Business Intelligence Brief: September 13, 2017

Short Items of Interest – US Economy

 

Small Business Sentiment Rebounds in August – The National Federation of Independent Business reported that small business optimism rose in August to 105.3, up slightly from 105.2 in July. That’s a small improvement, but the underlying implications are important. Consumer spending and demand seemed to be one of the primary drivers of optimism for small businesses. This observation comes from surveys that the NFIB directs at the small to medium sized business community and its conclusions are a bit more upbeat than some of the other assessments. The NFIB has a slightly more conservative bent and the members are generally more excited about some of the changes that have come since the start of the year – especially as far as regulation is concerned.

 

Material Handling Equipment Sales up 160%. The Conveyor Equipment Manufacturers Association said that it’s booked orders for bulk handling equipment was up 160% y/y in July. It’s a continuing indicator of extreme investment and activity happening in the sector – and it is likely to continue to be in a hyper growth mode for a couple more years. A few years ago, there was a dramatic decline in the number of people employed in the manufacturing sector – a loss of several millions. Much of this decline was due to the arrival of material handling systems that replaced the legions of people whose primary job had been to move things around the factory and to the next phase of transportation.

 

Job Openings Set Another Record High in July. Job openings jumped to 6.170 million in July, a new record high. The country is starting to see a dangerous level of job openings (if it isn’t already there). And, with hurricanes Harvey and Irma hitting different geographic regions in the country, we might see a significant increase in job openings when the data is released for September (release of data will be in November). This has become an interesting dilemma for the job market. There are lots of openings but the people who are needed are simply not there. The pattern observed is that companies soon abandon their search and start to think capital investment instead – acquiring machines as opposed to hiring people.

 

Short Items of Interest – Global Economy

 

The Hidden Impact of the Chinese Ban on Diesel Vehicles. We wrote earlier about China’s ban on gasoline and diesel vehicles by the year 2040. We are also cognizant of the push to get large, class 8 electric trucks into the US national distribution system. The Chinese ban could expedite the move to electric delivery vehicles – and create the next great competitive divide in the industry. China has taken steps to deal with the choking pollution in its big cities and has targeted the utilities and transportation. This may help create a very competitive sector as far as solar energy, wind and of course the electric car market. The Chinese are boosting this industry with their mandates and their edicts and could start to jump further ahead soon.

 

Recovery Efforts Underway, Eyes to the Pacific – There are three small storms in the Pacific that could have some impact on the West Coast of Mexico. Right now, the storms are moving very slowly and generally in a northern direction where they could impact the Baja Peninsula or tourist areas in Northwest Mexico. The Atlantic is clear of storms that could impact the US or island chains in the Caribbean. The big issue at the moment is shipping as these storms are lining up to disrupt the lanes all across the Pacific. This is not an ideal time for that kind of interference given the shipping geared for the holiday season in the US.

 

Trouble with a Canary in a Coal Mine? We noted that the Shanghai Containerized Freight Index has dropped for six weeks in a row, falling 16% over that time. The Chinese Containerized Freight Index has done the same thing. The question is: why? Most of the conjecture is based on the fact that imports are down in the US at the same time there has been concern about trade disputes. The Chinese have been putting more emphasis on the domestic market as compared to exports.

 

 

How Can the Threat from Pyongyang be Contained?

What to do about North Korea? This has been the single most vexing geopolitical issue facing the world over the last few years and the longer this impasse lasts the less that seems can be done about it. Lots of threats have been made and lots of restrictions have been imposed but little has changed. The overall business and investment community has waffled back and forth as far as what this really means to them. The threat is real enough but there is considerable difference of opinion as to whether the wort case scenario would actually develop. The majority of analysts make the assertion that it is a long way from having missiles and nuclear weapons and actually using them – especially when North Korea would be severely “out-gunned”. The sense among some analysts is that these really are more defensive in nature – a way to keep the US or anybody else from engineering some kind of regime change. The statements that come from Kim Jong-un often reference the fate that awaited Saddam Hussein and Muammar Khadaffi. Kim has no desire to die in a rat hole somewhere and thinks of his armory as a preventive measure. Assuming the US and the world feel a powerful need to end this threat there are limited options and each have their own flaws.

 

Analysis: There has been plenty of conversation regarding the military option – everything from some kind of surgical strike on facilities that are connected to the weapons under development to some kind of all-out campaign to remove Kim and the entire North Korean regime. This has been deemed a last resort strategy as it would very likely escalate and would cost millions of lives in South Korea at the very least. In the worst-case scenario, it would trigger a conflict between the US and China that could very easily spin into a major conflict. Bombastic threats aside, this option has been rejected by most of the analysts and the US military has no enthusiasm for the tactic.

The option that has been pursued has been the imposition of economic sanctions of ever more intensity. The latest set include limiting the number of guest workers that North Korea will be allowed to contribute, reducing imports of oil and restricting the exports the country relies on. The US has gone after banks that do business with North Korea as well as businesses in the region still conducting operations. The majority of the US pressure has been directed at China of late with the assumption that only China has the leverage necessary to impose cooperation on Kim. This leverage may not be as direct or immediate as assumed as the North Koreans have leverage of their own and know what China fears the most. Should the Kim regime fail, the Chinese would be dealing with a massive influx of refugees that would come streaming across the border and China wants nothing to do with this. They want Kim propped up as long as possible.

There is one aspect of the sanctions tool that is very often overlooked. The process works best when there is both carrot and stick. The set-up is generally that punishments will stop when there is compliance. Sanctions would be lifted when the North Koreans elected to give up their nuclear ambition and they would be offered a whole host of concessions as a reward for this decision. What has been missing thus far is the incentive part. What does Kim get in return for abandoning his nuclear ambitions? At the very least he would expect solemn promises that nobody would be trying to remove him from power and he would expect very clear statements of support from the Chinese but it would go far beyond that. The US, South Korea and Japan would be expected to provide substantial aid and investment – likely in the tens of billions of dollars. The Kim regime would demand that every step be taken to ensure his survival as the head of his country. To many this seems like blackmail and in a sense, it is. Kim is essentially betting that of the two bad outcomes for the US, propping him up indefinitely is the “least bad”. In the world of sanctions there is no progress unless punishment is somehow connected to reward.

 

Better News on the Household Income Front

The most consistent complaint since the start of the recession is that household income has been stagnant for almost ten years. Wages have not gone up despite the improved rate of joblessness. There has still not been a recovery that takes the US back to where it was before the crisis but the improvements of late are significant and promising as far as the future is concerned. Median household income was up to $59,039 and this is a 3.2% improvement over the year before. Last year’s numbers were a 5.2% improvement over the year before and that suggests that there has been real financial improvement for the majority of the population.

 

Analysis: Having said all that there are some caveats to be aware of. One of the key ones is a methodology change as far as how these incomes are measured. The analysts have looked at various types of household income and altered the way they are computed. The focus was on trying to determine a monetary value for the kind of social service assistance that people receive from the government and there was a new means by which to try computing non-wage and salary income. By some alternative measures there was a decline of 1.6% rather than a gain. It all comes down to which of the methodologies are the most accurate.

The other point to observe is that median household income varied considerably by ethnicity. The Asian population has an average that is far higher at $81,431 and the black population is far lower at $39,490. The Hispanic households are at $47,675 and white households are at $65,041. All sectors have seen big gains since the recessions of 2001 and 2007-2008 but the speed of recovery has varied a great deal.

 

Norwegian Lessons

The election in Norway has not captured the attention of the world as has the German contest or the maneuvers of Brexit or the start of the Macron era or the latest antics of Trump but there may be more important lessons to be learned from this race than would be obvious at first glance. All of the other contests and developments in the other countries have a common current running through them to one degree or another. Populism has been the emergent political theme of the past year. Populism and the anger of the voter propelled Donald Trump to the Presidency and motivated the British vote to leave the EU. Populism created the contest in France between the supporters of Marine Le Pen and the “anybody but Le Pen” voters. In the end, all the major traditional parties in France collapsed. Angela Merkel has faced opposition from her right for the first time and the AfD has continued to gain strength.

 

Analysis: Norway has its populist party as well – the Progress Party. They have been motivated by much the same thing that has motivated the others. They are anti-immigration, anti-establishment and government and they are generally anti-business – at least the larger companies. It has been easy to dismiss many of these populist movements as bigots and right-wing ideologues and indeed there have been elements that match that description. There are deeper issues that motivate the majority of those voting for these groups and in Norway there has been a recognition of that underlying anger on the part of the center-right and that has helped them essentially coopt and control the populist right. The Social Democrats had been very confident in their ability to regain control of government and they assumed that many of those in the working-class categories would flock to their platform as they have in the past. After all these welfare state offerings were designed to help the poor and working class, weren’t they?

The voter anger that has fueled the populists has been rooted in the sense of being overlooked. The world has changed and more quickly than most have been able to keep up with. Jobs that were secure a few years ago are now vanishing under the onslaught of technology. Immigrants who have been arriving of late have not been interested in assimilation as many have essentially been driven from their homes by conflict and deprivation. They want to preserve their way of life and that makes them more alien to the domestic population. Job insecurity only increases the tension. The government has been blamed for much of this and there is a pervasive belief that everything is corrupt or that only specific minorities and groups are of importance to the traditional power elites. In all fairness, the populists have tried to grossly oversimplify the issues and there is much blame assigned that is neither accurate nor fair but this is the attitude that politicians have to confront.

Norway’s center right has avoided confronting the populists and instead elected to bring them into government as part of the ruling coalition in hopes that being in power would temper some of the rhetoric and force them to engage with real policy making. After a term in office that strategy appears to be working but it continues to demand real leadership by the traditional centrists as opposed to the center simply mimicking the positions of the populist extreme.

 

Chinese Response to Expanded Sanctions

There are those in the US who would like to use extreme economic pressure on the Chinese as a way to get to the North Koreans and for some this means going after some of the Chinese banks that underwrite business deals between China and North Korea. Not all Chinese banks are engaged in this but the ones that are seem to be among the top five largest. The aim is to deny Pyongyang the ability to conduct business and it is certainly true that this would be a major step up in the sanctions game. The problem is that what these banks are doing right now are not in violation of the current sanctions protocol and an American attack on these banks will be viewed by the Chinese as a provocation and this ensures there would be retaliation.

 

Analysis: The most likely reaction on the part of China would be to subtly make the US business community pay the price. Given that much of the business to be done in China involves the state run companies, the ability to beak deals is very much in the Chinese set of capabilities. The sectors that would stand to lose the most would be aerospace, agriculture and the entertainment industry as these are all sectors that heavily engage in China. Boeing would be hard pressed to compete with Airbus and domestic Chinese competitors. The farm sector in China is key to much of the US export trade and that could go away as well. The investments that China has made in entertainment in the US has been significant and replacing that Chinese money would be very hard. China would be able to do some real damage.

 

The Black Owl Report – An Executive Intelligence Brief

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The Aftermath

Now comes the second guessing and the hindsight driven analysis. There are many reports regarding what should have been done to keep these two storms from being so damaging with suggestions that range from employing technology for better protection to rolling back the clock to ensure that fewer people are exposed to a part of the world that can be dangerous. There is an incredible level of second-guessing as to how to have handled this disaster but there has also been criticism of the way it was reported. In the end, the impact of Irma was not as awful as had been predicted and many have now asserted that this was all media hype and driven by some other agenda.

The reality is that nobody wants a Pollyanna report. If the media had downplayed the storm all week and suggested that people just hang out and wait there would have been deserved outrage if the impact was greater than expected. It is far better to assume the worst and get a break – it would seem that everybody would welcome a scenario less severe than expected.

 

This is a commentary by Keith that appeared in this week’s Black Owl Report. We invite you to start a one-month trial subscription so that you can see the variety we offer in this publication.

 

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Why Would South Korean’s Protest THAAD Missile Defense Deployment? We watched with curiosity as riots and protests erupted in South Korea as US military support teams worked to deploy up to 4 new THAAD anti-missile batteries.

 

The THAAD missile defense systems are some of the most advanced, each can carry several dozen missiles that can be deployed against aerial attacks. Given the activities of North Korea lately, one would think that citizens in the area would be thankful for the extra layer of support. But, clearly they aren’t. We wondered why?

 

It turns out that there were rumors that the THAAD missile battery system caused health problems. The South Korean Government was late, but accurate to point out that multiple THAAD systems had been deployed around the world without any health problems with local citizens.

 

The real story is this: they are afraid that North Korea will target areas where the THAADs are set up. They fear that this will make the surrounding communities an initial target for a North Korean attack – and they don’t want the “target” on their community.

 

Don’t look at protests on the nightly news and take it face value – there’s part misinformation leading to the protests…and part fear that it will make them target number one.

 

 

 

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