June Employment Robust—For How Long?

Posted on July 6, 2018 by Popular Economics Weekly

The Mortgage Corner

More workers are being hired in manufacturing and professional services in June’s unemployment report. But this is before the trade war now taking hold with at least 5 allies and trading partners.

Washington’s 25 percent duties on Chinese imports went into effect at midnight EDT and affected products such as water boilers, X-ray machine components, airplane tires and various other industrial parts. China immediately retaliated with tariffs on its $34 billion list of goods issued last month, including soybeans, pork and electric vehicles.

We know that manufacturing will also be hurt by the tariffs on imported steel and aluminum that go into the finished products the US exports, so the 36,000 hires in manufacturing may be a temporary blip as manufacturers attempt to get ahead of already occurring price rises.

Even more hurt will be put on Midwestern farmers, as China, the EU, Canada, and maybe even Mexico will be targeting their produce with higher tariffs in response to Trump’s levies.

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Graph: MarketWatch

A sharp rise in the number of unemployed actively looking for a job, to 6.564 million from 6.065 million in May, lifted the unemployment rate 2 tenths to 4.0 percent from 3.8 percent in May, and also lifted the participation rate 2 tenths to 62.9 percent.

It’s because for the first time in nearly 20 years of existing records, already in April the number of job openings at 6.698 million in the Labor Department’s JOLTS report exceeded the number of unemployed actively looking for work, at 6.346 million. It suggests employers are having a hard time finding people to fill the jobs. That is the understatement of the year.

The gap between openings and hires in the JOLTS report was 1.120 million, the second largest on record next only to March’s 1.147 million. It also gives a picture of why employers are having finally to raise their workers’ pay.

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Graph: Calculated Risk

The Bureau of Labor Statistics reported “The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) was little changed in June at 4.7 million. These individuals, who would have preferred full-time employment, were working part time because their hours had been reduced or they were unable to find full-time jobs.”

But add the 1.5 million that want to work but haven’t worked in the past 26 weeks, and we still have a decent labor pool to draw from. It all adds up to 7.8 percent that are the “Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force,” per the BLS.

So is the June jobs report just an attempt to get ahead of the inevitable jump in prices and job losses that a trade war causes? Such a war has to seriously hurt all business, not just US businesses.

Harlan Green © 2018

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Trumpcare Makes Us Sick, or Worse!

Posted on July 5, 2018 by Popular Economics Weekly

Financial FAQs

It took 4 hours to coax Patricia Okoumou, a Congolese immigrant, down from the Statue of Liberty while wearing a t-shirt that said, “Trumpcare Makes Us Sick.” It was serendipitous timing. She was part of a group wanting the abolition of ICE, but her t-shirt also brought attention to Republican and Trump administration efforts to abolish Obamacare, when a just released HHS report states that Obamacare is doing better than ever for those in most need of health insurance.

President Trump has to be aware that most Americans want to keep Obamacare, even with the latest Republican tax cut bill that also abolishes the Obamacare mandate in 2019 requiring Americans not covered to pay a penalty if they have no health care coverage. The result has already been higher premiums for those above the federal poverty level not subsidized by the federal government.

The reason Obamacare is popular with a majority of Americans is that the alternative Trumpcare bills attempted by Republicans last year wouldn’t just make Americans sicker. Approximately 17,000 people could have died if a House Republican health proposal endorsed by the Trump administration had become law in 2018, who otherwise would have lived with health care coverage.  By 2026, the number of people killed by Trumpcare could have grown to approximately 29,000 in that year alone, according to Think Progress, a progressive think tank, that is backed up by a CBO estimate that 24 million more Americans could lose health insurance by 2026 under Trumpcare.

Trump’s assertion that he has “gutted” Obamacare in his attempt to sicken more Americans simply isn’t true. In fact, those in most need of health care coverage earning less than the federal poverty line, $48,500 for an individual, and $100,400 for a family of four, are doing quite well, according to the latest assessment from the Centers for Medicare and Medicare Services that administers Obamacare under HHS.

Overall, according to the figures released by the agency, 10.6 million Americans had signed up for ACA coverage by February and paid their first month’s premium, according to the Los Angeles Times. That was about 3 percent ahead of the 10.3-million enrollment at the same moment in 2017, the agency said.

Unsubsidized customers responded to higher premiums by abandoning their health coverage in droves, HHS reported. The trend began in 2017, after Trump’s inauguration. That year, subsidized enrollments fell by about 223,000, or 3 percent. But unsubsidized enrollments fell by 1.3 million, or 20 percent.

This is while subsidized enrollment (those receiving Advanced Premium Tax Credits, or APTC) was 23 percent larger than unsubsidized (non-APTC) in 2014 and 32 percent larger in 2016 — reached 61 percent in 2017.

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Graph: LA Times

Trump’s answer to the premium increases caused by his own policies has been to undercut the law even further by eliminating the consumer protections that make health insurance worth buying. These include requirements that all policies cover essential health benefits such as maternity care, hospitalization and prescription drugs, and opening the marketplace further to short-term junk insurance that carries lower premiums but offers substandard coverage.

We are not even mentioning Trump’s efforts to abolish the exemption for existing illnesses. In fact, Trump and Republican attempts to repeal and replace Obamacare are not only making Americans sicker, but killing US in larger numbers, as well.

Harlan Green © 2018

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What are Corporations Doing With Their Tax Cut?

Posted on July 3, 2018 by Popular Economics Weekly

Popular Economics Weekly

Economists are predicting second quarter GDP growth of as much as 3.8 percent, up from 2.2 percent in Q1 2018. But it may be a one-time surge, as all indications are the massive 2017corporate tax cut that lowered their nominal tax rate from 35 to 21 percent won’t create any more jobs than are normal in a fully-employed economy by investing, say, in more production capacity (i.e., in capital expenditures).

Instead, corporations are returning their one-time windfall of up to $300 billion to the stockholders, adding to their already $2.1 trillion cash hoard that corporations haven’t been able to find a use for. So stock buybacks are the preferred use of their cash, or more M&A acquisitions like the AT&T purchase of Time Warner.

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Graph: FRED

This isn’t helping the ordinary tax payer, as Medicare and Medicaid spending cuts of up to $1 trillion over the next ten years had to be enacted to pay for the corporate windfall and consequent addition of $1.5 trillion to the national debt. Federal tax revenues are plunging in consequence, as shown in the FRED Graph.

It isn’t boosting the stock market very much, either; just keeping the DOW and S&P indexes from falling further after the first-quarter selloff, with a 1.6 percent S&P 500 decline in the first quarter offset by a 3 percent gain in the second quarter, reports CNBC, leaving the index barely up about 1.4 percent for the year.

“Stocks right now are hanging by a thread, boosted by a bonanza of corporate buying unrivaled in market history and held back by a burst in investor selling that also has set a new record,” said CNBC.

Companies announced $433.6 billion in share repurchases during the period, nearly doubling the previous record of $242.1 billion in the first quarter, according to market research firm TrimTabs, per CNBC.

At the same time, investors dumped $23.7 billion in stock market-focused funds in June, also a new record. For the full quarter, the brutal June brought global net equity outflows to $20.2 billion, the worst performance since the third quarter of 2016, just before the presidential election. The selling is particularly acute in mutual funds, which saw $52.9 billion in outflows during the quarter and are typically more the purview of the retail side.

Why the selloff in stocks? Much of it has to do with the misinformation campaign of Trump officials, who literally maintain the opposite of reality. The Republican’s tax cut orthodoxy has always maintained that tax cuts create more jobs—that repatriating some $300B in overseas’ profits will be spend at home. But that’s only when corporations choose to invest in future growth, as I said, rather than enriching their CEOs and stockholders with higher dividends, or M&As that usually dilute shareholder equity,.

The national debt is on track to approach 100 percent of gross domestic product (GDP) by 2028, said the nonpartisan CBO, which analyzes legislation for Congress.

“That amount is far greater than the debt in any year since just after World War II,” adding that the debt is now about 77 percent of GDP, a measure of the size of the economy.

The numbers don’t lie. Tax revenues are in fact declining, which means those tax cuts aren’t paying for themselves. It also means a larger share of the tax revenue pie will have to be spent on interest payments, and therefore less on the programs that benefit most Americans—on healthcare, education, R&D, environmental protection, workplace protection, and poverty programs like food stamps—anything that would boost the standard of living for those living on the edge.

Harlan Green © 2018

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Low Mortgage Rates Boost Sales–Even with Limited Supply

Posted on June 29, 2018 by Popular Economics Weekly

The Mortgage Corner

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Graph: FRED

How is it possible the 30-year fixed conforming rate has fallen again to 4.0 percent for 1 origination point in California, yet has never been below 5 percent before the Great Recession, when mortgage fixed rates ranged from 5 to 10 percent at times?  It has much to do with current economic policies.

This is boosting the housing market and higher homeownership rates. New-home sales jumped to a higher-than-expected 689,000 annualized rate vs. a revised 646,000 rate in April, as millennials in the 30-year old range are snapping up whatever is in the affordable range.

The median price, at $313,000, fell 1.7 percent in the month for a year-on-year decline of 3.3 percent which is a great mismatch with the 14.1 percent growth rate for sales, says Econoday. So even though supply was up 3,000 in the month, relative to sales it fell to a 5.2 months supply in May vs. 5.5 months in April because of the higher sales rate.

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Graph: Econoday

But pending home sales have been declining, an indication that the housing market may have peaked. U.S. pending home sales declined 0.5 percent to a reading of 105.9 in May, and are at a 5-month low, the National Association of Realtors said Wednesday. An inadequate housing supply is the culprit, even with booming construction.

This is why privately-owned housing starts in May were sizzling as well, at a seasonally adjusted annual rate of 1,350,000, per the US Census Bureau. It is 5.0 percent above the revised April estimate of 1,286,000 and is 20.3 percent above the May 2017 rate of 1,122,000. Single-family housing starts in May were at a rate of 936,000; this is 3.9 percent above the revised April figure of 901,000.

The homeownership rate has risen for 5 straight quarters, with most of the increase from millennials in the 30-year age group, as we said. The first-quarter jump was led by Americans under 35. Their ownership rate, 35.3 percent in the first quarter, was a full percentage point higher than a year ago.

Another sign of sizzling demand is purchase escrow closings are taking less than 30 days on average, according to the NAR. Falling mortgage rates have energized the housing in particular and given younger families a chance to enter the housing market

These interest rates won’t hold for long, even with the Trump trade wars that are causing investors to buy bonds as insurance. It has driven down the 10-year Treasury yield to recession level 2.85 percent. This is a harbinger of tough times ahead with soaring budget deficits also adding to the danger of more financial instability.

Harlan Green © 2018

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Trade Wars Kill Future Growth—Part II

Posted on June 26, 2018 by Popular Economics Weekly

Popular Economics Weekly

The sad reality is that in initiating trade wars with allies and opponents alike, President Trump could be bringing on the next Great Recession. Because breaking up trade alliances with our allies means less leverage in any negotiations with, say, China. For instance, our (former?) allies can now sell their products to the remaining 11 Asian members of the Trans-Pacific Partnership (TPP) that the US abandoned immediately after Trump took office.

The European Union would also be free to sell its products to others rather than suffer the tariffs Trump is levying on them. And Canada will also purchase more from them, replacing many of the products formally bought from US companies.

Nobel economist Paul Krugman is considered one of the most knowledgeable about foreign trade. He won the Nobel Prize for formulating just why countries and regions trade with each other, and trade protectionism died out after WWII.

It’s called the theory of comparative advantage, because more benefit if those that produce things most efficiently (the cheapest) get to export them to countries that can’t produce them so cheaply, and the modern trading system was formed.

China manufactures are capturing more of the solar panel market because it can make them cheaply. Canada’s lumber prices are cheaper, so it exports lumber to the U.S. The National Association of Realtors reports that tariffs on Canadian lumber imports is already raising the cost of construction on an average-priced American home $9,000 at a time when fewer Americans can afford to buy a home.

“The U.S. currently exports about 12 percent of GDP, says Professor Krugman. “Not all of that is domestic value added, because some components are imported. But there’s still a lot of the economy, maybe 9 or 10 percent, engaged in production for foreign markets. And if we have the kind of trade war I’ve been envisaging, something like 70 percent of that part of the economy – say, 9 or 10 million workers – will have to start doing something else. And there would be a multiplier effect on many communities now built around export industries, which would lose service jobs too.”

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Graph: NYTimes

Krugman also believes if this becomes a prolonged trade war, “we’re talking about a really big rollback of world trade. Figure 1 shows world trade (exports plus imports) as a share of world GDP back to 1950; a 70 percent reduction would bring us roughly back to 1950s levels. If Trump is really taking us into a trade war, the global economy is going to get a lot less global.”

Does anyone realize what 1950 levels of trade would mean in today’s world? That’s before the baby boomers became consumers with the huge increase in demand for consumer goods. Modern day consumers would now be competing for less than half the number of imported products, which means soaring prices, which leads to higher inflation and interest rates, which are the sign of an overheating economy.

And this is happening just when Trump’s avowed goal is to bring back more manufacturing jobs that mostly depend on exports to other countries. It’s a solvable conundrum. The loss of manufacturing jobs because of foreign tariffs on US goods could cancel out whatever benefits protectionism would garner for American steelworkers, or auto manufacturers.

And where will the trade war hurt first? Tariffs on exports like Kentucky Bourbon, Wisconsin dairy products, Iowa pork, and soybeans were the first to be raised by the EU and China, because they come from Trump territory.

It’s much better to work with our allies than attempt to bully them.

Harlan Green © 2018

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Trade Wars Kill Future Growth—Part II

Posted on June 26, 2018 by Popular Economics Weekly

Popular Economics Weekly

The sad reality is that in initiating trade wars with allies and opponents alike, President Trump could be bringing on the next Great Recession. Because breaking up trade alliances with our allies means less leverage in any negotiations with, say, China. For instance, our (former?) allies can now sell their products to the remaining 11 Asian members of the Transpacific Trade Pact (TPP) that the US abandoned immediately after Trump took office.

The European Union would also be free to sell its products to others rather than suffer the tariffs Trump is levying on them. And Canada will also purchase more from them, replacing many of the products formally bought from US companies.

Nobel economist Paul Krugman is considered one of the most knowledgeable about foreign trade. He won the Nobel Prize for formulating just why countries and regions trade with each other, and trade protectionism died out after WWII.

It’s called the theory of comparative advantage, because more benefit if those that produce things most efficiently (the cheapest) get to export them to countries that can’t produce them so cheaply, and the modern trading system was formed.

China manufactures are capturing more of the solar panel market because it can make them cheaply. Canada’s lumber prices are cheaper, so it exports lumber to the U.S. The National Association of Realtors reports that tariffs on Canadian lumber imports is already raising the cost of construction on an average-priced American home $9,000.

“The U.S. currently exports about 12 percent of GDP, says Professor Krugman. “Not all of that is domestic value added, because some components are imported. But there’s still a lot of the economy, maybe 9 or 10 percent, engaged in production for foreign markets. And if we have the kind of trade war I’ve been envisaging, something like 70 percent of that part of the economy – say, 9 or 10 million workers – will have to start doing something else. And there would be a multiplier effect on many communities now built around export industries, which would lose service jobs too.”

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Graph: NYTimes

Krugman also believes if this becomes a prolonged trade war, “we’re talking about a really big rollback of world trade. Figure 1 shows world trade (exports plus imports) as a share of world GDP back to 1950; a 70 percent reduction would bring us roughly back to 1950s levels. If Trump is really taking us into a trade war, the global economy is going to get a lot less global.”

Does anyone realize what 1950 levels of trade would mean in today’s world? That’s before the baby boomers became consumers with the huge increase in demand for consumer goods. Modern day consumers would now be competing for less than half the number of imported products, which means soaring prices, which leads to higher inflation and interest rates, which are the sign of an overheating economy.

And this is happening just when Trump’s avowed goal is to bring back more manufacturing jobs that mostly depend on exports to other countries. It’s a solvable conundrum. The loss of manufacturing jobs because of foreign tariffs on US goods could cancel out whatever benefits protectionism would garner for American steelworkers, or auto manufacturers.

And where will the trade war hurt first? Tariffs on exports like Kentucky Bourbon, Wisconsin dairy products, Iowa pork, and soybeans were the first to be raised by the EU and China, because they come from Trump territory.

It’s much better to work with our allies than attempt to bully them.

Harlan Green © 2018

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

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Trade Wars Not Good For Future Growth Either

Posted on June 22, 2018 by Popular Economics Weekly

Popular Economics Weekly

The Conference Board Leading Economic Index® (LEI)for the U.S. increased 0.2 percent in May to 109.5 (2016 = 100), following a 0.4 percent increase in April, and a 0.4 percent increase in March.

This monthly announcement of the LEI is a good predictor of future economic growth because it reports on 12 items that measure trends on everything from interest rates, to housing permits, to stock prices, and hours in the work week. It is slowing, surely not a coincidence with the talk of a worldwide trade war.

“While May’s increase in the U.S. LEI was slower than in recent months, the improvements in a majority of its components offset the declines in leading indicators of labor markets and residential construction,” said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board. “The U.S. LEI still points to solid growth but the current trend, which is moderating, indicates that economic activity is not likely to accelerate.”

That’s because raising tariffs on imported goods and services is raising taxes, which Republicans aren’t supposed to do, and all reputable economists agree slows growth.

Here’s another reason why it not good to raise taxes on imported goods. Firstly, some 80 percent of what consumers buy is imported. And consumers overall incomes haven’t been rising at all in 2017 when inflation is subtracted from the total.

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Graph: Marketwatch

Marketwatch economist Rex Nutting reports that although GDP growth in Q2 could be as high as 4.5 percent, 2014 was a much better year when average nominal wages were rising 1.3 percent above the inflation rate. And that is really what determines consumers’ demand for goods and services.

With consumers already skating on thin ice with their finances; so much so that their personal savings rate has sunk to a decade low 2.3 percent, raising taxes could well bring us to a tipping point. Let’s not forget a recession starts when economic activity has peaked, and can go no higher, and starts an inevitable decline.

Another economic indicator just out is the IHS Markit US Manufacturing PMI, which fell to 54.6 in June from 56.4 in May, well below market expectations of 56.5. The reading pointed to the slowest expansion in factory activity in 7 months, preliminary estimates showed. New work rose the least since September, partly reflecting a slight drop in export sales.

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Was the drop in exports because of the tariff wars? The Great Recession began in December 2017 with the US still at full employment. Job losses didn’t accelerate until it dawned on the public in mid-2008 that Wall Street and the banks were in big trouble.

The unemployment rate fluctuated wildly, from a low of 4.7 percent in 2008 to a peak of 10.1 percent in 2009, after the U.S. housing bubble burst and Wall Street saw collapses unlike those seen since the Great Depression in the 1930s.

Harlan Green © 2018

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Housing Construction Booming For How Long With a Trade War?

Posted on June 19, 2018 by Popular Economics Weekly

The Mortgage Corner

How is it possible the 10-year Treasury yield has fallen back to 2.88 percent, and the 30-year fixed conforming rate is again 4.0 percent for 1 origination point in California? It’s all because the Trump trade wars that are supposed to be “easy to win” have alarmed financial markets so much that investors are fleeing back to the safe haven of Treasury bonds. Really? Why should this bother financial markets when trading partners reciprocate with higher import taxes of their own on American-made goods?

That’s right, a tariff is a tax on goods made or bought by Americans, whether it’s exports or imports. So much for the Republican’s promise of no new taxes, which even Republican orthodoxy says raises prices and reduces demand for those goods and services.

The housing market doesn’t seem to mind, at the moment. Privately-owned housing starts in May were at a seasonally adjusted annual rate of 1,350,000, said the US Census Bureau today. This is 5.0 percent above the revised April estimate of 1,286,000 and is 20.3 percent above the May 2017 rate of 1,122,000. Single-family housing starts in May were at a rate of 936,000; this is 3.9 percent above the revised April figure of 901,000. The May rate for units in buildings with five units or more was 404,000.

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Graph: Econoday

The gain for completions is entirely centered in the key single-family category, up 11.0 percent to 890,000 to offset a 13.8 percent decline for multi-units.The May reading of 1.35 million is the number of housing units builders would begin if they kept this pace for the next 12 months, said the NAHB press release. Within this overall number, single-family starts rose 3.9 percent to 936,000 – the second highest reading since the Great Recession. Meanwhile, the multifamily sector — which includes apartment buildings and condos — rose 7.5 percent to 414,000 units.

“Ongoing job creation, positive demographics and tight existing home inventory should spur more single-family production in the months ahead,” said NAHB Chief Economist Robert Dietz. “However, the softening of single-family permits is consistent with our reports showing that builders are concerned over mounting construction costs, including the highly elevated prices of softwood lumber.”

And that leads us back to Trump’s problem with “easy to win” trade wars. The NAHB leadership just met with Commerce Secretary Wilbur Ross to discuss the growing problem of escalating lumber prices that are being exacerbated by tariffs on Canadian lumber imports into the U.S.

“Today, we discussed with Secretary Ross our mutual concern that lumber prices have risen sharply higher than the tariff rate would indicate,” said NAHB Chair Randy Noel, “and this is hurting housing affordability in markets across the nation. Rising lumber prices have increased the price of an average single-family home by nearly $9,000 and added more than $3,000 to the price of the average multifamily unit.”

I wonder who is promising that prices in the free market are predictable when a trade war is initiated? It is the height of folly to promise beneficial results when past history has said trade wars harm almost everyone involved.

Harlan Green © 2018

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Boom Times Here with Rising Retail Sales, Inflation

Posted on June 14, 2018 by Popular Economics Weekly

The Mortgage Corner

Retail sales jumped 0.8 percent in May which easily tops economists’ estimates. And the results include an upward revision to April which now stands at a 0.4 percent gain, according to Econoday. It is in part due to rising inflation, as the retail Consumer Price Index also jumped and retail sales make no corrections for inflation.

This illustrates just what a booming economy should look like after many years of low or no inflation since the end of the Great Recession. Consumers increased their demand for goods and services because they felt more prosperous, and also see prices rising or about to rise. It’s not abnormal to see 4 to 5 percent retail inflation when an economy is booming—something that hasn’t been the case for any stretch since the end of the Great Recession.

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Graph: Econoday

“The retail report shows balanced gains including a 1.3 percent jump at restaurants and a 0.5 percent increase for motor vehicles, both pointing to rising discretionary demand. Building materials,” said Econoday, “which have been soft, surged 2.4 percent in what will be a plus for residential investment. Department stores have been very weak but have now put together back-to-back gains of 1.5 percent in May and 0.7 percent in April. Clothing stores, at 1.3 and 1.2 percent, have likewise bounced back with sizable gains the last two months.”

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Graph: Econoday

And year-on-year consumer prices are up 2.8 percent, and core inflation without gas and energy fluctuations is up 2.2 percent. The overall culprit was rising gas prices, as a barrel of oil is now in the mid-$60 price range. Gasoline jumped 1.7 percent in the month outside of which most other readings are modest-to-moderate. Rent rose 0.3 percent in the month as did owners’ equivalent rent while medical care, outside of a spike for related commodities and hospital services, remains largely flat.

There are other factors that cause prices to rise faster, such as plentiful jobs, and consumer confidence, which has been soaring for a year. The Conference Board’s Consumer Confidence Index came in at a very strong 128.0 in May which is just below expectations but up from a downward revised 125.6 in April. 

Significantly more consumers say jobs are currently plentiful, at 42.4 percent vs April’s 38.2 percent, and about the same say they are hard to get, at 15.8 vs 15.5 percent.

Expectations also moved higher, up 1.3 points to 105.6 with sizably more, at 19.7 percent vs April’s 18.6 percent, seeing more jobs opening up in the next six months, reports the Conference Board.

“Consumer confidence increased in May after a modest decline in April,” said Lynn Franco, Director of Economic Indicators at The Conference Board. “Consumers’ assessment of current conditions increased to a 17-year high (March 2001, 167.5), suggesting that the level of economic growth in Q2 is likely to have improved from Q1. Consumers’ short-term expectations improved modestly, suggesting that the pace of growth over the coming months is not likely to gain any significant momentum. Overall, confidence levels remain at historically strong levels and should continue to support solid consumer spending in the near-term.”

This is the picture of a booming economy, with all cylinders firing. But inflation is rising sharply and a trade war will create even more inflation. So what happens with the Fed and interest rates, if inflation continues to rise? The Fed Governors are saying at least 2 more rates hikes may be necessary, if inflation continues to rise more than moderately.

Harlan Green © 2018

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The Price of Incompetence in Foreign Policy and Trade

Posted on June 13, 2018 by Popular Economics Weekly

Popular Economics Weekly

The Trump administration’s foreign policy is becoming obvious after the Singapore Summit with North Korea—Make Russia, N Korea, China (and almost every other authoritarian government in the world) Great Again at the expense of America and its closest allies and friends.

The Singapore Summit showed more of Trump’s naiveté on the foreign policy front with the 8-point communique that gave Kim Jong Un what he wanted—U.S. recognition of the legitimacy of his regime and promise by President Trump of some kind of security blanket (including possible withdrawal of American troops from S Korea) with no concessions of his own that hadn’t already been agreed to with South Korea in April—such as N Korea’s many-times stated intention to de-nuclearize the Korean peninsula in some way.

This is after POTUS dissed the G-7 summit, while insulting Canada’s Prime Minister, and suggesting that Russia be re-admitted to the G-7 without atoning for its many sins; such interfering in American and European elections, withdrawing its troops from the Ukraine, and support of Syria’s genocide of its own citizens.

The so-called master of the Art-of-the Deal once again revealed his true weaknesses. He only knows how to deal with those that mirror his own bully mentality. Trump only began to succeed in his real estate empire after Mafia figures and Russian Oligarchs put their laundered funds into his projects.

It’s as if his own limitations prevent him from even understanding western democratic leaders, or the complexities of western democracies, in general. His statement that “winning trade wars is easy” tells us exactly what he doesn’t know. Every trade war in history has been damaging to all sides—such as the Smoot-Hawley Tariff Act of 1930 that worsened the Great Depression with an almost 70 percent reduction of mainly agricultural exports.

The Trump administration is now raising tariffs on steel and aluminum, which risks a full-blown trade war and another stock market crash. We have a very unsteady stock and bond market that is being whipsawed by inconsistent policies and Presidential Tweet rants—in the ninth year of this business cycle. Actually, it’s looking more and more like the end of this prosperity cycle.

Today’s wholesale Producer Price Index already showed the effects of the steel and aluminum tariffs—higher prices for both parts and finished products. Prices for steel mill products surged a monthly 4.3 percent following a 3.2 percent gain in April. Prices for aluminum mill shapes came in at an even hotter 5.0 percent monthly gain that follows April’s 1.8 percent climb.

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Graph: Econoday

On an unadjusted basis (without seasonal variations), the final demand index moved up 3.1 percent for the 12 months ended in May, said the BLS, the largest 12-month increase since climbing 3.1 percent in January 2012.

And the Federal Reserve today announced they will be raising their short term rates another 0.25 percent, from 1.75 percent to 2 percent, raising the costs of consumer borrowing even higher, which is sure to slow down spending. This is after consumers reported a record first quarter borrowing binge.

The Federal Reserve Bank of New York’s Center for Microeconomic Data just issued its Quarterly Report on Household Debt and Credit, which shows that total household debt increased by $63 billion to $13.21 trillion in the first quarter of 2018. It was the 15th consecutive quarter with an increase, and the total is now $536 billion higher than the previous peak of $12.68 trillion, from the third quarter of 2008.

The consumers’ personal savings rate has dropped to 2.8 percent from an already extremely low 3 percent. As Roosevelt Fed Chair Marriner Eccles once said of the Great Depression, “…The other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.”

We are already seeing the inflationary effects of trade wars that President Trump believes are “easy to win”.

Harlan Green © 2018

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