Short Items of Interest—U.S. Economy
States Are Not Ready
Now that the economists of the country are starting to coalesce around the idea the next recession will be in 2019 or 2020, there is some conversation as to whether the country is ready. Right now, the answer would have to be a resounding no. The fact is very few of the states have taken steps to build their economies to the point they would be able to handle even a modest downturn. In some cases, they just have not seen the growth needed to escape the impact of the last recession, but more often than not, they have simply ignored the assertion that another recession would come at some point. This is the same problem that has affected the whole country. It would be a good time to start planning for that rainy day by building some surplus and addressing debt, but that has not been the strategy as there have been tax cuts and additional spending.
Crash to Follow
The economy has been surging of late, but perhaps for all the wrong reasons. It is somewhat akin to deciding that your hardware store needs to increase its purchase of plywood 100 times every month based on the demand you saw as a hurricane was heading your way. The U.S. is exporting at a record rate—that has improved the trade picture significantly. The problem is that much of that export activity is unrelated to current demand. It is just an attempt to get the product shipped prior to the tariffs and trade restrictions kicking in. Too much of the growth right now is defensive. That sets up a period of high inventories and slumping sales.
Markets Worry About Trade
Up to this point, there has been relatively little reaction to the trade tensions as far as the markets are concerned. There has been a persistent belief that most of this has been for show and that Trump would not actually follow through with the more draconian threats. Now that it looks like there is not going to be the expected level of restraint, the implications of an all-out trade war are sinking in. It worries the markets to the point there has been some serious decline. Granted there are those who have asserted that the markets are overvalued and due for a correction, but that may also mean this decline will be more serious and long lasting.
Short Items of Interest—Global Economy
More Migration Fallout in Europe
The meeting that has been charged with developing a solution to the migration crisis is unlikely to meet that challenge and will instead be an opportunity to vent on all sides. Nothing has divided the EU this thoroughly in decades. The states that oppose more accommodation for the migrants are deeply opposed by those that want severe crackdowns. There appears to be very little room for compromise. Behind the immediate fear is that any sort of accommodation will encourage even larger flows. The Europeans are simply not prepared to host any more. Germany's government is teetering on the edge and Italy has made the issue the No. 1 factor as far as the decision to remain in the EU.
Trump Now Seeks to Attack NATO
One day before the meeting of NATO, Trump has elected to blast the members over what they spend on defense. His assertion is that they do not spend enough as compared to the U.S., but they will counter with the assertion that most of NATO is now embroiled in U.S. efforts in places like Afghanistan and Iraq. The systematic attack on allies is highly confusing to these states which are about ready to fight back—by withdrawing their current support for the U.S. Russia has tried for years to break NATO. Now it appears Trump will do it for them.
Mattis Losing Influence?
The battle over what to do with NATO may be the last straw for the Defense Secretary as James Mattis is very publicly at odds with Trump over this meeting. He has been reported to have indicated he is close to resigning over this issue and others.
British Approach to Brexit in Tatters
The Brexit issue has been the most vexing the U.K. has faced since the decision to get involved with the EU in the first place. The vote to leave the EU took nearly everybody in the U.K. by surprise—even those who had been advocating it. The primary issue for the voter was immigration, but the primary impact of the move has been economic. Those who have been trying to figure out how to play this are desperately trying to limit the damage to the British economy. The approach pushed by Prime Minister Theresa May has been called a "soft exit," one that would allow the U.K. to maintain many of the relationships and rules that governed business, but the EU is not eager to give this up without something tangible in return. Much of that emphasis has been on the very social issues that had voters upset with the EU in the first place.
Analysis: The man who had been charged with running the process has elected to step down. He has blasted May and the soft exit on the way out. He is being replaced with another supporter of Brexit who has taken an even tougher stance in the past. David Davis was upset with the concessions made to the Europeans and refuses to go one step further. Thus far, there has been no similar ultimatum from his replacement, Dominic Raab, but he has a reputation for more extreme positions than Davis. On the other hand, he has the credibility within the exit community that he could conceivably bring a compromise to the table and get their grudging support. The process has been very rocky so far, as neither the Europeans nor the British seem in the mood to give ground.
What Do We Know Now About the Labor Situation?
To be honest, we don't really know much more than we did in previous reports as there has not been much significant change. The expectations were met and the policy that rests on the status of the labor market will continue as it has prior to this latest report. The Federal Reserve will not be altering their plans for higher interest rates on the basis of this jobs report and there is unlikely to be a change in the way the business community approaches the issue of hiring. The statements that accompanied the report were encouraging, although there was also attention paid to the issues that continue to dominate the labor market.
Analysis: One of the more interesting developments this month was the shift from U-6 to U-3 as far as the classification of some workers. This is what explains the addition of 213,000 jobs, but also an increase in the unemployment rate back to 4%. The breakdown of the jobless categories has always been interesting and often not very well understood. It doesn't help when various politicians cherry pick a number or two to provide "proof" for whatever assumption they want to make. The truth is that computing what is happening in the job market is one of the hardest tasks assigned to any statistical office. The interpretation is even more challenging. Each month, there are millions of jobs gained and millions lost. The number that is cited as a job gain is the difference between the losses and the gains. There are also millions of reasons that jobs are lost and gained. The majority of "lost" jobs are voluntary departures—people who choose to quit one job to take another, people who elect to retire or people who decide to stay home to raise children or take care of sick and elderly relatives. People quit to attend school full time and people quit to join the military. Then, there are those who are fired or get laid off. Each of these categories is quite different and would require different policy approaches assuming that all of these issues even need addressing.
Most economists are not really all that interested in whether people have a job if that job is not a very good one that doesn't pay much and offers little in the way of future progress. The desire is for people to be good consumers so they can drive economic growth. If everybody is employed but in jobs that do not pay decently, the economy will not perform as well as it would if only 80% of the population was employed in jobs that paid well. One of the consistent concerns has been that job gains have been disproportionately in the low-paid and low-skilled categories. That has meant that wages as a whole have not been moving up as quickly as would be assumed with unemployment rates this low.
Currently, there are more available jobs than there are people looking for work. This is a somewhat unique problem. There are at least two issues manifesting here. The most pressing is the labor shortage that has affected dozens of sectors. There are not enough skilled workers in the manufacturing sector and there are chronic shortages of truck drivers, construction workers and health care workers. Airlines are deeply concerned about where they will find pilots in the near future. There are worries about teachers and professionals in law and accounting as well. A secondary issue as far as labor availability is that many of the jobs available do not appeal to the workforce. The jobs require heavy manual labor and pay poorly or they are jobs in less than ideal circumstances. These have been the jobs taken by the immigrant workers in the past, but this population has dwindled as the U.S. gets aggressive on border enforcement at the same time these workers are finding job opportunities at home. These jobs will likely not be filled any time soon as they are simply not popular when there are other options available.
The difference between U-3 and U-6 has been the significant number of people who get discouraged with the prospects they are offered. They essentially resign from the formal job search. They are still counted as unemployed, but because they are no longer getting benefits and availing themselves of the tools of the formal search, they are designated "discouraged workers" and counted as part of U-6. When these workers emerge and start to formally look for work, they are reclassified as part of U-3. That is what has happened this month. There have been a significant number of new additions to the workforce, but they are not doing much to address the skills gap at this point.
Where Will New Workers Come From?
The U.S. economic expansion is already running into some sustainability issues. There are far too many job openings for people with skills and experience. That means there are far too many companies not expanding as fast as they might be able to because they do not have the employee base they need. Where will the business community find that needed workforce?
Analysis: There are not all that many realistic options. Encouraging women to have more children is a long-term proposition unless there is a change in the child labor laws. This leaves keeping people in the workforce longer by delaying retirement and it means immigration. The latter has always been the method of choice for the U.S. There have been many waves of migrant labor over the decades. Another such wave is needed now, but it requires an educated and skilled workforce for the most part. These are not the people who are trying to enter the U.S. illegally, but right now, the U.S. hardly has an open-door policy towards this kind of migrant. This position will have to change; if the past is prologue, it will. The U.S. has long resisted the arrival of new groups until they are needed. The parts of the world most likely to contribute to the influx will be South Asia, Southeast Asia and perhaps parts of Africa where people are being educated, but where job opportunities have not been able to keep pace.
Is There Such a Thing as 'Fair' Trade?
Strictly speaking the answer is no—at least if one defines fair trade as something where everybody wins. There are really only two reasons that nations engage in trade at all. The first rational is called "absolute advantage." This means that a given nation has some resource or product that nobody else has. The rest of the world wants that thing and is willing to give something up to get it. In reality, there are very few places that have a 100% exclusivity when it comes to any given resource or product. But there are limited options. Oil is an example. There are many states that have oil, but the majority of the countries in the world do not have oil in amounts large enough to exploit. These countries will be able to sell their oil to those that want it. The same process works with manufactured goods as not every nation is capable of producing things like commercial aircraft or specialized medical equipment. This kind of trade is generally not all that controversial as everybody knows what the purpose of that exchange is.
Analysis: The second rationale for trade is far more complex and provokes a lot more opposition. This is termed comparative advantage. It involves a lot of judgment calls. Every nation can conceivably produce almost everything it needs (except for those unique resources that are motivating absolute advantage). The U.S. can certainly produce whatever it may desire in the way of goods—from aircraft to tube socks. The question is why would the same economy (sophisticated enough to build commercial airliners and other technical goods) be at all interested in producing tube socks and other cheap consumer goods? It would be a waste of talent and resources that could be better spent on making those high-value items. This means that countries like the U.S. elect to focus on that high-value product and import the low-value stuff that consumers want but don't want to pay a lot for. The challenge with comparative advantage is that a choice has to be made. It is not going to always be a popular one. There will be companies that are in the business of making those tube socks and employees being paid to make them. They stand to lose their jobs and they will not be the people hired to build airplanes. These are the losers in trade. They have a right to try to defend their way of life except if comes at the expense of everybody that now has to pay a premium for tube socks.
What is fair in the context of comparative advantage? Does it mean the U.S. sells to other nations the exact amount that it buys? Not really. Does it mean the U.S. focuses its talents and skills on those things it does best and allows other nations to supply those things the U.S. chooses not to focus on? This seems to come closer to the notion of fair if it is being applied to the entire population. This is always the rub—what is good for the majority is often not at all good for the minority. There will be winners and losers regardless of the system used—it all depends on who you chose to be in which category. The U.S. is a consumer-driven economy. Generally, that has meant pursuing policies that favor that consumer—until now that is.
Humbling It Is
I have to confess that I have taken my health for granted most of my life. I was rarely sick—even as the flu was felling the multitude. I didn't get seriously injured and was able to shrug off the minor stuff. I was a bit cavalier about eating well and exercising, although I was never a total sloth. This has been the year that dragged me back to reality and will (hopefully) cause some serious adjustments. Patient readers of this newsletter have been "treated" to all my whining and complaining about everything from throat cancer to a detached retina. They have doubtless become as tired of the stories as I have in telling them.
There have been some things learned in all this, however. The first is that I really don't have time for this nonsense. Not that anybody does, but I realized that I pack my schedule pretty full. It hardly leaves time for the delights of treatment and reaction to the malady. That's another reason to get back in fighting form. The second learning came as no shock to anyone who knows me. I am not a patient guy and this has been a very slow process. I feel that I should be back to normal by now and get very frustrated with the pace of recovery even as I know I was warned it would be like this.
Maybe the most interesting thing I learned is that being selfish is not all that rare. I was talking with a guy who had experienced a very long and painful battle with a brain tumor and was now five years in recovery. I was almost apologizing for mentioning my simple little bout as it was nothing compared to his. He looked me right in the eye and said "that's bull. What you went through was the most important to you—it was your life, your dreams and your responsibilities on the line. People tried to tell me the same thing, that other people had it worse. How is that a help to me?" What it boils down to is that our struggles are our own and matter to us more than to anyone else. At the end of the day, we have to do our own fighting even as we get as much help as we can from others.