The US economy is fine, but trade storms are gathering
Workers assemble cars at the newly renovated Ford’s Assembly Plant in Chicago, June 24, 2019.
Jim Young | AFP | Getty Images
A former colleague of mine at the OECD (a Paris-based public policy research organization financed by member country governments) smiled at me over a five-o’clock beer with a cutting remark that reports of economic analysis were “a dime a dozen.”
I felt like wiping the floor with him, but gulping down my drink, I thought again how low a once revered profession of “worldly philosophers” had fallen.
Economists, of course, bear the onus of that reputational collapse. The person who put the imprimatur on our reports had no formal economic training, and his main criterion for the reports’ passing grade was that they should be “pleasingly non-strident.”
So, in that spirit, here are a few thoughts on the current state, and, bravely, on the outlook of the U.S. economy, based on the evidence available at the close of trading in New York last Friday.
Steady activity and strong drivers
The latest comprehensive survey evidence on 90% of the U.S. economy, reported earlier this month by the Institute of Supply Management (ISM), showed that output continued to grow during July in 13 out of 18 non-manufacturing industries under review.
The activity for the sector as a whole indicated uninterrupted growth for 114 consecutive months.
According to that survey, employment was growing, supplier deliveries were slowing, inventories were falling and prices were declining. All those are encouraging signs for a steady growth of output and employment in the months ahead.
The ISM also reported that the index of manufacturing activity last month remained in the positive territory, while staying on a downward trend for nearly three years. The manufacturers’ employment grew, customers’ inventories were too low and prices decreased at a faster rate, the index showed.
And there was more evidence last week on the largely outsourced U.S. manufacturing sector. The monthly survey of the Federal Reserve showed that the industrial output was stagnant since the beginning of the year, but it still eked out a 0.5% increase in the 12 months to July.
That is the freshest snapshot of the U.S. economy we have at the moment.
Now, to gauge where the economy is likely to go in the months ahead, we have to look at the variables driving demand, output and employment.
Jobs, household incomes and credit costs directly underpin private consumption, residential investments and business capital outlays — and make up 87.2% of the U.S. economy in the second quarter of this year.
With an unemployment rate of 3.7% in July, most people agree that the U.S. has a fully-employed economy. Others may beg to differ, because the real unemployment rate is 7.1% — if you add 4 million involuntary part-time workers (because they cannot find a full-time job) and another 1.5 million who are no longer looking for a job, to the 6.1 million people who officially reported out of work.
Things get worse and uglier if you consider that only 63% of the U.S. civilian labor force is in the labor market, while 96 million of Americans are wasted resources.
Trade disputes and hybrid wars
With all those caveats, it seems that jobs are plentiful, with some sectors of the economy, such as retail trade and public administration, reporting labor shortages.
The real after-tax household incomes are also looking good – growing at an annual rate of 3.3% in the first half of this year, with savings as a percentage of disposable personal income hitting a stellar 8.1% as of last June.
Credit flows? A real bonanza, with the Fed’s high-powered money hitting last week a mind-boggling $3.3 trillion, and excess reserves in the banking system (money banks can lend) at $1.4 trillion. The right-hand side of the Fed’s balance sheet is now four times larger than during the pre-crisis months in 2008.
And that’s not enough. President Donald Trump wants more, much more, while the Fed’s cacophony of contradictory statements fails to deliver an authoritative and compelling defense of one of the most important parts of American public policy.
Exports — 13% of the U.S. economy — are the only other major GDP component I left out because they are mainly determined by demand coming from the European Union, China, Japan, Canada and Mexico. In the first half of this year, those economies took $537 billion of American goods sales abroad — about two-thirds of the total — and 2% less than a year before.
China looms large in the U.S. trade picture owing to a systematic and outsized trade surplus on American goods trade, running at an annual rate of $334 billion in the first six months of this year.
The China trade story is a comedy of errors. The U.S. is left holding the bag for squandering an unassailable case where Beijing had to yield — and was apparently willing to yield until Washington tried to use trade to impose changes on China’s economic and trade policies under a permanent threat of American sanctions.
As a result, problems of China trade have now gone far into the political and security minefields. Beijing believes that the ongoing violent social unrest in Hong Kong is being spearheaded by the U.S., and is suspecting that Washington wants to open another front with large arms sales to Taiwan. The Korean Peninsula and Japan are also part of the U.S.-China confrontation, with potentially highly damaging economic implications for Tokyo and Seoul.
China is cutting down purchases of American goods and services, and is ready to retaliate against any further impositions of American tariffs on Chinese goods shipped to U.S. markets.
In spite of that, Trump says that the U.S.-China trade war will be a short one, and that any trade deal will be on Washington’s terms. Don’t believe a word of it.
A fully-employed U.S. economy, operating above its noninflationary growth potential, needs no further help from an already extraordinarily easy monetary policy with negative real short- and long-term interest rates.
The monetary policy has nothing to do with tanking equity markets.
The problem is elsewhere, because traders see no end to America’s unfolding trade disputes with Europe and China. Markets are also watching the burning fuse on tinderboxes in the Persian Gulf, Hong Kong, Taiwan, the Korean Peninsula and the contested maritime borders in the South China Sea.
Will the French President Emmanuel Macron summon the courage and wisdom, during this week’s G-7 summit in the French city of Biarritz where leaders of U.S., Japan, Germany, France, U.K., Italy and Canada will meet? Will Macron be able to calm down an American president furiously pushing his European allies into open hostilities with China and Russia?
Macron’s pointedly scheduled meeting on Monday, Aug. 19 — five days before the G-7, with Russian President Vladimir Putin at his summer residence on the French Riviera is a message that France wants Europe out of a senseless military confrontation with unmovable European and Asian nuclear superpowers. He apparently wants to do that with no concession to Russia — a repeat of his frank and robust talk with China’s president in Paris last March.
Commentary by Michael Ivanovitch, an independent analyst focusing on world economy, geopolitics and investment strategy. He served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York, and taught economics at Columbia Business School.