobs with the company. The assertion is that people have a right to do as they wish but companies have a right to employ who they wish.
Business Behaviors That May Never Return
The latest viral crisis is very different than then one we experienced in 2020 and not in terms of the health implications. That has not changed all that much although some of the threats have been amplified. The Delta variant is far easier to catch but the other basics are as they have been. The vast majority of people survive the disease and some 60% are never even aware they were infected. Basic protocols such as mask wearing and distancing help limit exposure and there are still effective treatments for most. The key difference is that we now have vaccines but their effectiveness is compromised by the resistance to them. The big change is that the economic dislocation and the social impact is not being driven by government edict this time. In the spring of 2020, the onslaught was unexpected and not understood and the reaction was to close most of the economy in order to impose a quarantine that was only supposed to last a few weeks. Everybody now understands what a disaster this was and it is unlikely that another mass shutdown will be attempted. This time it is the consumer that is shutting the economy down. There is a significant reduction in everything from traveling to attending events, shopping, eating out and so on. The resumption of that fearful reaction is doing to the economy in 2021 what the shutdowns did in 2020. This means that adjustments made now are likely to last far longer than those that were reactions to the government action.
Analysis: Given the persistence of this crisis and the reaction of the consumer and business community there are likely some permanent changes underway. At the top of that list is how we work. It is a reasonable expectation that roughly half the working population will never return to the traditional office. There will be hybrids that have people working remotely for two or three days and in the office for two or three but there will also be many that remain 100% remote. This creates a whole host of issues beyond the way that people will be expected to interact. The situation facing Southwest Airlines is a good example. The pilots are suing the company because they have not been able to exercise the same “remote work procedure” that other employees can. They essentially want “hazard pay” given their work environments. That same division exists in many companies – those that can work from home and those that can’t.
The second major change has been discussed by executives that are no longer willing to travel or to send their employees out. There has been a significant decrease in business travel and that threatens the health of the airline sector as well as the entire aerospace manufacturing arena. The airlines simply can’t survive on the casual traveler as these are not the people that pay for upgrades and services. Their usage is also highly seasonal. Airlines will have to radically slash schedules and will likely have to abandon many destinations. The trade show and the business conference will be in peril if these trends continue or accelerate. The alternatives include virtual trade shows and extensive use of the technologies we have all become far too familiar with.
Over the last thirty to forty years, it has become abundantly clear that pay and benefits will only go so far in terms of building employee loyalty. The single most important motivation for an employee to remain at a specific job is their attachment to the people they work with. Unless the pay hike or benefit package is substantial, the average person stays employed where they like the people they work with. The workplace is the dominant social engagement opportunity for millions of people. If there is no longer an office environment there is little to keep people loyal and connected and there will be considerable movement from job to job as employers have little choice but to engage in a bidding war.
We have harped on the growing importance of education and training for years and that will become ever more important but there is another aspect to the training needs. In the remote environment people will have to become far more independent and disciplined in their work. It is very hard to engage in close supervision in that remote environment and there have been many complaints already. Employees are falling into two difficult categories for managers. One type communicates very little and assumes they know what they are doing until they submit something that is way off the mark. The other type communicates too much and requires feedback on every single thing they engage in. The supervisor is either dealing with crisis situations or being driven mad by unwanted detail.
Just Another Note on the Concept of Labor Shortage
As a colleague of mine pointed out recently – when an owner or manager says, “we need people”, what they are really saying is “we have a backlog and a lot of work to do”. They really don’t care how that backlog is addressed or how the work gets done. If it involves people, so be it. If it involves the use of robots and machines, that is ok too. If it involves outsourcing to some other company or country that is fine as well. The bottom line is that the work needs to be done as efficiently as possible. The drive to move production overseas was accelerated by the cheaper costs of production in China and elsewhere. As these cost benefits have eroded there is a search for alternatives.
Analysis: If the price of labor goes up significantly in the US because of the labor shortage there is more of an incentive to adopt machines and technology as these prices are falling at the same time the capabilities increase. He described a machine that grabbed a piece of sheet metal, ran it through a punch/shear, reoriented it, ran it through a bending machine and placed it on another conveyer that put it in a truck. The only human action required was to push a button that said “GO”. This machine is not cheap but it doesn’t take breaks, doesn’t go on vacation and is unlikely to cross the street to work for the competition.
Japan’s Political Turmoil
Yoshihide Suga has suddenly decided to resign but in truth this exit was expected almost from day one of his stint as Prime Minister. Continuity in the leadership position has been the exception in Japan over the last few decades and few expected Suga to last very long. He was the consensus candidate after the resignation of Shinzo Abe – one of the few Prime Ministers that had been able to hold power for a long time. Abe was in place for one year (2006 to 2007) and then returned to hold the position from 2012 to 2020. This made him the longest serving Prime Minister in Japan’s history. When health issues forced him to resign the faction fights that preoccupy the Liberal Democratic Party exploded and Suga was seen as something of a neutral player that all might be able to accept. He had three assets as far as leadership was concerned. He had been very close to Abe and vowed that he would carry on with his predecessors’ policies, he was considered a consummate insider who had been the power behind the throne to a significant degree and he was independent of the factions. Those assets became liabilities in his year as leader.
Analysis: The biggest problem is that his reputation for competence was shattered by the country’s inability to get control of the virus. Never mind that there has been no nation in the world that has been successful at addressing the pandemic, he was assailed for Japan’s viral crisis. The critics have had no suggestions of their own but that has been a global issue. Half the population wanted extreme responses that focused on eradicating the threat even if it meant the utter collapse of the economy for years and the other half wanted nothing to interfere with economic progress even if that meant the deaths of millions. Suga might have survived this pandemic angst if he had the support of one or more of the key factions but his independence soon became a weakness. The desire to continue Abe’s politics left out the majority of the new politicians and local leaders and they all now want their turn. The last straw was the disastrous Tokyo Olympics. This was never popular with the public as the event is very expensive and disrupted normal life in Tokyo. The Games were nothing but constant controversy – sex scandals, no audiences, high profile pullouts, viral outbreaks and very few of those triumphant moments that people want from these contests. The public wanted these Games canceled.
The factions are at each other’s throat again and this time there will be no consensus candidate. The bloody political battles within the LDP have been the norm in Japan. It is very early days and the jockeying for power has just started but two names have been circulating already. One has public popularity and has mastered the use of social media while the other is a master of the insider games and can use that leverage to gain support. The decision as to who leads Japan is not made directly by the voter but by the political party that dominates the Diet and that is the LDP. Whoever leads that party becomes the Prime Minister but once that position is held that person becomes the national face of the party and popular support is critical. Taro Kono is the front runner for the moment. He is a former Foreign Minister and Defense Minister and has made a name for himself in social media. His nationalist credentials endear him to those of a more populist orientation. His initial challenger is another former Foreign Minister – Fumio Kishida. He has an insider reputation and comes out of one of the major factions. He doesn’t have the public support that Kono has. Given the almost Byzantine nature of Japanese politics it is entirely possible that a winning candidate emerges from nowhere.
Whoever takes the post they will face familiar issues. They will need to get a handle on the pandemic response immediately and there is still very deep division over what that response should be. The decision by Suga to connect Taiwan’s security to that of Japan was a bold step and many will want to know where the next leader stands. The economy remains a top priority as it always is. Japan had started to grow earlier in the year and that pace was interrupted by the pandemic resurgence. Abe promised national economic progress and was able to deliver on some of that promise before the pandemic. Can the next leader pick up where Abe left off even as Japan’s ability to throw money at the plan is more limited than ever?
More Fallout from Afghanistan
The European Union has been content to operate under a broad military alliance with the US for the better part of a century. The US and Europe tended to involve themselves together on military missions with the US always taking the clear lead and contributing the majority of troops and money. The chaotic end to the 20-year intervention in Afghanistan has convinced some in Europe that they need to develop an independent military that can engage without the US. There are many in Europe who want no part of this kind of mission capability but the advocates assert that Europe would be foolish to trust the US at this point.
Analysis: The European focus would be North Africa and the Middle East as well as potential threats from Russia.
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 dominance of the Liberal Democratic Party in Japan is easy to see with the chart above. The LDP is the green dots. The blue seats belong to the Constitutional Democratic Party and pink dots are the Komeito. The rest of the seats are held by small parties such as the Japanese Communist Party and Kibo No To. The bottom line is that winning support from an LDP faction is what it takes to rule.
What We Are Watching – From the Black Owl Report
Observations – Speaking to a group, one question after seeing a wave of economic data was that the Delta Variant seems to be taking a toll on communities around the country; but the stock market and businesses are still optimistic about the future. Have we gotten past a critical point where the Delta Variant no longer worries us about lockdowns, and now it’s all about the rest of the world? Deaths are the worst since December, with more than 7,225 last week alone, 20% more than we lost in Pearl Harbor. Cases are still rising in 42 states and many analysts want to point to this as being positive – because its fewer states than at any time over the past six weeks. In fact, those that want to point to the situation getting “much better” point to a statistic that shows hospitalizations only growing 11% over the past week, not 33% like we were three weeks ago. What looks to be headed our way – good news or bad?
Go to www.armada-intel.com/trial for more stories like this.
No Accounting for Taste
My wife is a devotee of HGTV. At any given moment the TV will be tuned to shows like Property Brothers, Home Town, Love It or List It and so on. We started to watch the latest version of Design Star – Next Gen. We are a little late as this originally aired in February but we have avoided spoilers so far. The point is that in the episodes we watched we have tended to look at each other with very perplexed expressions on our face. “Really? – People would want to live with that?” Many of the shows seem to leave me with that impression. Gay has a very distinct style and one that we built into the house from the start. It gets described as “country French” by some and “Tuscan” by others. Anything but the cold chrome and steel stuff I see these days. I am sure my office would cause Marie Kondo to have a fit. It is floor to ceiling books (and the ceilings are 14 feet high). I have a library ladder for crying out loud and every shelf is loaded with items from my travels or my collections (lighthouses, dragons, cats, wolves etc.) It is a nightmare to dust but every piece brings memories and I fully intend to read all those books (really!) We each have our own taste – mine tends towards the idiosyncratic and I’m sure it strikes people as way too busy. The rest of my house reflects Gay’s design and is therefore much more tasteful but she tolerates my chaos as long as it stays put!