July 2018 Economic Overview

The Fed raised interest rates to a range of 1.75 to 2.00 percent and implied there would be two more raises this year. The task now is to balance US growth and falling unemployment without encouraging inflation. By 2020, the economy will be overheating. With lunatics running the asylum, who knows what is next.

If any country can bully the world, the US can, it’s power is unmatched and is there, to be exploited which is why every president, including Mr. Obama, has used it to get his way abroad. But it is hard to think of a president who bullies as gleefully as Trump. He routinely treats America’s partners shoddily and obviously avoids the idea of alliances. No president failed to clothe the application of coercive power claiming to be acting for the global good. Trump may also succeed in the short term, yet in the long run his approach will not work. He starts on false premises.

He is wrong to think that every winner creates a loser or that trade deficits signifies a ‘bad deal’. He is wrong to think America loses by taking on the costs of global leadership and submitting itself to rules. Rules help deter aggressors, shape countries behavior, safeguard American interests. Rules help create mechanisms to solve problems from trade to climate change. Order is vital for American security.

Trump’s antics spreads anarchy and hostility. His assaults are relentless. The trading system will not be able to enforce old rules or forge new ones. America’s allies will be less inclined to follow our lead. A tit-for-tat trade war will unleash destructive mercantilisms. Asian countries may begin to hedge against America’s unreliability by cozying up to China. Countries will be able to act with impunity. Freer trade will unravel.

Worst of all Trump’s impulses mean that China’s rise is more likely to end in confrontation. His dark, zero-sum outlook is destined to lead to antagonism and rivalry. He values neither world trading systems nor allies, so he will wreck it for smaller bilateral deficits. This could lead to retaliation. His deal with North Korea leaves Asian allies vulnerable to the North’s nukes. Trump falls back on the old saw that ‘Might makes right’. His impulses will not serve America or the world for long. Kissinger said ‘order must be accepted as just’. It is better to try to deter Trump now, while the dispute is small. Countries should act in unison and within the spirit of a rules-based system. They should complain to the WTO. The idea that Trump’s tariffs have anything to do with national security is laughable. Retaliation should be carefully calibrated to target symbolically important goods. Tax imports from swing states, aim to weaken protectionism.

Barriers to trade distort economies and harm consumers. A show of strength in the face of Trumps aggression offers the best hope for keeping markets open. Trump is Actively undermining the rules-based international order. It is now time for America’s enemies and allies to fear it. Trump is up to his ears in foreign policy controversy and is showing no sign of being constrained. Our allies look on aghast!

Trump’s disruptive trade disputes are only going to get worse, a full-fledged trade war will drag our GDP by 0.3 to 0.4% relative to base line in the first year then an additional 0.5 to 0.6% in the second year. But an overview of the economy is that populism, xenophobia and protectionism seem weirdly good for business.

June 2018 Economic Overview

The economy has been growing for almost 10 straight years. The unemployment is 3.9 percent for the first time since 2000. And yet wage growth remains stubbornly mediocre. How come?

There is no single answer. But the power of American companies, relative to the power of workers, seems to be a big part of the story. Companies are bigger than they used to be, sometimes dominant in their particular industry. — and labor unions are far weaker. If workers don’t like their paychecks, they often do not have an effective way to demand higher wages or find a higher-paying job.

This power mismatch between companies and workers is a long-running story. Corporate profits have surged since the 1980s. but not so for workers’ pay and benefits. The shortfall is equal to about 4 percentage points of G.D.P. — which works out as $6,000 per household every year. We are talking about real money.

One of the more important ways companies have gained the upper hand over workers has been legal changes that have made it harder for workers (and consumers) to band together and exercise power. A very business-friendly Supreme Court is likely to continue the trend as it ruled 5-4 that makes it much more difficult for workers to fight back against companies they believe are engaging in wage theft, discriminatory pay practices or some such.

While Mr. Trump’s foreign policies have not, yet, caused serious losses in the stock market, investors’ stoicism could face greater tests soon. Earnings growth for corporate America this year probably peaked in the first quarter. And since neither the E.U. nor China looks close to caving to Mr. Trump’s threats, global trade tensions look set to escalate.

The big question: How hard will the U.S. crack down on allies who do not go along with sanctions — is this another trade fight?

The value of the dollar has further to fall and that fall may come in concert with the global economic recovery we have been discussing over the past eighteen months. Trump’s tariffs risk igniting a global trade war that could scuttle the market’s sanguine mood and hurt growth globally. And nowhere is that fear of an undermined rally more evident than in the dollar’s value against the Japanese yen.

The dollar has fallen nearly 7% against the yen since its 2018 high on Jan. 8. That’s a nearly 34% annualized loss.

When the global economy is just starting to come out of crisis, the one thing that will absolutely disrupt the cycle is a trade war and this is Trump’s first salvo in the trade war. The yen is reflecting this faster, stronger and more intensely than any other instrument.

May 2018 Economic Overview

U.S. economic growth cooled last quarter. Consumers pulled back following outsize spending in the prior period, though solid business investment cushioned some of the weakness and employee-compensation costs accelerated amid a tight job market. These results underline the difficulty of achieving Trump’s goal of 3 percent sustained growth, despite corporate and individual tax cuts that went into effect in January. Other figures on Friday cast a shadow over the strong, synchronized global upswing: Europe’s economy lost momentum in the first quarter as expansions slowed from the U.K. to France, partly because winter storms.

Consumer spending, the biggest part of the economy, rose 1.1 percent, matching estimates and marking the smallest gain since 2013. Business-equipment spending and residential investment also slowed. The tax cuts, focused on corporations and the wealthy, kicked in on Jan. 1, and employers adjusted worker paychecks to reflect the lower tax rates in February. But two recent polls have shown a slim majority of Americans said they haven’t notice an increase in take-home pay. The White House has estimated average annual household income would increase $4,000, factoring in economic growth and companies using their tax savings to increase wages. But the nonpartisan Tax Policy Center estimated that the figure would be $1,600 this year — and just $930 for middle-income households. Trump strongly criticized former President Obama for not having a single calendar year in which economic growth hit 3%. In fact, Obama presided over growth of 2.9% in 2015 and three 12-monthly periods during his administration in which growth exceeded 3%.

Trump‘s antediluvian trade policy seems bent on our destruction. He makes threats, strike deals and declares victory. Unfortunately, His mercantilism seems to be gaining steam. Foreigners have duly queued up to sue for peace. Vindication? Far from it. No deal has yet been done with China. The danger of a trans-pacific escalation remains real, partly because of his character. If he wins one fight, he is likelier to start another. His policy seems to be founded on wretched economics and dangerous politics. He is obsessed with our trade deficit which is bilateral. His bluster cannot change basic economic logic: Tariffs bring trade into balance only if they somehow encourage national savings or reduce investment. If America slaps taxes on Chinese goods, China will buy less of them and the deficit will shrink. But, unless Americans change their total spending and saving, China will just buy more from elsewhere.

The president’s fundamental error is to see trade as a zero-sum game. To him, exporting is winning and importing is losing. Gains from trade come from the specialization permitted by the free exchange of goods, capital and know-how. This partially explains why his politics are so irresponsible. Rather than work within the rules-based system of trade, much of which was America’s creation, he bypasses at will. Managed trade is a mistake, not a victory. It substitutes power of political lobbies for market forces, favoring well-organized producers over silent, disparate consumers. His approach threatens to leave everyone much worse off. Yet, global trade has proven itself to be remarkedly resilient.

China has signaled that they are not about to back off. Its steel and aluminum exports to us amounts to less than 0.03% of its GDP, is not even a rounding error. Trump’s request that they cut their trade surplus by $100 B is risible. An investigation of their Intellectual-property practices is almost completed and Xi Ping surely wants to show that he is no pushover. Worryingly, each side thinks that in a trade war of attrition, it would have the advantage. This has all the makings of a lose-lose battle.
Most presidents, after their honeymoon, something happens because all of the things that they are planning to do politically, do not happen overnight.

Consequently, when the honeymoon period is over these presidents have a bear market. The biggest question mark is the impact on markets when investors realize that the federal government’s annual budget deficit is set to rise to more than $1 trillion in 2020, as estimated by the Congressional Budget Office. In a decade, the public debt will almost match the size of the US economy, bigger than at any point since after WW II and well past the level that worries economists.

Trump believes that his new tax law will push economic growth above 3% a year, generating more revenue than the tax cuts cost. But the Budget Office estimates the economy to grow at an average rate of 1.9% over the next ten years.

April 2018 Economic Overview

The current Republican regime will run a deficit in 2019-2020 as large as Obama’s. America is wandering into uncharted territory. “The economic outlook has strengthened in recent months,” The Fed said, Recently, and raised its rate by a quarter point to a range of 1.5-1.75%, a neutral range, a range that neither boosts nor slows the economy. Implication is that the cycle could go on longer than previously thought. There are two ways things can go wrong: the government outbidding the private sector, thus crowds out business. Lenders make the government pay higher rates to compensate for the risk of a default. This could tip government into a fiscal crisis. The government must then adopt draconian austerity measures.

There is reason that this orthodoxy may not apply. Our fiscal expansion occurring when the global financial system has had an insatiable appetite for safe government debt. Our government is nonetheless among the safer ways to meet the world’s need for safe assets.
This clearly can lead to more trouble in future, by deepening the world’s dependence on treasuries. Today’s rising debt seems likely to be used to justify future austerity, say, when control of the government swings back to the Democrats. America may regret its abandonment of budget principles. An overheating economy stems from an expansive fiscal policy at a time of full employment. An overheated economy would trigger monetary policy discipline and plant seeds of recession. Whatever turns the Fed unfriendly would likely be sufficient to derail the US equity market. But for now, we continue to expect the Federal Reserve to remain friendly to risk markets for a while longer.

March 2018 Economic Overview

Volatility is back. With a vengeance. The stock market rose steadily without a sell off until it abruptly ended in the second week of February, when the bottom fell out. Then resumed its progress from a lower level. Wage growth accelerated; the VIX, an investor expectation barometer, spiked from 14 to 37- an alarm bell high. The world nerves frayed. Implying that a transition is underway where growth causes inflation to replace stagnation as investors’ biggest fear. This shift is being complicated by an extraordinary gamble in the US. The enacted tax cuts are adding a hefty fiscal boost to juice up an expansion which is already mature. Public borrowing will double to $1 trillion, or 5% of GDP. The team steering this experiment is the least experienced in recent memory: Trump and his new Fed Chairman. Boom or Bust it is going to be a wild ride.

The world economy continues in fine fettle, buoyed by a synchronized acceleration in America, Europe, and Asia. Collateral damage to other markets was limited. Yet this episode of correction does signal what may lie ahead. The loose money policy is being dismantled. Stock markets are in a tug of war between strong profits, which warrant higher prices and higher bond yields which depress the present value of earnings. Tension is the return of monetary policy to normal conditions. What is not inevitable is the scale of the US’ impending fiscal bet. Economists reckon that Trump’s tax reform will jolt growth at most 0.3%. And Congress is about to boost government spending. The mood of fiscal insouciance in Washington DC is troubling. We are being more profligate than at any time since 1945.

This cocktail of expensive stock market, maturing business cycle and fiscal largesse would test the mettle of any experienced policymaker. Instead the policy is being bought by people who claim deficits do not matter. And the Fed has a brand-new boss who has no formal experience in monetary policy.

We must get to grips with our fiscal deficit otherwise, interest rates will soar. Mr. Powell must steer between two opposite dangers: Dovish where he hesitates to gradually tighten rates to avoid creating a bubble; the other is to tighten too tight, too fast which would be a mistake. First, it is far from clear if the economy is at full employment; second, the risk of a sudden burst of inflation is limited; Third, there are sizeable benefits to letting the labor market tighten further.

The fiscal stimulation of the scale that Trump is putting in place is poorly designed and recklessly large. Financial market Volatility will be the new normal. Hopefully the Fed will not lose its head.

February 2018 Economic Overview

The economy’s vital signs are stronger than they have been in years. Companies are posting jobs faster than they can find workers to fill them. Incomes are rising. The stock market sets records seemingly every month. As noted previously, the market is up about 30% since Trump’s election. It is up over 200% since 2009, when Obama was inaugurated. In recent Quinnipiac Poll, 66% of people feel the economy is “Excellent or Good.” That is the highest number ever recorded by this poll, Trump tweeted. In fact, this is the third-strongest bull market since 1929. Strong earnings and an accommodative Federal Reserve providing ultra-low interest rates continue to provide the impetus. With savings accounts and bonds offering such paltry returns, investors have little incentive to switch out of stocks. Trump’s push for deregulation and tax cuts has had an effect. Tax cuts for corporations could continue to boost stock market prices since lower taxes boosts profits and lower taxes encourage US-based multi-nationals to bring home foreign earnings. But history suggests they will use much of it to buy back their own shares which helps drive ups share prices. The present boom has been unusually long. 2018 is likely to be another year of declining US Dollar, primarily because it is a sign of the burgeoning health of other countries’ economies. Since global world health is buoyant few countries seem to mind if their currencies rise.

We must mention some items of concern, however: US auto sales fell 1.8% in 2017, ending seven years of growth. Trump’s massive tax package aims to stimulate business, as well as tariffs, meant to protect them. He blamed technology and globalization for jobs losses. Recent history of consolidations has played a much larger part. Banking for example, where regional banks have been replaced by larger rivals. There were 4,938 commercial banks end of 2017. In 1984, there were 14,400.

With those banks have gone local branches, well paid jobs and also the social capital that comes with local banking teams that live in communities they service, lend to and interact with. Replaced they are, by low-wage jobs from large companies such Wal-Mart and Amazon.

January 2018 Economic Overview

US economy is in good shape and likely to remain that way throughout 2018. Business confidence is high and jobs are plentiful. Unemployment is 4.1%, lowest in more than a decade and wages are growing. In spite of Trump’s claim, he was lucky in his inheritance. The market is up 25% since his election, but it is up 195% since 2009! Unemployment under Obama fell from 10% to 4.7, then to 4.1% under Trump. The economy is not in danger, but the maturity of the business cycle makes a nonsense of Trump’s trumping his authorship of economic success. For a year we have participated along with Europe and Asia in a synchronized global expansion. Should it continue, it will be the second longest expansion, EVER.

Evidence of overheating is scant. Here is the shade- the longer the expansion, the higher the likelihood of companies are to automate. They have the incentive to do so. It is harder now for industry to find additional workers. America is not about to return to pre-2005 productivity rates. Regardless of the tweeting Trumps does. Policy makers are going to regret the tax cuts they are enacting. They are squandering much needed revenues. Interest rates will peak at much lower levels than in the past but the immediate outlook is sunny.

Putin is playing Trump as if he were his asset. China looms over the West, particularly the US. It is conquering minds as well as territory. Australia was the first to tackle sophisticated foreign efforts to influence lawmakers. Not much later, Germany accused China of trying to groom its politicians. China’s sharp power as in using elbows, in contrast to soft power which is more cultural, helps their authoritarian regime coerce and manipulate opinion abroad. West must find a statesmanlike middle ground starting with an understanding of sharp power and how it works.

China’s sharp power uses a series of interlocking steps: subversion, bullying and pressure to promote self-censorship and pressure. Sometimes it is blatant as with China punished Norway for awarding Nobel prize to a Chinese Activist. Western professors have been forced to recant and some have lost access to Chinese archives. Because China is integrated into economic, political, and cultural life, the West is vulnerable to such pressure. West may value trade over principal. China has been active for decades in Africa and its citizens chafe under the saddle.

China wants to shape rules of global engagement, rules created by the US and Trump could care less! He is more worried with building walls and less about trade.
The West must make room for China’s ambitions, but that does not mean anything goes. Counter-intelligence, the law, and an independent media are the best protection. Unleashing a witch hunt against the media or against Chinese people would be wrong. Politicians calling for tit-for-tat reciprocity in any regard would be self-defeating. West must stand by its own principles and not be spooked by the West losing power to China’s emerging power. We must use our own values to blunt China’s sharp power.

December 2017 Economic Overview

Fed Chairman Janet Yellen is still inclined to raise interest rates gradually seeking to balance the risks of moving too fast or too slowly. The Fed is widely expected to raise its benchmark rate by a quarter of a percentage point at its final policy meeting of the year in mid-December. The rate now sits in a range of 1 percent to 1.25 percent.

Unemployment has fallen to 4.1 percent as of October, which the Fed regards as a little lower than the minimum level that can be sustained without spurring inflation.

On the other hand, the Fed sees little reason to rush. The economy is not overheating, inflation is below 2 percent, and the Fed does not want to stall growth.

Candidate Trump made aggressive claims about growing the U.S. economy. In a speech to the Economic Club of New York on Sept. 15, Trump asserted that his economic plan would raise U.S. gross domestic product (GDP) by more than 4 percent per year. The next month, he stepped up that claim during the third presidential debate saying: “And I actually think we can go higher than 4 percent. I think you can go to 5 percent or 6 percent.”

For the record, the United States has not seen consistent economic growth of 5-6 percent since the 1940s, or 4 percent since the 1950s and 1960s. Growth in the 1970s, 1980s and 1990s was only slightly above 3 percent. Since 2000, it has been less than that, at 1.6 percent. For the next decade, the nonpartisan Congressional Budget Office (CBO) has projected U.S. GDP growth of approximately 2 percent per year.

Trump’s proposed fiscal policy of tax cuts and increased government spending are not likely to result in a sustained increase in GDP expansion. We would like to be wrong on this point, but to date we evaluate Trump’s fiscal proposals as unlikely to overcome major headwinds of high debt, low productivity growth and stagnant workforce growth. The latter two have not generally been negative headwinds, but rather have been strong tailwinds for growth for most of U.S. history — so strong that the pernicious negatives of debt were masked when debt-to-income levels were lower than exist today.

U.S. private debt relative to GDP has been increasing almost steadily for the past 65 years. Since 2000, government debt has also surged. This has resulted in total U.S. private and federal government debt accumulation in excess of $58 trillion, about equal to three times annual GDP or income. A major red flag is that the recent growth rate of total debt continues to exceed the growth rate of nominal GDP, signaling subpar investment outcomes and the burdensome weight of the accumulated debt load. Our worry is that Trump’s fiscal expansion will exacerbate this debt cycle and actually work to suppress long-term economic growth.

November 2017 Economic Overview

University of Chicago Professor Richard Thaler was awarded the Nobel Prize for Economics for challenging the traditional idea that free markets reflect self-interests of rational individuals. They do things contrary to their own good. He created a new field called ‘Behavioral Economics’ which looks for ways governments or companies ‘nudge’ people to take actions for their long-term interests. Society relies on traits of character in a society. And in America we are experiencing less crime, but people are more scared. Contrary to Trump’s portrayal of ‘American Carnage,’ we are experiencing the paradox of fear. From ’93 to 2014, Americans became 62% less likely to become the victim of a violent crime. Persons aged 12 and older, per 1000 persons, victimhood dropped from 29.3 to just 11.1 in that period. So far for 2017, we are on track for the second lowest rate of victims any year since 1990. The paradox, it that in spite of the facts of safety, many Americans are convinced that crime is growing…Thank you Mr. Trump and for your rhetoric. Is increased domestic manufacturing a possible answer? If we could find properly trained workers manufacturing might prosper. However, studies show that the majority of past factory jobs losses were the result of investment in automation, which continue to pay off. American manufacturing has more than doubled output in real terms since the Reagan era, to $2trn today. Productivity is soaring. Output per labor hour rose by 47% between 2002 and 2915. American manufacturing activity hit a 13 year high in September. Our biggest problem is manufacturing cannot find enough skilled laborer! It is estimated that in the next ten years, there will be 3.5 million manufacturing jobs will go unfilled as a result. Public-Private partnerships aim to speed up the development of advanced techniques such as 3-D printing and digital manufacturing and to help train workers in these areas.

It will take more than a few of these partnerships to tackle America’s yawning skills gap. Initiatives, policy makers and manufacturers can judge what best works and copy successes. Continued technological progress will keep manufacturing employment from returning to past heights. But if skilled workers could be found, they could guide machines and the sector’s output could really take off.

The Tea Party prepared the way for Trump’s insurgency. A serious effort at the deficit would have involved entitlement reform, moderated defense spending or rises and a shutdown of government when they were not forthcoming. The 40-odd congressmen demanded highly partisan, selective cuts that were proxy for antipathy to public spending, for redistribution, and to immigration. This also implied more defense spending and no cuts to social security. What we truly need is a center-right party committed to prudent fiscal restraint, without rancor.
Candidate Donald Trump made aggressive claims about growing the U.S. economy by his plan would raise GDP more than 4%. Then, he stepped up that claim during the third presidential debate saying: “And I actually think we can go higher than 4 percent. I think you can go to 5 percent or 6 percent.” The United States has not seen consistent economic growth of 5-6 percent since the 1940s, or 4 percent since the 1950s and 1960s. Growth in the 1970s, 1980s and 1990s was only slightly above 3 percent. Since 2000, it has been less than that, at 1.6 percent. For the next decade, the nonpartisan Congressional Budget Office (CBO) has projected U.S. GDP growth of approximately 2 percent per year.

Trump’s proposed fiscal policy of tax cuts and increased government spending are not likely to result in a sustained increase in GDP expansion. We think real growth will be short of the 50-200 percent increase over CBO projections that have been promised. We would like to be wrong on this point, but to date we evaluate Trump’s fiscal proposals as unlikely to overcome major headwinds of high debt, low productivity growth and stagnant workforce growth. The latter two have not generally been negative headwinds, but rather have been strong tailwinds for growth for most of U.S. history — so strong that the pernicious negatives of debt were masked when debt-to-income levels were lower than exist today.

October 2017 Economic Overview

Our economy continues on the longest economic expansion in American history, well prior to the recent presidential election, at a pace of around 2%, about as much that is sustainable longer term. Weather related problems may slow the pace, but the trend is well established and is likely to persist. Home construction is modestly increasing held back by the lack of skilled labor and to a degree, the availability of credit. Infrastructure and military spending have been moderate despite Trump’s political spin. City, state and pension spending is and will likely continue constrained because their budgets are mainly in deficit and because of wide spread anti-tax sentiments. Plant and equipment investment is growing faster than GDP. Business inventory accumulation remains low perhaps because of internet innovations that appear to be reshaping consumer practices.
Since employment growth is bound to diminish as the ranks of the unemployed are depleted (the current unemployment rate of 4.4% is unlikely to fall much further), consumption growth, too, is liable to slow.  Once monthly payroll job increases decline significantly, as is probable by mid-2018 if not sooner, sales gains will erode and talk of recession will revive–possibly easing the political gridlock over tax reduction.

I have spent many years of my life outside the US. Living abroad reinforced the idea that what is noblest of our country is exactly its openness: Its openness to talent, to new ideas, to new ways of doing things, to new blood. We are a welcoming society. We don’t build walls, we build towers to seek new horizons and new friends. What is Ellis Island all about if it is not about Welcome? What about NASA and the Peace Corps? These are not isolationist tendencies.

My America is a place that gives immigrants and “the wretched refuse” of the world — the words on the Statue of Liberty — a chance to make this arena for their dreams and ambitions, despite all the difficulties of adjustment. My America is not the one that builds a wall to keep people out. Many of you have lived it in your own lives. America is hardly overrun with immigrants: Their percentage of population is lower than in any decade between 1860 and 1930. Post-World War II, when the population of immigrants fell to 4.7%, that was when America began to stagnate. The potential growth of any economy has, is the sum of workforce and productivity growth.

With baby boomers retiring, the rest of us and our economy need immigration more than ever. The rule of thumb is that 10,000 boomers will hit retirement age every day for years. Someone has to do their work — and someone has to replace their consumption.