Wednesday, December 11, 2019

Why Our Endless Tariff Wars?

Popular Economics Weekly

Wrightson-ICAP

POTUS and the Trump administration can’t end their trade wars, although House Speaker Nancy Pelosi just announced they had reached agreement with Republicans on a new NAFTA accord with Canada and Mexico—now called the USMCA, or U.S. Mexico Canada Agreement—because it gives more protections to U.S. workers. She said there’s nothing wrong with a win for President Trump “when it’s the right thing to do (sic).”

But there is no agreement with even a Phase I trade agreement with China, and Trump has basically neutered the World Trade Organization that settles trade disputes by blocking any new appointment to its arbitration panel, which will not only prolong trade disputes but create new ones, since there’s no longer a mechanism for resolving them.

The result has been declining labor productivity and manufacturing output, which puts future economic growth in jeopardy. Productivity declined in mid-2019 after several years of acceleration, in part because companies reduced investment in manufacturing and production in response to the U.S. trade fight with China and the EU. The dispute has also undermined exports and made it harder for businesses to plan ahead.

Labor Productivity, or output per hour worked, declined for the first time since 2015. It fell at a 0.2 percent annual rate from July to September, the government said Tuesday. This means that the hours worked increased faster than output, so that it is increasing just 1.5 percent annually, which means workers will have difficulty improving their standard of living within their working lifetime. They haven’t been able to increase their median income since the 1980s, and trickle-down economic theory prevailed.

This was the theory that lower taxes and less government services lifted all boats, when it fact it only lifted the most expensive yachts. The cutback in government investments in such as infrastructure, education, and R&D, which all serve to increase productivity and efficiency, was another reason for the productivity decline.
And, “Productivity is likely to continue to lag unless there’s a rebound in business investment,” said MarketWatch’s Jeffery Bartash, “but that probably won’t happen unless the trade dispute is largely resolved.”
Higher productivity is the key to a rising standard of living, resulting in higher pay, more profits and low inflation. Low productivity is a sign of an inefficient economy.Productivity in the U.S. has risen at an average rate of just 1.3 percent since 2007, compared with a 2.1 percent average since the end of World War II.

There are better ways to settle trade disputes, such as remaining in trade alliances like the Trans-Pacific Partnership that Trump withdrew from. The other 11 Asian trade partners then drew up their own agreement to better bargain with China, in particular; whereas the U.S. has been unable to reach any agreement by going it alone.

So we know another path to increased productivity is the ability to get along with our economic friends and find a way to work with our enemies.

Harlan Green © 2019

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Friday, December 6, 2019

Big November Employment Boost

Financial FAQs


Total nonfarm payroll employment rose by 266,000 in November, and the unemployment rate was little changed at 3.5 percent, the U.S. Bureau of Labor Statistics reported today. Notable job gains occurred in health care and in professional and technical services. Employment rose in manufacturing, reflecting the return of workers from a strike.

What happened to the slowing economy, especially in manufacturing since last year’s sugar high from the 2017 Republican tax cuts? Manufacturing added 54,000 jobs, but it was mostly GM workers returning to work after their successful strike that gave them some of the enormous profits GM has been generating. It showed labor unions are finally taking back their power to negotiate higher benefits for their workers, after years of decline.

Though in fact, it was the 74,000 new jobs in Leisure and Hospitality highlighting strong consumer spending in restaurants and hotels that is sustaining economic growth.

Consumers are still optimistic, per the University of Michigan sentiment survey that rose to a preliminary December reading of 99.2 from a final November reading of 96.8. Consumers’ views on current conditions rose to 115.2 in December from 111.6 in November, while a barometer of their expectations rose to 88.9 from 87.3.

The only caveat was the slight drop in average hourly pay to 3.1 percent, down from 3.4 percent earlier in 2019. Why? It’s all the lower-paying jobs that benefit from consumer spending; like Transportation and warehousing (15.5k new jobs), and the aforementioned Leisure and Hospitality jobs.


Longer-term inflation expectations fell to 2.3 percent, matching a record low in the U. of Michigan survey. Federal Reserve policy makers watch this figure closely and have cited below-target inflation as one of the reasons behind the three interest- rate cuts this year. The Fed, which holds a meeting next week, has signaled it will keep rates on hold barring a material shift in the outlook.

There is little wage growth, and therefore little inflation, which means consumers can keep spending through the holidays. The ongoing trade wars aren’t yet boosting import prices enough that would bring on higher inflation, while energy prices have also fallen, keeping gas prices low.

These are all reasons to keep the economy afloat, with the additional caveat that importers can’t keep absorbing the tariff increases forever.

Harlan Green © 2019

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Wednesday, December 4, 2019

Economic Growth...Watch Out--Part II

Popular Economics Weekly


It is obvious from the above graph that manufacturing activity is contracting, whereas the service industries continue to grow.  Exports that depend mostly on manufactured goods are therefore declining, while imports that depend on consumers are increasing. This also means slowing economic growth, since shrinking exports add less to GDP growth, while much larger import totals actually subtract from growth.
November was the fourth consecutive month of PMI® contraction, at a faster rate compared to the prior month, said Timothy R. Fiore, Chair of the Institute for Supply Management® (ISM®) Manufacturing Business Survey Committee. “Demand contracted, with the New Orders Index contracting faster, the Customers’ Inventories Index remaining at ‘too low’ levels and the Backlog of Orders Index contracting for the seventh straight month (and at a faster rate). The New Export Orders Index returned to contraction territory, likely contributing to the faster contraction of the New Orders Index.”
Manufacturing is in recession, in other words. The Philadelphia Inquirer reports that Kentucky’s steel industry has suffered because of steel and aluminum tariffs that have in fact slowed demand for its products. The result is steel prices have dropped by more than 40 percent since last summer.

“They have been hurt by tepid domestic demand for steel production amid a U.S. manufacturing recession and a global slowdown in economic growth, among other things,” reports the Inquirer.
Demand for steel in the U.S. grew 2.1 percent in 2018. But this year, a slowdown in American construction and automobile production helped diminish demand to just 1 percent, and it is projected to grow just 0.4 percent in 2020, the World Steel Association said this month, per the Inquirer.
And “Global trade remains the most significant cross-industry issue,” said ISM’s Fiore. “Among the six big industry sectors, Food, Beverage & Tobacco Products remains the strongest, while Fabricated Metal Products is the weakest. Overall, sentiment this month is neutral regarding near-term growth,” says Fiore.
Why the decline in manufacturing? It has to be the Trump administration’s trade policies, as manufacturing depends on foreign trade for many of its components, and foreign demand for many of its products.

This is while the Trump administration has just announced new tariffs on steel and aluminum products from Brazil and Argentina, further hurting global trade.

We also know overall Industrial Production is declining. Total industrial production was 1.1 percent lower in October than it was a year earlier. Capacity utilization for the industrial sector decreased 0.8 percentage point in October to 76.7 percent, a rate that is 3.1 percentage points below its long-run (1972–2018) average.

Last week’s revised Q3 GDP report was upped to 2.1 from 1.9 percent, with a slight increase in consumption and inventories. But it won’t help an even weaker Q4 GDP which is predicted to barely grow due to declining exports, as I said last week.



Manufacturing and consumer spending are really the two main components of economic growth. Stock prices of the largest steel companies have declined as much as 50 percent, also according to the Inquirer. And with steel prices down, their earnings have begun to decline.

So trade wars seem to be wreaking as much havoc to economic growth as other geopolitical concerns, such as growing civil unrest in the Middle East and Asia (Hong Kong). Continuing to wage trade wars in the name of national security is really becoming a danger to our national security, as well as economic growth.

Harlan Green © 2019

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Sunday, December 1, 2019

Consumer Confidence Is Boosting Housing

The Mortgage Corner


New-home sales are now back to the long term average in the above graph that dates back to the 1960s, and consumers are still reasonably confident of their future.
"Sales of new singlefamily houses in October 2019 were at a seasonally adjusted annual rate of 733,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 0.7 percent below the revised September rate of 738,000, but is 31.6 percent above the October 2018 estimate of 557,000."
This was the first time since 2007 that the annual pace of single-family home sales remained above 700,000 for three consecutive months, according to Calculated Risk. New-home sales were nearly 32 percent higher on an annual basis in October.

This means that residential construction is also increasing the supply of new homes, as I said last week; at the same time as there is a significant housing shortage and housing construction isn’t yet back to historical levels.

Whereas, “Consumer confidence declined for a fourth consecutive month, driven by a softening in consumers’ assessment of current business and employment conditions,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “The decline in the Present Situation Index suggests that economic growth in the final quarter of 2019 will remain weak. However, consumers’ short-term expectations improved modestly, and growth in early 2020 is likely to remain at around 2 percent. Overall, confidence levels are still high and should support solid spending during this holiday season.”
So, although consumer confidence is down a bit from last year, it is still enough to cheer consumers for the holidays.

I said I was also going to say something about interest rates trends last week. We only have to look to Japan and the EU to see that U.S. interest rates could continue downward; but only if our government doesn’t step in with public investments that are sorely needed—such as in our energy network, infrastructure, education, environmental protection and the like that we have been discussing ad nauseum.

As of now, the opposite is true. Republicans rammed through tax cuts that have run up a $1 trillion dollar annual deficit. But the windfall went into corporation profits rather than into public spending programs that would have produced more productive workers and sustained growth.

It meant that financial engineering has created a huge savings glut—both here and in Europe—that is driving down interest rates to zero or below. EU countries are so desperate to put their excess savings to work that they are willing to pay investors to use their savings with negative interest rates. The same could happen here if we don’t find a way to use those savings productively.

This came out of so-called austerity measures in an overreaction to the Great Recession. Conservative ‘austerians’ as they were called worried more about budget deficits than investments that would stimulate more spending by domestic consumers and businesses that would in turn boost future growth.

This is what happens with the savings glut we have now. Too many policymakers and investors are obsessed with saving—in fact, hoarding wealth—rather than putting it to productive use that would lower public debt over the long term.

Though it’s really rational financial behavior when individuals hold on to savings for a rainy day. But that’s not the case for governments that won’t spend what’s needed for the future. It will bring on the rainy days sooner. Lord John Maynard Keynes knew it in the 1930s. He was the creator of Keynesian economics and a government that gave us the New Deal.

Harlan Green © 2019

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen