A variety of economic indicators plus changes in investor and consumer behaviors appear on track to culminate in an unbridled “perfect storm.”
Tariffs on Steel and Aluminum
On Thursday, May 31, 2018, the Trump administration announced the imposition of a 25 percent tariff on steel and a 10 percent tariff on aluminum to be exacted on Mexico, Canada, and the European Union. Trump argues that he needs the on-again, off-again tariffs turned on again to save jobs and protect national security.1 The Commerce Department put out two lengthy reports recently arguing that the United States needed larger steel and aluminum industries to have enough metal for F-18 and F-35 fighter jets and armored military vehicles.2 It remains to be seen whether the US-imposed tariffs will lead to such larger industries.
The tariffs, as Max Bouchet and Joseph Parilla of the Brookings Institution have said the tariffs “represent the latest in a line of aggressive trade policy changes, beginning with the removal of the United States from the Trans-Pacific partnership and the renegotiation of NAFTA.”
Those same authors believe such tariffs “may put regions and states at an economic disadvantage” through the imposition of retaliatory tariffs and the resultant ripple effect of higher prices for steel and aluminum imports affecting industries as diverse as auto manufacturing, brewing and construction. “When measured in total volume, the nation’s largest states dominate steel and aluminum imports. Texas, California, Illinois, Michigan, Louisiana, Pennsylvania, Ohio, and New York all import more than $2 billion annually in steel and aluminum products, and together account for 60 percent of the nation’s total. Aside from Texas, California, and Louisiana, these states are concentrated in the Rust Belt of the Northeast and Midwest. Given the large size of their economies, disruptions to trade in these states have significant potential to influence national economic growth and key industry sectors like automotive manufacturing, chemicals, and oil and gas production.” Indeed, in 2017, imports of steel and aluminum goods covered within the scope of the Commerce Department’s section 232 investigation totaled nearly $48 billion. Canada and Mexico together supply 32 percent of US aluminum and steel imports. Michigan relies on those countries for more than 70 percent of its steel and aluminum products which support the states’ automotive and metalworking clusters, and which together employ 230,000 workers.
The Nation’s Debt and Its Deficits
The U.S. debt, currently in excess of $21 trillion, is the sum of all outstanding debt owed by the federal government. Two-thirds of the debt is held by the public in the form of U.S. Treasury bills, notes, and bonds, both U.S. and foreign. The remaining third is intragovernmental debt owed to various departments who hold Government Account securities. Social Security and other trust funds are the biggest owners, meaning everyone’s retirement money is tied up here.
America’s debt is the largest sovereign debt in the world for a single country. It runs neck and neck with that of the European Union, an economic union of 28 countries. The debt exceeds what America produces in a whole year. In 1988, the debt was only half of America's economic output. Recently the Congressional Budget Office characterized the nation’s long term debt, as “unsustainable.” Annual interest payments alone could rise to $1 trillion within a decade.
Further, estimates predict that the nation’s deficits could exceed $1 trillion as soon as next year. In March 2018, Congress passed a 2,232 page, $1.3 trillion omnibus spending bill. Passage of the spending bill followed Republicans’ approval of a tax-cut package in December 2017 that the Joint Committee on Taxation estimates added more than $1 trillion to the deficit even after accounting for economic growth.
Loss of Jobs
According to a report by the World Economic Forum and Boston Consulting Group and as reported on May 30, 2018 by Axios, almost 1.4 million Americans will see their occupations vanish by 2026 due to technological change. Without acquiring new skills, according to the report, 575,000 Americans, 41% of the 1.4 million affected, will have either miniscule or no chance of finding other work. Women, says the report, may be disproportionately affected.
Interestingly, seventy-four percent of executives say they plan to use artificial intelligence to automate tasks in their workplace within the next three years. Yet, only 3% intend to significantly increase investments in worker training in the same period.
Broad-based Pay Hikes are History
On May 24 and 25, 2018, the Federal Reserve Bank of Atlanta and the Federal Reserve Bank of Dallas held a joint conference entitled, “Technology-Enabled Disruption: Implications for Business, Labor Markets and Monetary Policy.” Axios reported that the conference was a “rare, candid and bracing talk from executives atop corporate America.”
One of the take-aways from the conference is that broad-based wage gains for American workers are history. “It’s just not going to happen,” said Troy Taylor, CEO of the Coke franchise for Florida. Wage gains, will go mostly to technically-skilled employees. John Stephens, chief financial officer at AT&T said that 20% of his company’s employees were Call Center workers. Axios reported that Stephens said he doesn’t need that many and he added, “I don’t need that many guys to install coaxial cables” either.
Mall Closures Will be Greater than Forecast
The Fed conference also considered the health of the U.S. mall industry. Former J.C. Penney CEO Mike Ullman is quoted as saying that the anticipated demise of the U.S. retail mall industry will be worse than previously forecast with just a quarter of the current 1,200 malls surviving the next five years. Until recently, most experts had said that a quarter of the shopping malls in the US will close. Ullman, however, reversed the numbers, estimating that only 300 malls will make it. The rest will close, a product of decades-long changes in consumer taste and the continuing impact of Amazonization. To survive, he said, malls must have adequate cash or access to cash the make the transition to a new style of retail in addition to having a location that caters primarily to the top income quartile.
Acute Job Shortages
Mark Zandi, chief economist for Moodys Analytics, was quoted by Axios as saying that current “job growth is constrained for the first time in a decade.” A record number of positions are currently unfilled in manufacturing, transportation, healthcare, financial services, and leisure and hospitality, according to the Kansas City Fed, in a report earlier this month. The report said that overall wage growth continued to trail other recent economic recoveries. “Nine years after the end of the Great Recession,” said the report, “year-over-year wage growth has still not reached 3%.”
Millions of U.S. Homeowners Still Underwater on Their Mortgages
Bloomberg News reports that a staggering number of American homeowners remain underwater on their mortgages a decade after the housing bubble burst. Almost 4.5 million households — or 9.1 percent — owed more than their homes are worth in the fourth quarter of 2017, according to data firm Zillow, with an estimated 713,000 owing at least twice as much as their property’s value. While the percentage is declining, families in communities with stagnant property values are “trapped in their homes with no easy options to regain equity other than waiting,” said Aaron Terrazas, a senior economist at Zillow.
One View of the Forecast
Ray Dalio, the chairman of hedge fund behemoth Bridgewater Associates, and the man who predicted the 2008 financial crisis, said in February 2018 that “the probability of a recession prior to the next presidential election would be relatively high, 70% or something like that.” Guggenheim Partners, a New York-based investment firm, predicted last month that the next recession “will occur by the end of 2019 or 2020.” Seventy percent of investors polled by Bank of America Merrill Lynch in January 2018 believed the global economy is in a “late cycle” — the highest percent holding that opinion since January 2008. Dalio was reported in CNN Money as agreeing with that thinking. Whenever it hits, the next downturn could be complicated by the widening gap between America’s rich and poor. Dalio said there’s one economy for the country’s top 40%, and another economy for the bottom 60%. Yet there’s only one federal budget, leading to “conflict” over “how the pie is divided.”
Presumably, the bottom 60% won’t be going to the remaining malls anyway.
Title: “Something Wicked This Way Comes” is a dark fantasy novel by Ray Bradbury published in 1962. The novel is about two 13-year-old best friends, Jim Nightshade and William Halloway, and their nightmarish experience with a traveling carnival that comes to their Midwestern town one October. The carnival’s leader is the mysterious “Mr. Dark,” who seemingly wields the power to grant the citizenry’s secret desires. In reality, Mr. Dark is a malevolent being who, like the carnival, lives off the life force of those he enslaves.
1. The New York Times reported that Angela Merkel of Germany called the tariffs “illegal.” Justin Trudeau of Canada reportedly said it was “inconceivable” that Canada “could be considered a national security threat.” Mexico, “within minutes of the American action,” had drawn up a list of retaliatory targets including steel, pork, apples, cranberries, and cheeses. Jean-Claude Juncker, president of the European Commission, called the tariffs announced on Thursday “protectionism, pure and simple.” All of the countries affected said they would impose their own retaliatory tariffs “immediately.” The United Steelworkers Union said the tariffs called “into serious question” the design and direction of the administration’s trade strategy. The Federal Reserve’s latest Beige Book contains more than two dozen references to business concerns that the tariffs will hurt sales and profits. Senator Ben Sasse (R-Neb.) called the tariffs “dumb.”
2. According to a report published in 2017 by the Stockholm International Peace Research Institute entitled “Trends In International Arms Transfers,” the US is the largest weapons exporter in the world. It sold weapons to at least 98 countries between 2013 and 2017. Its largest clients were: Saudi Arabia (18% of all sales), UAE (7.4% of all sales), and Australia (6.7% of all sales). The US accounted for 34% of all weapons exports in the world and its exports increased by 25% compared to 2008-2012.
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