Economic Commentary

Real US economic activity data reveals a continued mixed picture with strength in consumer spending and recession-like weakness in manufacturing. Consumer confidence surveys, both U of M as well as the Conference Board, are weaker and reflect growing concerns and uncertainties in global and domestic sustainability. The concerns seem to be focused on geopolitical hot spots, trade policy and the consistent focus on the inverted yield curve. Let’s consider each of these issues.

Nearly every Central Bank in Europe, Asia and Indonesia are either cutting rates or easing credit to stimulate their respective economies. The upper segment of consumer spending has taken notice and their appetite for large consumer purchases has contracted dramatically. Days on market of homes listed above $2.0 million has increased consistently over the last five months and supply has grown in six of the largest markets as measured by the Case-Schiller report on housing. It is now a strong buyer’s market in private aircraft and large yachts. Why the shift between a seller’s and buyer’s market? The profiles of buyers of expensive homes, vacation estates, private planes and yachts tend to be that of entrepreneurial owners of businesses that are close to the manufacturing, distribution and import/export logistical world. They may be witnessing a shift in global economic activity that has them valuing cash as opposed to assets that are illiquid and difficult to resell.

As if the ideological battle between North and South Korea was not enough to create global economic tension, South Korea and Japan have now decided to not renew trade agreements and have entered the tariff escalation bargaining process. Both countries have much larger trading partners, but the new and very public tension only adds to the turmoil present in the global marketplace. Hong Kong’s destabilization due to the protests over sovereignty issues has raised the temperature of the long simmering issues between Hong Kong and China. It is hard to assume business as usual when China is positioning military assets as well as personnel on their joint borders. It is assumed by most analysts that the Chinese leadership is playing the very long game in the issue of Hong Kong’s desire for sovereignty; however, the current Chief Executive of Hong Kong, Carrie Lam, has all but admitted she is without the support of the people and has no ready answer for the resumption of normalcy. This is a message China cannot be pleased with.

Most continue to be wondering where the victory line is in the trade dispute between The United States and China. A resumption of the previous normal seems unlikely, and the current administration as well as their political opponents on the Democrat side seem convinced that China is a worthy target for trade battles. On the surface, China seems more vulnerable than they have been at any time in the past two decades. Their GDP growth has slowed and their sovereign debt has increased as they have attempted to reboot their economy from export driven to internally focused innovation. China also knows that the shift that US companies made to their global logistical supply chain in Asia took decades to put in place. It is a supply chain both owned and leased that cannot be either replicated nor changed nimbly. The administration’s bully pulpit telling US manufacturers to “get out of China” ignores the complexity of that global supply chain and ignores the nearly two billion customers in China as well.

The party in power knows that the American consumer is growing in their awareness that they are paying more due to tariffs for consumer goods. Administration spokespeople on the Sunday morning political talk show circuit are now explaining the “short-term pain” for “longer lasting gain” value strategy of raising tariffs, which essentially admits what other economists have long known. Tariffs generally raise prices and retard economies. Manufacturers in the Midwest dependent upon global supply chains of raw materials, aggregates, steel and aluminum are witnessing rapid price increases as well as punishing tariffs imposed on their exports, which often occur simultaneously. Developers and builders of large commercial projects have witnessed price increases to projects that have dampened demands and contracted markets. The “political will” question now becomes: Will the expansion and increase in the amount of tariffs get China to the table in a meaningful way before the administration feels a weakening of the political will of those necessary to continue the strategy? The answer will certainly come; however, wreaking global economic health and increasing pessimism by consumers may well challenge the political will to stay the course.

Brexit continues to add confusion to the economic landscape. Any implosion of Europe will impact the US economy; thus, we have a vested interest in seeing that both the UK and the remaining, though tenuous, European Union will get it right. Signs that progress is being made are non-existent at this writing and the chaos of the May administration has not been improved upon by the Boris Johnson administration. Is it high on the radar screen of most American consumers? Probably not, but if it does unravel in an ugly fashion, they will certainly feel it.

There will be a lot of focus on the September 18th FOMC (Federal Open Market Committee) meeting as well as increasing expectations that the Fed will join nearly every other central bank in Europe, Asia and Indonesia and reduce interest rates. Other US presidents have attempted to “jawbone” the Fed into monetary policy that the then-sitting President and their advisors sought. Our current President seems to have drawn a line in the sand for Chairman Powell and the appointed governors of the Federal Reserve. Nearly every reserve chairman has made serious attempts to stay clear of criticizing the policies of the administration and Treasury department and have gone to great lengths to remain independent of party politics. The September 18th meeting will in many ways reveal how this Federal Reserve intends to maintain that independence.

Much has been written recently about a housing sales slump, which has experienced a recession-like six-quarter reduction in sales. This type of decline is typically associated with an in-place recession, often compounded with higher unemployment and decreasing affordability factors. None of these data points are currently in play. Higher cost of materials, lack of skilled labor and a reduction in buildable lots have created a significant shortage of lower end starter home sales. Housing impacts only four percent of GDP, but a decline in any component of GDP when our annual growth rate hovers at 2% is not helpful.

The strength of our eleven-year growth rate has always been our consumer. Capital expenditure and business investment, which accelerated in late 2017 and continued through 2018, has retreated. Currently, consumer and government deficit spending remains strong, but it is clear there are headwinds to our continued expansion.