By the time you read this the monthly jobs numbers will have been released. This assessment is coming before the data has been presented and is essentially a best guess for the moment. As with previous months the devil will be in the detail. The last few months have seen a steady softening of the labor market but that reversed again this month with the addition of 222,000 jobs. Last year there were some 189,000 jobs created every month and for this year the average had been 138,000. This is to be expected given the fact the unemployment rate is low and companies have been asserting they can’t find the people they want to hire. It is really a good thing when the rate of hiring falls because the majority of people who are employable have found jobs. There remains a persistent issue of people who are essentially unemployable as they either lack the relevant skills, are in the wrong place at the wrong time or are facing some other impediment as far as employment is concerned.
Analysis: Perhaps the most critical question will be why people remain out of the workforce. The unemployment rate fell to 4.3% (at the U-3 level) and 8.4% (at the U-6 level). This is as low as the rates have been in several years and this is generally a good sign. The caveat is that there are two reasons that unemployment rates decline. People either get jobs or they drop out of the search for that new job. The fact that U-6 has been dropping suggests that there are fewer people dropping out as U-6 counts the discouraged workers as well as those who are involuntarily part time. There are debates over whether this should be considered full employment but all agree that this is pretty close.
The issue of workforce participation remains a major concern although most of the change is explained by the advancing age of the Baby Boomer. Whether one is part of the workforce or not depends on many factors but the most important is retirement. The number of eligible people who are not in the workforce is over 90 million but more than half that total is composed of those who have left in retirement. These are not the concern. The worry is over those who would like to be in the workforce but can’t seem to break in. The current rate of workforce participation is 62.7% and that is as low as it was in the 1970s when most women had yet to engage with the job market. Even today the largest percentage of people out of the workforce beyond those who have retired are those (mostly women) who have chosen to stay home to take care of family.
The most important data this month will be wage related. This has been vexing to many analysts as there has been a break in the usual pattern. Low unemployment rates generally stimulate wage hikes. As people to fill jobs become scarce, the natural assumption is that business will pay more for the people they need and they will also pay their existing workers more in order to keep them from being poached. There has been some of this but not enough to create a real surge in wages. The increase over the last year or so has been around 2.5% – not awful but not great either. The companies that are hiring may decide to invest in technology rather than hire people and many have been seeking to keep their labor costs as low as possible.
The Europeans and the Japanese have signed a trade deal that is both significant and insignificant. This deal has been in the works for years but was utterly stalled a few months ago as neither party was willing to concede on some key issues. Suddenly the talks heated up and the pact has been signed – even as some of those sticky issues have yet to be resolved. Analysts have been divided as to what this agreement really means. It appears to be as much politically motivated as it is economic.
Analysis: In the wake of Brexit, the aggressive protectionism of Trump and the rise of populism in many parts of Europe it had been assumed that the old order was in decline and that notions of free trade and globalization were in full retreat. The assessment of many was that free trade was going to be replaced by isolationism and bunker mentality that rejected engagement with the rest of world. This pact is as much a repudiation of that assertion as it is a real trade pact. Japan and Europe have essentially driven a stake in the ground in defense of open trade with an assertion that it remains a priority for their economies even as they have some issues. Some have interpreted this as a declaration of their independence from the US. The perception in Japan and Europe is that the US has reversed course completely and will no longer be a reliable trade partner. That means these export dependent regions will need to find alternatives and that means working with one another.
The fundamental challenge is that these are both export dependent nations with relatively weak import sectors. It is not that there are no consumers in Europe or Japan as the sector is large. It is simply that it is not as large as the consumer sector in the US. The Japanese and Europeans have aimed their output at the US for years for a good reason. The pact between Europe and Japan will open the European car market to Japan to a greater extent and the Japanese will be open to importing agricultural output from Europe. The big changes that had been under discussion over the last few years have been tabled for now in the interests of getting this deal done quickly. The timing is not accidental as it will be a talking point during the G-20 meetings.
The hard cold fact is the rest of the world can’t afford a disengaged US for very long. To be honest the US can’t long afford that isolation either. The push now is to get the US to back away from protectionism and every tactic is being trotted out. The IMF scolds the US (along with many other groups), trading partners are trying to offer good deals (UK is at the forefront of this) and there are efforts to entice the US with the notion that its intransigence is costing it money (Japan/EU deal).
There are still oil hawks out there. The last few years have changed many perceptions as far as the oil market is concerned but not everyone is convinced that the old order is gone forever. They continue to assert that prices will start to rise again while the glut will ease and they point out that this situation has existed before. The counter argument has been that some of the changes have been significant and that it will take a lot to change the current pattern. OPEC is a shell of what it once was and can’t even maintain discipline within the core of the cartel. The big player now is the US and it has enough power to bend the markets – more or less at will. A good example of that influence was on display this week when an oil price rally was snuffed out by the announcement that production was up in the US. The price of gasoline this summer has been as low as it has been in well over a decade despite the fact this is prime driving season and the time that most prices traditionally rise.
Analysis: There are several factors that have affected the oil markets over the last few years and the challenge now is to determine which of these are temporary and which are semi-permanent. The most important shift has been the emergence of the US as the world’s dominant producer. The role that was once occupied by the Saudi Arabians has fallen to the US in some respects. The oil rally that started earlier this week fizzled as the US stepped up production. The oil shale development has been significant for a few reasons but one of them is the fact it can be turned off and on rather quickly. If the per barrel price rises even a little the US producers can hit the market fast and take advantage of that hike. The other major producers need price stability for longer periods of time.
The other factors that have contributed to the stability of that low oil price are considered more temporary and some even assert they are anomalies more than anything else. For example, the expectation had been that countries such as Libya, Iran, Iraq and others would be experiencing drastic reductions in oil output due to the instability and chaos in these countries. The fact is that production has been steadier than expected as both the governments and the rebels have had an incentive to keep the oil flowing and the sector has had some protection. The Iranians have been producing more as there has been more wiggle room to sell to the global market. The expected disruption in other oil states never took place and that has allowed them to stay current. The oil hawks point out that any and all of this could change in an instant and the world would be suddenly confronted with shortages.
The biggest mystery concerns demand. Much has been made of the end of peak supply concerns and the emergence of peak demand. Is there really enough of a change to dismiss the chances of a shortage? Will demand recover at some point? The fact is that vehicles have become far more efficient and there will not be a reversal of that process. The millennial generation in the US and Europe will not be gas guzzlers and that suggests that oil demand has indeed peaked and at the same time that supplies are as bountiful as they have been in decades.
This will not go down as the most pleasant of G-20 meetings. In some of the past years the meeting struggled to gain even a little press attention as there was not all that much real controversy. This year the global press has shown up in droves – the most to ever cover these meetings. They expected and are getting real fireworks and confrontations – both inside the meetings and outside. The protest groups stepped up their engagement as they expected more press attention and the violence exploded and expanded within hours. The attacks on police have been more vicious than in past years and security is now extremely tight. The confrontations within the meeting are not going to be as physical but tempers are flaring.
Analysis: The majority of the delegates are on the side of Angela Merkel and dead set against the policies of Trump. They are taking the US to task over trade barriers, the withdrawal from the climate accords and a host of other issues. Thus far Trump has responded with his own brand of disdain and is clearly playing to a US audience. This will not be the meeting that sees a rapprochement with Europe and the world as far as the Trump White House is concerned. The hope is that there are some small gains on issues that are not part of the overall controversy but they will not register the same way that the disagreements will. The staunchest of traditional US allies are all taking a cautious approach and that leaves the more overt enemies with lots of room to criticize. China is now a stalwart ally of the Germans and that rarely happens. Russia is under suspicion by Europe but Putin has leverage as far as the US is concerned.
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I received a lot of comment on the story from yesterday that discussed the lack of civil discourse these days. It really seemed to hit a nerve as most of us have grown very, very tired of the screams and rants and the desire to demonize anyone who has the audacity to question us. Several comments included some steps to take to try to return the conversation to what once passed as normal.
The first is to avoid connecting a disagreement over an issue to actual dislike for the person we disagree with. The tendency today is to personalize everything and take every criticism as a direct attack. The way to avoid that trap is to humanize the person. No matter how virulently one disagrees with someone they undoubtedly have much more in common with us than it would seem. They love their families too, they like movies and sports teams we like, they may even share hobbies. Imagine meeting them under different circumstances. A person who took me to task on almost every story I wrote shared my enthusiasm for Doctor Who and we would shift gears to talk of Cybermen, Daleks and Weeping Angels when we sense that our debate was getting a little too intense.
Practice debate as opposed to argument. Screaming obscenities at somebody will not likely change any minds but maybe appealing to facts might. You have a reason you believe the way you do and so do the people you disagree with. They need to know what motivates your belief and you need to know what motivates them. Granted it takes two to tango on this one but somebody needs to start and make the effort to ask.
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When Do We Put the Geopolitical Premium Back In? – Given all the activity seemingly taking place around the world, does it surprise any of us that there isn’t more of a reaction in the stock market or in areas of influence that affect our daily professional lives? It wasn’t long ago that sending three US carrier battle groups into a region would have sent shockwaves through the stock market. Today, it barely seems to capture 30 seconds of our attention. Maybe that’s a good thing. Conditions and tensions are not insignificant.
We don’t have to go any further than the war being waged in cyberspace to understand just how impactful current global events could be. The UN has gone so far as to say that a recent cyberattack (likely sponsored by a state) constitutes an act of war! New evidence suggests that much of the hacking taking place may be shifting to process-control systems; attacks that can shut down infrastructure and create dangerous conditions for citizens all over the world. This has been a risk for years, just ask Iran how much risk there is with computer control systems that go haywire from a cyberattack. There’s evidence emerging today (no surprise) that many of our nuclear facilities have already been attacked many times – luckily with no negative consequences. Maybe it’s the volume of instant news and information that we get today. Maybe until something hits us between the eyes will we be concerned about it. We certainly seem to be more de-sensitized to the important things – and more sensitized to the events and activities that have no bearing on your business.
For instance, the geopolitical premium that we used to see on crude oil (for instance) just hasn’t emerged. It could be the changing market for crude oil and the explosion of production all over the world that is helping keep the risk premium off prices. But, about nine years ago, we would have seen anything from a $20-$30 risk premium on top of crude oil prices if a Middle Eastern country blew its nose. Maybe that’s a bad example, because we have had significant events take place in major producer nations – and it hasn’t slowed down the accumulation of crude oil supplies. So, perhaps we now have proof that we don’t need to react or worry about such things any longer. We still believe in the ripple effect (or butterfly effect). An event in a remote part of the world can ripple through and create problems in our domestic market. We may not label the root cause of a factor accurately and link it back to its origin, and that might be the problem.
There’s two things worth noting as they pertain to you conducting business today and into the future.
We try to watch for the pebbles hitting the pond, and then monitor the ripples as they approach the boat we are in. Deciphering between the waves that matter and those that barely rock the boat is the challenge. And that’s the game we all play – right? Have a great weekend. KP
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