June 2019 Economic Overview

Two huge uncertainties for the world economies: Will there be a deal or will America raise tariffs; is there a point at which China might lash out against America?

  • An IMF study says tariff revenue collected from levies on Chinese goods “has been borne almost entirely” by U.S. importers.
  • China and the U.S. have been engaged in a trade war for more than a year. In that time, they have targeted billions of dollars-worth of goods with high import tariffs.
  • President Donald Trump claimed on May 8 that the higher levies on Chinese goods are “filling U.S. coffers” to the tune of $100 billion per year.
  • But the IMF says the bilateral trade deficit between China and the U.S. remains “broadly unchanged” even with the tariffs.

The latest tit-for-tat tariffs on Chinese imports have already taken a wrecking ball to stocks’ gains. Now, some analysts are bracing for the impact to trickle out to the broader economy.

One prominent analysist said, that the potential cost headwinds of 25% tariffs on all Chinese exports to the U.S. could be in the range of 1.0-1.5% of the index’s net income, But demand destruction and ailing confidence increase the potential impacts well beyond just higher costs and would likely lead to an economic recession.

Late last week, the Trump administration raised the rate of tariffs on $200 billion worth of Chinese imports to 25%, and announced that further levies on another $300 billion in imports would be forthcoming. Trump has claimed repeatedly that China broke the deal the two sides had been working toward over the past several months, leading to the use of tariffs to try and extract further concessions.

Beijing retaliated by announcing plans to set a tariff rate as high as 25% on a portion of $60 billion worth of U.S.-made goods, effective June 1. The news sent contracts on the Dow down more than 500 points in pre-market trading.

We have highlighted the likelihood of an earnings recession or S&P contraction of bottom-line growth, the near level of the S&P 500 of 3000 approached earlier this year, was probably overvalued. Last week, the S&P 500 posted a weekly loss of 2.18% as concerns about trade tensions simmered. However, the index was still up about 15% for the year-to-date.

But earnings recession aside, an increase in the prospect of increased trade tensions has also pulled up the probability

There are many signs that the risk of a recession in the next 12 months is rising, While an economic recession doesn’t always ensue after the indicator signals downturn, on average equities tend to underperform treasuries over the next twelve months by about 6%, indicating we have little upside until either prices fall back to more reasonable levels or this indicator reverses.

While the prospects of a near-term trade deal appear off the table for now amid a trade talk deadlock, a breakthrough would be unlikely to immediately reverse the choppiness in trading seen over the past several sessions. Negative surprises like the re-escalation of U.S.-China trade tensions can have greater negative price impacts than fundamentals might suggest, as such unexpected occurrences can leave a lasting impact on sentiment and outlooks.

Volatility may not subside as quickly as some might think even if there is a proper de-escalation of these trade deal risks.

May 2019 Economic Overview

The surprising 1st quarter’s robust growth of 3.2% for the U.S economy may prove short lived. Overall growth will slow toward year-end. US economic challenges, especially in the US created tariff war with China and in weakening growth in Europe, where the real problem of slowing, is. But, the decade-long expansion in not in danger, yet.

Disposable personal income increased by 3%, prices increased by 1.3%, excluding food and energy. Overall prices climbed by 0.8% in the first quarter.  Personal spending though, the biggest component was up just 1.2%, two tenths more than expected as an increase in spending on services and nondurable goods offset a decline in spending on durable goods.

Investors were closely watching out for the report as they looked for more confirmation that a recession may not be in the cards over the short term. The S&P 500 is up 16.7% this year after the Federal Reserve reversed course in its path to tighter monetary policy, easing fears that a recession may be imminent.

The mantra that we’ve lost good-paying jobs to China is exactly wrong. We have lost the bad-paying jobs to China and gained good-paying jobs. The U.S. has lost 5 million manufacturing jobs since 2000, and those losses have reverberated across the country. The scale of those losses has overshadowed areas of growth—but there has been growth. For example, the number of workers employed manufacturing medical equipment and supplies has grown eight percent over the last two decades, even as overall the U.S. job market has been robust for much of 2016. Employers have added more than 2.2 million jobs over the past 12 months — a sign of economic health that predates Trump’s presidential victory. Manufacturing employment has fallen 28 percent over that same time period.

Finally, though immigrants make up about 13 percent of the U.S. population, they contribute nearly 15 percent of the country’s economic output. They have an outsized role in U.S. economic output because they are disproportionately likely to be working and are concentrated among prime working ages. Moreover, many immigrants are business owners. In fact, the share of immigrant workers who own small businesses is slightly higher than the comparable share among U.S.-born workers. We should not be fearful that immigrants are stealing jobs from “everyday Americans.” Study after study has shown that immigration actually improves wages to U.S.-born workers and provides more job opportunities for U.S.-born workers. ABC News, reported that “The fact is immigrants often push U.S.-born workers up in the labor market rather than out of it.”

April 2019 Economic Overview

The Fed painted a far less rosy economic picture than the White House when it left interest rates unchanged and signaled it expected to make few changes in the near future. Growth is slowing because of the Trump initiated trade war, economic slowdown in Europe and China, and the virtually non-existent benefits from his tax cuts. The Fed now expects 2.1% growth, down from previous estimates of 2.3% in December and more than a full percentage point less than the White House predicts. Rate hikes seem to be off the table for this year, giving Trump what he wants.

Wall Street is happy as a clam, but Trump’s tax cuts will not give the economic growth he predicts. But the slowdown will have its impact, where, is a mystery at the moment. C.E.O.s’ economic confidence fell for the fourth quarter in a row as well as forecasts for growth, unemployment and inflation. All suggesting the American economy is entering a more sluggish period.

Most of us grew-up looking toward a system that had been established after WW II- democratic governments, globalized economy that would gradually bring the world together and believed it was remarkably stable.

But globalization has a downside- it is faceless, and people want to know their identity, want to be connected to some religious or ethnic or national group. Donald Trump, perhaps the most undemocratic president in modern American history is looking more fascist by the day.

Fascists use “emergencies” to create fear and conflict, so there is a potential red line. If Trump does that, then he really is a bully with an army. If Trump actually uses the military to deploy or incite violence, that’s when all bets are off. Authoritarian leaders have a way of learning from one another in real time, which can create an anti-democratic spiral.

we are witnessing an anti-democratic spiral. Trump’s rather peculiar relationship with Russian President Vladimir Putin is especially troubling. I mean, why is Trump hiding his details of his conversations from his own administration? We have no idea of what they talked about. The Mueller report is yet to be made public, until then, judgements should be withheld, in spite of Administration’s victory dancing.

I am an optimist who worries a lot. we have to call it out, and that’s what I am going to do.

March 2019 Economic Overview

There is a high likelihood for economic trouble in 2019. Borrowing costs are rising and debt is soaring. The underlying weakness, as ever, is debt and avoiding harm is tricky. American economic policy is not helping. Our country’s budget deficit will approach 6% of GDP, the highest the country has seen, not fighting our way out of a war or a recession.

America’s expansion could shortly reach 121 months, the longest ever. (Trump has been president for 25 of those months, so his bragging rights are for staying out of the way!). The yield on ten-year governments has been climbing. Higher yields are often bad news for stock markets. With unemployment rate around 4%, the country was in a recession in less than a year later.

Trump’s trade war with China has high stakes. His tariff hikes alone could shave several tenths of a percentage point from our GDP growth, delaying them, only delays the pain. The greater effect will be on business confidence, business does not like uncertainty. A global downturn is not inevitable, pent-up demand may extend the business cycle a bit longer. An American recession, in any case, won’t begin until the back of 2019. But signs of stress are evident and the world has never escaped the reckoning that comes from rising interest rates, excessive borrowing and risky policies. It will not this time either.

Trump has divided America and dominated world affairs to a degree that has no modern precedent. His style – diplomacy via tweet shows his contempt for conventional norms. His world-view – a zero sum, grievance laden, mercantilism – racially tinged nationalism – marks a wrenching change from our country’s post WWII role.

His critics think he’s been a catastrophe, threatening the fabric of American democracy. He is economically illiterate, morally bankrupt and geo-strategically short-sighted.

His supporters think he is Tough Trump, boorish and embarrassing but “our Boor”. He is someone who brought a roaring economy and called time out on an outdated global order.

At best Trump can be credited with modest tweaks that to the narrow mercantilist American self-interest, amount to modest negotiating successes. Trumpism seems more of a strategy of simply smashing the international order, making mini-deals to tilt its terms, declaring victory and moving on.

In 2019, the other shoe will drop.

February 2019 Economic Overview

Any number of things led to Trump’s capitulation of his shutdown of the US government. Good sense was not one of them, unfortunately. He continues to insist that money be allocated to build his great wall or great metal barrier to protect us from the invading hoards from Latin America. Economists had been warning that the damage is real and growing. Many economists believe that even with this short reprieve, the growth in our economy has been or will be squandered. Business and consumer confidence- already burdened by signs of slowing global growth, trade tensions with China and waning effects of the 2017 tax overhaul could suffer. Including the end of the standoff, the economy could slip from what appeared to be the strongest year of growth since the 2007 financial crisis into a stall, or worse.

Fear of immigration is poisoning Western politics. Trump owes his job to it. Brexit would not be happening without it. Strident nationalists wield power in Italy, Hungary, Poland and Austria, and have gained influence elsewhere. The West risks a backlash of the sort that ended the previous great age of mobility, before 1914. According to Gallup, 700m people—14% of the world’s adults—would like to move permanently to another country, usually a rich one. In sub-Saharan Africa the figure is 31%. The rich world clearly could not absorb so many newcomers at once. This is one reason why the politicians who complain loudest are winning elections. However, the economic benefits of allowing a steady flow are potentially gigantic. An unskilled Mexican who moves to America raises his wages by 150%; a Nigerian, by 1,000%. Therein lies the problem: the biggest benefits of moving accrue to the migrants themselves, while the power to admit them rests with voters in rich countries.

At Yale’s CEO Summit last week in New York City, though off the record, nearly 150 business leaders who were there: three out of four CEOS said they often apologized to their international business partners about the president and about his messages. Eighty-seven percent said Trump’s negotiation style had cost our nation the trust of its allies and three-quarters felt that he was not leading effectively on issues critical to US national security.

January 2019 Economic Overview

Trump built a wall, not with Mexico, but with the rest of the world. This year the trade war became a reality. The main target was China. Since July the US imposed tariffs on $250 billion of Chinese imports, and China retaliated with tariffs of their own. In addition, Trump began fighting with almost everyone of its other trade partners, alienating many of them. Business will undoubtably begin to suffer. US companies paid $1 billion more in tariffs annually on Chinese tech imports in October.

The November jobs report showed the U.S. labor market continues to hum along; the economy added 155,000 jobs and the unemployment rate stayed at 3.7%, the lowest overall unemployment level since 1969.

Wages were in-line with expectations, with average hourly earnings rising 0.3% over last month and 3.1% over the prior year. Wage growth has been closely tracked for signs of inflation pressures in the economy. Wages rose 3.1% over the prior year, in October, the fastest pace of annual wage growth since April 2009 while 250,000 new jobs were created. Except for the headline gyrations of the stock market, there is nothing to suggest the economy is suffering a more sudden downturn.

Not with standing that the fear of immigration is poisoning Western politics. Trump owes his job to it. Brexit would not be happening without it. Strident nationalists wield power in Italy, Hungary, Poland, and Austria, and have gained influence elsewhere. The West risks a backlash of the sort that ended the previous great age of mobility, before 1914. According to Gallup, 700m people- 14% of the world’s adult population- would like to move permanently to another country, usually a rich one. In Sub-Saharan Africa, the figure is 31%.

The rich world clearly could not absorb so many newcomers at once. This is one reason why the politicians who complain loudest are winning elections. However, the economic benefits of allowing a steady flow are potentially gigantic. An unskilled Mexican who moves to the US raises his wages by 150%; a Nigerian by 1000%. Therein lies the problem: the biggest benefits of moving accrue to the migrants themselves, while the power to admit them rests with voters of the rich countries.

December 2018 Economic Overview

A US market sell-off led by technology stocks wiped out gains for entire 2018 stoking fears that the US could face significant challenges. Though the economy appears strong, unemployment is low, corporations are producing large profits and wages are beginning to rise, slides in stocks are often the first sign of trouble. In this case the slump reflects concerns about privacy lapses and mismanagement at tech companies, as well as fears of slowing growth and the impact of Trump’s trade war with China. Our budget deficit of over $100 bn in October cannot be ignored indefinitely.

America’s farmers are at the center of Trump’s trade war. More than 1/5th of agricultural exports face new tariffs. This all reminds us the 1980s when the US suspended grain sales to the Soviet Union, interest rates rose, incomes sank and many farmers left the business completely. Today, American farmers are titans of international commerce, due in part to government subsidies as well as productivity measures helping efficiencies and yields. These helped depress soybeans and corn prices, even as land and fertilizer remained relatively expensive. So, this trade war is particularly ill-timed. Trump and Xi Jinping are due to meet at the G20 summit, but neither seems anxious to concede much. When one export market shuts, it is very difficult to divert goods elsewhere. Soybean farmers are particularly concerned that trade flows will shift permanently. Economists expect the average farm loss of $70,000. In 2015, 51% of output came from farms with sales of less than $1 million compared to just 31% in 1991.

The government may also become more involved in agriculture to muddled effect. Trump disrupted global trade flows by using $12 Bn of taxpayer money to offset farmer’s losses. The risk is that American farmers become less competitive and more distorted.

November 2018 Economic Overview

Trump will have a glowing economy to brag about for at least a few more months, but signs of a slowdown ahead are gathering steam. Stocks have vacillated and are barely even since January and looks worse. Traders worry if the market is accurately pricing in the impact of Trump’s trade war with china and his insulting every US trading parent in the world. How much longer can this nine-and-half-year-old bull market last? The answer started last week.

Retail sales slowed recently, prompting forecast be lowered from 5% to 4.7%. The housing market is slowing due to rising mortgage expense and all-time high prices for new homes and existing home sales have fallen to a two-year low. Wages grew 3.3% in the third quarter, beating the cost of inflation and proof that the super-hot jobs market is growing paychecks.

A recession is not imminent, but one is increasingly likely, as the stimulus of tax cuts, federal spending hikes wear off, and soaring federal deficits take a toll on debt markets. Trump suggests the US can outlast China in a war of attrition, as his protectionist trade policies cut growth on both sides of the world, testing how much economic pain politicians can impose on their own people. But if his calculation truly favors the US.

China and its leaders do not seem to have noticed. They have made no concessions to Trump and seem content to wait and see who blinks first. The biggest risk is that neither blinks.

The world economy’s problem in 2018 is one of uneven momentum. Trump’s tax cuts have lifted quarterly growth, and unemployment is the lowest since 1969 in the US. Yet the IMF thinks growth will slow for all advanced economies. The dollar is strengthening making it harder for emerging markets to repay their dollar debts. The fear is that those problems will wash back onto our shores. The rich world is ill-prepared for even for a mild recession- the policy arsenal is depleted. Today the Fed’s tool of lowering rates is cut in half. The Euro-area even less and Japan has no room at all.

Timely action could avert some of the danger. Raising inflation targets would be a good first move. But pre-emptive action calls for initiative from politicians which is conspicuously absent.

October 2018 Economic Overview

The U.S. economy will expand at a robust pace in coming quarters but slow to 2% by the end of 2019. Contrary to Trump’s assertions: Trade wars are not ’easy to win’, can be much more complicated than anticipated, and always have unexpected consequences. Tariffs are bad policy. Trump kicked off the week by imposing 10% tariff on $200 billion worth of Chinese imports. China retaliated with $60 billion saying in affect that they are not going to be pushed around. A trade war could hasten the next US economic downturn.

We looked at indicators: job gains, unemployment rate, GDP growth, wages, business investment, prime-age worker employment. They tell a typical story: Trump’s economy is a continuation of the trend set by the last years of the Obama economy. History books will award Bush and Obama for a historic turnaround. Trump can be credited with only staying out of the way. He has exceeded expectations only for job creation and for GDP growth. The real test will be whether these positive trends can be sustained.

Since consumers pay the higher prices duties bring, for example after Trump put tariffs on washing machines, the price for laundry equipment shot up 16% over a three-month period. Overall, Trump’s tariffs threaten to disrupt businesses and depress their revenues.

Tariffs risk triggering a more alarming response by investors. The evidence is that China is going to be more assertive in this Trump initiated confrontation, implying a more protracted solution. When you add issues such as theft of intellectual property by China and the widening trade gap, negotiations are likely to be protracted. We cannot rule out a ripple throughout the rest of the globe.

Tariffs could translate into less trade, which could hinder growth in smaller nations. The U.S. dollar has already begun to rise in value as trade tensions have mounted. This has insulated the United States from higher prices.

Republicans’ control of the House and the Senate is at stake in the midterm congressional races in November. Trump has portrayed the import taxes as a winning electoral issue because they are forcing other countries to compromise with the United States.

But public opinion suggests that his tariffs could prove a vulnerability. A poll released Aug. 24 by The Associated Press-NORC Center for Public Affairs Research found that 61 percent of Americans disapproved of the president’s handling of trade negotiations. All of these trade fights, with Mexico, Canada, and China may be riling businesses and consumers, the ones who pay for the increased prices. In the long run, does the US behavior impair our image and world vitality? Countries are worried by our unilateralism. Threat to the dollar?

September 2018 Economic Overview

Second quarters GDP growth was revised to 4.2%, making it the best in four years.

Our current bull market, a period of rising stock prices is 3455 days driven by strong profits, low inflation and stable economic growth. The S&P is up fourfold.

The 1990s boom generated a return of 417%, while the Obama/Trump rally has produced a return of 324%. Investors are sanguine and this market will possibly become the longest on record, yet just recently, we experienced an inverted yield curve which is highly predictive.

In all three of our recent recessions, the yield curve for governments ‘inverted’. There are reasons to heed signs flashing across bond markets, now. First central bankers often overestimate the durability of a boom. Second, central bankers generally worry more about high inflation than about rising unemployment. Why be concerned? The unemployment rate is now unsustainably low. A slowing of growth sufficient to bring unemployment up to a rate the Fed deems natural, say 4.5% is needed.

We have experienced four post-2008 themes:
1.The immediate post-crisis response in which banks were rescued and the monetary and fiscal taps were opened;
2.The Euro-zone crisis which hit Greece, Ireland, Portugal, Italy and Spain;
3.Shift to the developed world with a more austere fiscal policy;
4.The rise of populist politics in Europe and America.

The immediate post-crisis response saved capitalism and was necessary, but the banking industry paid too low a price for its greed and hypocrisy. All in All, the backlash against bankers, the EU, governments and the impact of austerity led to the rise of populism and to its unlikely bandleader, Donald Trump.

Initially, European politicians dismissed the crisis as an American phenomenon generated by Wall Street, though European Banks were filled to the gunnels with dodgy American real estate loans. Now the most significant failure has been the inability of the Banking Industry, Wall Street, or the US government to deal with problems which lie at the heart of the system and persist today. The financial sector looks incredibly unaltered. Bank have more capital but have recently have been allowed to return to the self-dealing tactics of that era. It is true that bonuses are tied to longer-term performance, but bonuses are still huge and stories of banks’ bad behavior continue to come to light.

The biggest change has come in the public mood. Americans, even Republicans, have swallowed our free-market instincts and tolerate Trump’s protectionist, clap-trap measures and accept his threatening behavior! This change of mood raises fears about what will happen when another storm hits the world economy. The next attack could be even more severe and the remedial techniques that worked ten years ago may not be successful the second time around.

we need to invest in a lot more public infrastructure and investment in underserved communities, job training, more jobs, more lateral thinking. And a lot of this needs to be focused on the transition to a greener economy.

We also need to make sure that workers are empowered so that the benefits will flow to them rather than to corporate profits. Elizabeth Warren just came out with a whole set of policies to improve corporate responsibility. So, there’s a whole lot of things that we need to do to focus around public investment, increasing labor’s role at the bargaining table and raising taxes back up on the wealthiest so that we can fund public services for the rest of us.