Guest post by John Manzella*, U.S.-China trade war damage could last decades

When it comes to international trade, China hasn’t always played by the rules. So the question begs: How do you change that behavior? Engaging in a trade war by imposing tariffs isn’t ideal. To save face, Chinese President Xi Jinping must appear strong and that means responding to U.S. tariff increases with Chinese tariff increases. This tit for tat strategy, which escalated again on September 1, is increasing volatility and uncertainty, while hurting economic growth. But it gets worse.

As America’s exports to China get shut out, our allies and trading partners are filling the gap. For example, as U.S. soybean exports to China have dropped due to retaliatory tariffs, Brazilian soybean exports there have surged. Canada, Mexico, Australia, Japan and others also have benefited. These new trading relationships are unlikely to be temporary.

Reported in Xinhua, China’s official news agency, Han Jun, China’s vice-minister of agriculture and rural affairs, recently said: “Many countries have the will and ability to replace the U.S. presence in the Chinese agricultural market. If other countries become reliable suppliers to China, it will be difficult for the United States to regain the position.”

President Trump’s unpredictable actions may be textbook negotiating tactics. But they have Chinese customers questioning whether they can rely on American suppliers, which they increasingly view as unreliable partners due to the volatility in the commercial relationship, says the US-China Business Council (USCBC), an organization of approximately 200 American companies doing business in China. And the damage is mounting.

While 49% of respondents of a recent USCBC survey said they lost sales in China due to retaliatory tariffs, 37% said they lost sales due to their Chinese partners’ concerns about doing business with American companies, a seven-fold increase over 2018. Even if the trade war ended tomorrow, Chinese concerns moving forward likely will call for strategies to play it safe by reducing dependence on U.S. companies.

Trump’s go-it-alone tariff approach is proving very worrisome at best. And his statement, “trade wars are good, and easy to win,” couldn’t be further from the truth.

When faced with Trump’s tariffs, virtually all America’s allies and trading partners have responded in kind, often targeting U.S. agricultural exports. Peter Navarro, Trump’s trade advisor, grossly miscalculated what would follow when in 2018 he said, “I don’t believe there’s any country in the world that will retaliate for the simple reason that we are the biggest and most lucrative market in the world.”

What is a better strategy to deal with the Chinese? Working closely with our European, Asian, and other friends around the world to establish a united front against China would likely prove more effective. And for the most part, we have similar interests with regard to curtailing Chinese bad behavior.

But establishing a united front at this point would be difficult since Trump has either threatened many of our friends with protectionist measures or weakened the relationships. Nevertheless, this option may still be the best way forward.

The administration’s desire to persuade China to stop subsidizing its state-owned enterprises, enforce intellectual property protection, eliminate trade restrictions on U.S. firms, and stop demanding U.S. companies hand over technology in exchange for Chinese market access are important goals. But implementing the wrong strategy is severely hurting those it is intended to help.

American farmers and exporters have spent decades developing the Chinese market. Losing those markets is costly and difficult to bear. But trying to win them back may be extremely challenging, if not impossible at least in the foreseeable future. It’s time for the administration to take a different approach.

*John Manzella, founder of the ManzellaReport.com, is a speaker, author and nationally syndicated columnist on global business and economic trends. Contact him at JohnManzella.com.

Economics is Dismal But Is It a Science?

On September 3^rd, Joseph Epstein’s article was published in the Wall Street Journal – Economics is Dismal, But Is It a science?*

Epstein’s worry about economics is common but misplaced because most of us do not know what a science is. Epstein is worried that an economist makes an analysis or a forecast based on something that might not always be right. He underscores the idea that because politicians abuse economics, then it must be the fault of the economics. It is more true that economics is fine. It is the politicians and the journalists who are the problem.

I am glad that Epstein didn’t write about shovels. Shovels are perfectly good tools to move dirt from point A to point B. But if Donald Trump and Nancy Pelosi were in one room and each held a shovel – he might worry that those dang shovels are just way too political. Hmmm.

This opening allows me to pontificate about economics and science. When I was in graduate school at Chapel Hill I was fortunate to take a course in what was called economic methodology. It would have been better named economic philosophy or the philosophy of science. You didn’t learn much micro or macro economics in that course but rather we learned what it means to seek and find truth. That sounds hoity toity but it is a way to describe what we do as people every day.

In the USA we drive on the right side of the road. If you drive on the left you soon learn a lesson about safe driving.  You might say we learn by doing. We find similar truths in many ways every day. Sometimes we find truth by merely thinking about things. You do not need to throw a dart in the air above your head to find out it might come down and hit you on the head. Instead, you could sit in a nice chair and think about the law of gravity. You learn that what goes up must come down. So, you might not throw a dart or a bowling ball right above your head. The Theory of Gravity helped you learn that lesson. Of course, repeated trials could teach you the same lesson but that  might be painful. 

So what is a science? A science is basically a way to discover what seems to be true. It usually has two parts to it. The first part is the theory. We use all sorts of theories to make predictions. The theory of electricity tells you not to stick your screwdriver into the electrical socket. The theory of macroeconomics tells you that if governments have too much debt this might raise interest rates and/or inflation.

The second part of a science is to test to see if your theory holds in the real world. Have your worst friend stick a screwdriver into the socket 100 times to see if the theory holds. Or watch to see how large government debts affect interest rates and inflation in various countries at various times.

Epstein worries that economics is not a science. But surely all one has to do is theorize a bit and then put the theories up to testing in the real world and you have a science. Of course some people make distinctions between hard and soft sciences. Chemistry might be a hard science because physical laws are pretty old and tested. Economics is a soft science largely because it is the new kid on the block and has a ways to go before it gets the predictive accuracy of chemistry. It also deals with human behavior which can be less predictable that electrical currents. 

But please Mr Epstein do not confuse this hard/soft idea with politics and manipulation. All one needs to do is think a moment about how hard scientists disagree about such things as a hurricane’s path, the health effects of meatless meat or vaping, the timing of global warming, dangers of biofoods, the origins of black holes, and so on. No science has it all down pat. There are disagreements within all of them. This means we have not yet learned everything about a phenomenon and need to keep trying. But it also gives room whenever there is a policy issue stemming from these disagreements, for politicians and Epstein’s buddies in journalism to turn science into a heated and colorful debate.

In that sense, economics is no different from any other science – hard or soft. No matter what kind of science, when we try to extrapolate what we think we know into the future, we can never be sure we will be accurate. When we are not accurate then we should learn from the mistakes and improve the theory. But Epstein doesn’t care about that – he’d rather blame economics instead of the stupidity of politicians and the press.

* https://www.wsj.com/articles/economics-is-dismal-but-is-it-science-11567551425?mod=searchresults&page=1&pos=1

Nice Weather If You Are a Duck

No, I don't forecast weather. When it is raining we often say that it is nice weather -- but only if you are a duck. In other words -- if you are not a duck -- it is NOT nice weather!

I decided to take a break from moaning this week in order to look at some data. The data is meant to capture the growth of the world economy and its various parts. The International Monetary Fund loves to gather and present data. Normally, we all get to see the data when they present their World Economic Outlook reports in May and November. During the year, however, they often present updates. I found updates to world economic growth as of July 2019. These are presented in the table below.

You might say that the world economy is fine so long as you are not a duck. That doesn't make any sense so we might say the world economy is fine so long as you love being unemployed and/or don't like being hassled by things like customers. In fact, the world economy real stinks.

I took from the IMF dating measuring the real GDP growth of the world and various regions and countries. The first column in the table shows the actual growth rates in 2018. Since we are in the middle of 2019, I ignored that year. The second column shows the IMF projections for 2020 as of about a month ago, in July. As in all forecasts or projections, the future may turn out to differ from the projections today. But it is interesting to see what they are saying about the future today.

Notice that when you average all the countries of the world, the story is not too bad. The IMF expects world economic growth to stay about the same -- though technically we see a decline from 3.6% to 3.5% from 2018 to 2020. When compared to past years, this 3.5% is definitely below the usual outcomes. But on the positive side, while growth is slowing in most places, the IMF is not predicting a contraction in output in any of them. In other words, they are not forecasting a recession.

The US stands out in the table in going from 2.9% to 1.9%. That 1% decline in growth amounts to a 35% reduction in 2020 relative to growth in 2018.

Comparing future US economic growth to the other 17 places places listed in the table, only four countries/areas (Germany, India, Latin America & the Caribbean, and the Middle East, North Africa, etc.) are expected to grow faster in 2020 compared to 2018.

The remaining countries in the table are expected to decline (or stay the same) in terms of real GDP growth in 2020 compared to 2018. That's pretty special and deserves at least one JD toast.

While the 34.5% decline in the USA is impressive, Japan's growth is expected to shrink by about 50%. Economic growth in Russia, Spain, the Euro Area, Emerging Europe, France, and Italy are all expected to shrink by double-digit percentage changes. Smaller but still negative declines are expected for China, Mexico, and the Group of ASEAN countries.

Projections like these can be important to expectations, the least of which today result in low inflation and interest rates. As we go through the remaining months of 2019, it will be very interesting to see how this global picture changes.

	Actual	Projection	Diff	Diff %
	2018	2020		Change
World	3.6	3.5	-0.1	-2.8
US	2.9	1.9	-1.0	-34.5
Euro Area	1.9	1.6	-0.3	-15.8
Germany	1.4	1.7	0.3	21.4
France	1.7	1.4	-0.3	-17.6
Italy	0.9	0.8	-0.1	-11.1
Spain	2.6	1.9	-0.7	-26.9
Japan	0.8	0.4	-0.4	-50.0
UK	1.4	1.4	0.0	0.0
Canada	1.9	1.9	0.0	0.0
Russia	2.3	1.9	-0.4	-17.4
China	6.6	6.0	-0.6	-9.1
India	6.8	7.2	0.4	5.9
ASEAN	5.2	5.1	-0.1	-1.9
Emerging Europe	2.6	2.3	-0.3	-11.5
Latin Am & Caribb	1.0	2.3	1.3	130.0
Middle East, N. Africa, etc	1.6	3.0	1.4	87.5
Mexico	2.0	1.9	-0.1	-5.0
https://www.imf.org/ en/Publications/WEO/Issues/2019/07/18/WEOupdateJuly2019

Sticks and Stones Monetary Policy

I was having one of those weeks when it seemed like there wasn’t anything to say in the macrosphere. And then Fed Vice Chair William Dudley piped off enough to warrant an article about him in the WSJ (8/28/19) titled “The Federal Reserve Resistance.” Thanks Mr. Dudley. You made my day.

When I was a kid in the olden days our parents didn’t want us to get into fist fights. If someone said something nasty to us, we were told to say – “Sticks and stones will break my bones but words will never hurt me.” If anything, we should have learned this about Donald Trump. He says and tweets a lot of words. And often the words have no real meaning. He blurts and blurts. Most of us have learned to just ignore all that blather. Your grandma wears combat boots. Your Dad has a long nose. Your butt is bigger than Mt Everest. Most of us ignore stupidity.

That’s what is so surprising about Mr. Dudley. I am sure he has a PhD but I refuse to call him Dr. until he acts like one. He is acting like a school child and that’s okay for him – but he is ruining our understanding of the Fed’s role and in so doing proposing ridiculous policies.

The Fed is independent of the President and mostly from Congress. The President can nominate people to the Fed’s governing board when openings arise as in the Supreme Court. Congress can approve or disapprove of these nominees – and Congress always can write a new banking law that changes the operating rules at the Fed. But these options do not give the President or Congress the right to tell the Fed what to do insofar as ongoing monetary policy concerns.

As such, the Fed does what it wants to do. Trump or Pelosi or whoever can make speeches and write articles criticizing the Fed, but it doesn’t change a thing at the Fed. The Fed is usually smart enough to wear blinders or earplugs – but not Mr. Dudley. He makes up a fiction that the President is overstepping his duties. We all know Donald Trump. He runs his mouth a lot. Most of us ignore most of it. Why doesn’t Mr. Dudley do the same? 

Trump can talk all he wants but the Fed is independent. Trump can pressure the Fed to lower interest rates and previous Presidents have done similarly, but that doesn’t mean the Fed has to comply. I can remember many speeches by Arthur Burns wherein he basically turned the tables and told the President that if he did a better job at fiscal policy he wouldn’t need to pressure the Fed.

Instead Mr. Dudley wants to overthrow the President in the coming election. Really? Is that an independent Fed? Mr. Dudley even said the Fed could bring this about by not following Trump’s orders – and thereby pushing the economy into a recession. Mr. Dudley implied that recession might influence voters to get rid of President Trump. Wow. Crazy stuff. The Fed is just making things worse with this war of words.

If you read this blog you know I agree with the idea that the Fed should not lower interest rates. So it appears that I agree with Mr. Dudley about the direction of Fed policy. But when he gets too political and he says the Fed should induce a recession for political purposes -- he crosses the line. Instead Mr. Dudley could try to educate people about Fed independence and he could explain why a good Fed policy probably would NOT cause a recession...even if it means raising interest rates a tad.  

Are We Out of Bullets?

Keep your powder dry. Save your bullets. Invest in a diversified portfolio. Always have a pint of JD laying around.

The above are famous ways to warn people to save for the future. Surely you can empathize with the solider who spent too many bullets practicing at the firing range, only to be out of bullets on the battlefield.  Or imagine the budding new socialite whose daughter sucked down the last of the JD right before the big lawn party. Prudent people know they should save. Even if you save only a little, it can mount up to a nice nest egg in the future.

We ALL know this wisdom. We sometimes don’t follow it, especially in emergency situations. But we know it and we realize we jeopardize our future when we don’t.

Why is it that our own government cannot follow this simple and straightforward advice? Think about it. Most of our elected officials are educated and smart people. They also appear to be motivated to do good things for their country. Yet when they get together and vote, you would think that they just came from cocktails with the devil. 

In 2007-08, we had an economic emergency. Counting on my fingers, we have exited that emergency that started 12 years ago. 12 years ago, I was a young lad of barely 61 years. Nolan wasn’t even thought of. 12 years ago Abraham Lincoln was president. Just kidding on that one. But 12 years was a long time ago.

Point—if we needed to borrow for an emergency that started 12 years ago, we don’t need to borrow for it now. And it would be prudent to pay off the debt. Yet our fearless leader and all those goons we call congressmen are digging us deeper and deeper into debt. Our government was not very good at saving for a very long time – but they have gotten even worse as we approach 2020 and beyond. Our national debt is now big enough to finance a national Tuna convention in Hotlanta.

Who cares? Debt schmet. No big deal. What’s a little bit more debt?

Ask Venezuela. Or ask Greece. Or ask your neighbor who just had his vehicle removed from his driveway. 

There is more to the story. Lately, people are writing stories about how the large debt makes it impossible for our government to save the day when we finally go into a recession. As you know, I don’t yet buy this recession crap but it is possible that we could experience some very slow growth sometime in the near future. The worry now is that if we are already deeply in debt, the government won’t be able borrow more. Their hands will be tied. They will be out of bullets. 

But do you really believe all those goons are going to sit around on their hands as the US goes off into a recession?

Of course not. Those same goons will borrow even more. They will ride in on their white stallions and save the damsel in distress (apologies to my feminist and vegan friends). You can borrow bullets and you can borrow money. They will just borrow more. And then they will spend.

But there will be a difference this time. At some point, if you cannot pay for the borrowed bullets, no one will lend you more bullets. Maybe they will lend them but the price will be much higher. Either way, debtors who want more and more debt will find it more difficult to borrow. The Ds will blame the Rs and the Rs will blame the Ds and so we will spend endless hours in bars and cocktail parties blaming each other.

Notice that the process won't be fun. For example, foreigners might stop lending to us. That means the stock and bond markets will fall and interest rates will rise. It also means that the value of the dollar will fall. The falling dollar might be helpful for export sales but it will mean higher inflation rates and it will be a further reason for foreign money to go elsewhere. During a recession, you definitely don't want stock prices to fall, interest rates to rise, and investors to sell their US assets in a panic. 

That's a horrible scenario. Luckily, the parties can blame each other and no one will have to accept the blame. All this could be avoided by a little prudence. Pay attention to debt. You don't have to bring it to zero tomorrow, but you certainly should try to stop piling up mountains of new debt. And save a little JD for your next party too. 

Annoying Economics

Some of you would agree that economics is always annoying. But so are chemistry and dentistry. I have something different in mind here when I say that economics is annoying. What I am referring to is the total neglect that policymakers show to anything resembling economic analysis.

Imagine that we had national policymakers in charge of cancer. Imagine also that when you said you thought you had a specific type of cancer, the policymaker--without knowing anything about chemistry or biology--decided to give you advice about curing your cancer. Perhaps you should take a vacation to Sanibel Island. Or maybe you should instead lie on a bed of sharp objects. While you might like an excuse to go to Sanibel Island, you still might be leery and ask your best friend, what does this policymaker know about cancer? Really?

Sounds stupid and far-fetched? Maybe, but that’s how I feel about what I have been reading with respect to recent economic policy discussions. Two issues come to mind from the business news lately. First is the idea that the US Fed must follow what foreign central banks are doing. If the Bank of Japan or the European Central Bank decides to reduce interest rates, then of course, the Fed must too. It has no other recourse. It must follow. 

Second is the idea that if the inflation rate in the USA is below some pre-ordained rate, say 2%, then of course the USA Fed must reduce interest rates as a means to prop up inflation. Heaven forbid we should have an inflation rate of below 2% in Alaska or Atlanta. If inflation is too low, then the Fed must attend to raising it.

This is what we are reading today, and serious economists and policymakers repeat these mantras daily. But where do they get this crap from? Clearly they don’t get it from economics textbooks. The common thread among the two examples above is the immediate conclusion that government policy is the first line of defense for all economic problems. While economics does allow for a role for economic policy, economics ALWAYS teaches us about cause and effect and brings policy in only when basic economic forces are somehow missing. Economic policy is the last resort. Economic policy is called upon when basic economic factors don't resolve the problem.

What is this basic economics? Simply put, it is all about supply and demand and how they come to impact price and quantity. Each semester, we teach hordes of freshmen and grad students this stuff. On the white board or classroom screen, it looks pretty abstract and when we put it into math models it looks even crazier. But the formalization of economics is the result of observing behaviors of customers and  providers in real markets. Formalization perhaps overdoes each particular situation, but the formalization captures the interplay of important themes.

Consider a market in which demand greatly exceeds supply. Without naming any specific good or service, our mind envisions a time when it is not easy to find that good. It might be that the scarcity allows firms to charge higher prices for that good. But that is not the end of the story. Economics suggests that the scarcity and the rising prices creates the incentives for firms to bring more of that good to the market. It might take a while to make that happen but the incentives are there. 

Thus scarcity comes and goes and economics explains why. Notice that the basic economics does not immediately conclude that the government must provide the extra goods that are wanted. It does not suggest a business tax cut to create incentives for producers to create more of it. Adam Smith talked about an invisible hand, by which he meant that you don’t need the ever visible hand of the government to solve all divergences of supply and demand.

Economists take the economics one more step. We believe that when markets are not free it might take some assistance from the government to overcome a market failure. But notice that the focus of economics is on a specific failure for government to address – it does not require a government that is everywhere and always solving problems.

Isn’t economic theory fun?

Back to my two spouts for the day. If the ECB reduces interest rates, then the Fed must do so too. What? If the ECB reduces interest rates then people will want to invest money at higher interest rates in the USA. But the very act of all those folks wanting to buy US assets causes US asset prices to rise and US interest rates to fall. We call that a market result. If the EU drives down their rates, our rates in the USA fall too – and the Fed doesn’t have to do a thing. It's just economics. The dollar/euro exchange rate might be affected in the interim but once the interest rates equalize the exchange rate goes back to its previous level.

How about the idea  that the Fed has to push up the inflation rate. Inflation is too low so the Fed must increase it. Really? What about the idea that if goods and services become cheaper in the USA this might affect where people buy goods and services. Better priced items in the USA should divert spending or demand away from other countries and into the USA. That diversion of demand would cause the USA inflation rate to rise. Notice—the Fed doesn’t need to do it.  

If the Fed is pretty sure that inflation is not behaving and is causing real problems then it should ask why. Why is inflation low? Why is it stubbornly low? Maybe there is a reason that requires a Fed policy. Maybe the reason requires some other policy.

I am not saying that government should never intervene into economic markets. I am saying that government intervention is never the first thing to ponder. Economics can be helpful but not if politics is always the primary goal of policymakers. Sad that we seem to put the cart before the horse these days.

Output Change in the First Half of 2019

The table below is pretty long and ugly. But like a good book, a theme emerges across the many paragraphs and chapters.

The data in the table was pruned from the government source bea.gov that holds mountains of information about the US economy. A regular output of the Bureau of Economic Analysis (BEA) is announcement of the latest number's on national output or what we lovingly call real Gross Domestic Product or real GDP.

While one can find data going back as far as Nancy Pelosi's birthdate, today I pirate mainly very recent information from the first two quarters of this year. The columns identified in the chart by Q1 and Q2 show you that the annualized rate of change of real GDP in the first two quarters of 2019 were 3.1% and 2.1%, respectively.

If you do what I do and read all the crapola that gets written/spoken about such numbers each quarter, you probably shake your head at all the detail and reach for your bottle of Jack and your Perry Como CD. Being an unreformed professor of macroeconomics most of my life, I see my place in the world as being one who can look into all those numbers to find a plot. Of course I'd love to charge you for this valuable service but so far no one has volunteered even a farthing, whatever that is.

So here goes. Let's just focus on the first line of the table. We see that output slowed in Q2 from 3.1% to 2.1%. Hey dudes, at least it was still growing. The AVG 2019 column says that the average growth over those two quarters was 2.6%. The first column AVG 3 YRS says the economy has grown at an average rate of 2.3% over the last three years. I chose 3 years because Nolan is twice that old.

The DIFF column says that the average over the first half of 2019 was a smidge (0.3%) stronger than the average over the last three years. I'm sorry to say this but the BEA spent a ton of money just to tell us that the economy grew a smidge faster in 2019. Incredible. Don't you feel better now?

What else? All those lines below the first one help us to find even more golden nuggets -- or maybe even more of a story. So hold on friends. Maybe there is something here. All those lines below the top line refer to different categories of output. For example, take eight of the rows starting with gross private domestic investment. Those lines report what happened to business spending on such things as plant and equipment and what households were spending on new residences (houses, condos, etc).

I pick out those rows because the AVG DIFF column is very negative in 7 of the 8 parts of investment spending. The only one that was not negative was intellectual property products. The negatives imply that for each of those negative categories, the performance in 2019 was much less than in the three years prior. The -4.6% for business structures reveals that after growing by 1.3% per year in the previous three years, it fell by 3.3% in the first half of 2019. That's a swing of -4.6%.

So while overall real GDP was a yawner in early 2019, we are all wondering what the crappy business investment numbers mean for the future. Will US productivity decline in the future? Will firms cut back even more in the rest of the year? Will this cutback cause a recession? Will Bernie Sanders stop gesturing like a traffic cop in Barcelona? We don't know. But we are watching.

What else? Notice that Personal Consumption Expenditures (PCE) picked up in the second quarter of 2019 but even that 4.3% growth rate was not enough to make 2019 better than the previous three years. The laggard in PCE was the services component. What will happen during the rest of 2019? Will spending on goods slow or will spending on services increase?

Farther down the table is the data related to international trade--exports and imports. Lots of negatives there in the  DIFF column.

Looking at the first half of 2019 reveals as many questions as it suggests answers. Should we be worried that a recession is coming? From these numbers it's hard to know. But clearly the numbers on investment spending and trade require close attention.

AVG 2019 2019 AVG AVG 3 YRS Q1 Q2 2019 DIFF Gross domestic product (GDP) 2.3 3.1 2.1 2.6 0.3 Personal consumption expenditures 2.8 1.1 4.3 2.7 -0.1 Goods 3.9 1.5 8.3 4.9 1.0 Durable goods 6.4 0.3 12.9 6.6 0.2 Nondurable goods 2.6 2.2 6.0 4.1 1.5 Services 2.3 1.0 2.5 1.75 -0.5 Gross private domestic investment 2.7 6.2 -5.5 0.35 -2.4 Fixed investment 3.6 3.2 -0.8 1.2 -2.4 Nonresidential 3.8 4.4 -0.6 1.9 -1.9 Structures 1.3 4.0 -10.6 -3.3 -4.6 Equipment 3.4 -0.1 0.7 0.3 -3.1 Intellectual property prods 6.3 10.8 4.7 7.75 1.4 Residential 2.8 -1.0 -1.5 -1.3 -4.1 Change in private inventories NA ......... .......... NA NA Net exports of goods & svcs NA ......... .......... NA NA Exports 2.2 4.1 -5.2 -0.6 -2.7 Goods 2.9 4.6 -5.0 -0.2 -3.1 Services 0.8 3.3 -5.6 -1.2 -1.9 Imports 3.7 -1.5 0.1 -0.7 -4.4 Goods 3.8 -2.8 0.2 -1.3 -5.1 Services 3.5 4.5 -0.3 2.1 -1.4 Government Cons. And Inv. 1.4 2.9 5.0 3.95 2.6 Federal 1.4 2.2 7.9 5.05 3.7 National defense 1.1 7.7 2.8 5.25 4.1 Nondefense 1.7 -5.4 15.9 5.25 3.5 State and local 1.4 3.3 3.2 3.25 1.9

I Hate Hate

Sometimes I depart from macro so I can vent a bit on other subjects. Today the subject is hate. Grr.

I hate hate.

What a great title for a blog post! Think about it. What does it mean to hate hate?

Notice that the first hate in my short sentence is a verb and the second one is a direct object.

Notice also if hate (the direct object) is something bad, then how can you hate (verb) that? If hating is so bad why do you do it?

So that’s what got me started. Everyone hates hate. But nowadays, more people seem to be hateful!

What is hate? Wikipedia is helpful.

• Hate is a heavy metal band from Poland but let’s ignore that one.
• Synonyms for the verb hate: loathe, detest, dislike, greatly abhor, despise, feel hostile toward, find intolerable, recoil from
• Synonyms for the noun hate: feelings of hate and revenge, detestation, abhorrence, abomination, execration, resentment, hostility

Hatred has no positives. Prolonged hate tends to cause fixation on the hated ones and wastes a lot of time and energy -- and in extreme cases leads to violence or retribution. Which most likely causes more hate, violence and retribution. 

Hatred seems to be out of step with most religions. I don’t know many spiritual people who don’t follow the golden rule: do unto others as you would have them do unto you. Surely hatred is not part of any of those religions. I don’t think Buddha taught people to hate each other.                                                   

So there you go. I can’t really hate hate because I don’t want to hate anything. But I sure want to make it clear that hate ought to be less prevalent today.

No, I am not going to get into the trap today of saying this or that about political parties or their followers. My observation is that some people on both sides of the political spectrum are filled with hatred.

Notice one thing about hatred – it is much easier to do when you perceive that the other (bad) guys hate you. As long as anyone believes there are people who hate them, then the hate party will go on.

It’s a bit like the famous Prisoner’s Dilemma. If Joe thinks Bob is going to rat on him, then he is probably going to rat on Bob. Bob and Joe need a private meeting to agree to not rat on each other.

I think all of us need to have a private meeting and decide we are members of the same human race, and we are killing each other by hating each other.

Rant over. Thank you.

Policy Persistence and Stupidity

Almost four years ago in August of 2015, I wrote the below blog entitled Humpty Dumpty Monetary Policy.  No insult to Humpty but those clowns at the Fed were wrong in 2015 and they are even "wronger" today.

https://larrydavidsonspoutsoff.blogspot.com/2015/08/humpty-dumpty-monetary-policy.html

It is amazing how persistent stupidity can be. We have a new head of the Fed and we have a much stronger economic situation, yet the people at the Fed have decided that the only way to do their business is to run interest rates lower than a limbo dancer in Nassau.

Sure, the Fed spent a little time letting interest rates rise above zero, but that's not exactly what I would call normalcy. Any of you who have seen me after downing my usual nightly supply of JDs might question my ability to know normalcy when I see it -- but any of you who are trying to save for retirement or even for a new back yard trampoline know that zero interest rates are not your friend.

You argue -- Larry the Fed raised rates a jillion times in the last couple of years. Larry retorts. Friends, look at the markets today. The rate on a 10 year government bond is about 2% as I write. 2%! Really! You call that high? Factor in an inflation rate of prices of 2% and you get what? Yes math genius. You get a ZERO return. Factor in an inflation rate of 3% and well I don't want to say anything negative. Hmmm -- so much for that trampoline.

Read the articles in the newspapers lately -- this Fed board member and that board member are sooooo worried about the economy they must consider lowering rates. If zero real rates won't solve the problem, will minus 2%? I think not. Like pushing the blood back into a hole in your arm won't fix your medical problem, -2% interest rates won't do a thing for our problems today. What is wrong with those educated bimbos running the Fed?

And if that isn't bad enough, Pelosi and Trump have finally decided to agree about something. Apparently they both love nude hot tub parties. No just kidding. Yikes, please gouge my eyes out. To what are they agreeing? A government with trillion dollar deficits each year and a national debt soon to exceed the size of the entire economy is better than a Bob Dylan 8-track to them. That is truly sad and dangerous. No insult to Bob Dylan or 8-tracks intended.

Do I sound like I am yelling? I hope not. But come on dudes -- have we ever had a worse Fed and government? Ever?

Recessions and Business Costs

Last week I started a voyage in thinking about how constraints might cause a recession. If the US economy grew especially fast for a while, it would use up resources whose scarcity would create the seeds of the next recession. While there was some evidence to support that view, it clearly was not present for most of the World War II recessions.

So now I try a second approach to recessions. While strong growth could cause resource scarcity, it is possible to measure that inadequacy of resources in terms of their costs. I chose three typical measures of business costs and examined how they changed before the seven recessions: worker earnings, the price of oil, and a broad measure of business input costs known as the producer price index. To measure the buildup of the costs, I took a five-quarter moving average. The table below shows the five-quarter percentage change of each of these costs and adds a fourth column for the sum of them.  

What can we learn from this table?

First, the largest number on the table is the 118.4% for the cost buildup total right before the 1981-82 recession. While most of that came from oil prices, notice that the 7.7% increase for earnings and the 14.3% for PPI are large numbers for those categories over time. One could say that business costs were rising widely and rapidly before that recession.

Only the 2001 recession comes close to the 1981-82 number with a score of 59.2%. The cost rise before that recession was mostly the 53.7% increase in oil prices. The PPI was barely budging (3.7%) and worker earnings were up only (1.8%).

The 1973-74 and 1979-80 recessions are widely known to be oil-induced recessions. But the table does not show that. For one thing, right before both those recessions, earnings and the PPI were rising rapidly. Notice that oil does not appear to be a contributing factor. But that is because of some strange things going on with respect to timing. The 1973-74 recession was famous for the Nixon Wage and Price Controls, which put ceilings on oil prices, among other things. Oil prices and inflation generally soared, but only after the recession had already begun. It took a while for energy prices to build again, but build they did, with the biggest increases coming in 1980 and thereafter.

The 1990-91 and the 1969-70 recessions were preceded by little business cost buildup.

That leaves the big momma recession of 2008-09, and there we see no buildups in cost except for maybe oil. But we know there was much more to that one with respect to housing and finance. 

That leaves us thinking about when the next recession will come. If it comes in 2019 we see only rising oil prices as a main culprit. Our simple look at past recessions suggest that business costs can lead to recessions, but we see very little going on with earnings or the PPI before 2019.

Perhaps the recession will come from well-known risks like trade wars, global factors, or finance. But so far those factors are risks and not real trends. As far as I'm concerned, I see no recession in our near future.

Cost Pressures*
Recession	Earnings	Oil	PPI	Sum
1969/70	4.7	1.2	2.0	7.9
1973/74	7.4	1.0	4.2	12.6
1979/80	8.1	4.1	8.4	20.6
1981/82	7.7	96.4	14.3	118.4
1990/91	3.7	1.6	4.8	10.2
2001	3.7	53.7	1.8	59.2
2008/2009	3.9	12.8	4.3	21.0
2019/20	2.6	25.5	4.4	32.6

Average                4.2                  11.4         3.7          19.3

* These percentages are for the five quarters before the beginning
quarter of each recession

Excess and Recession

Two weeks ago  Professor Klemkosky congratulated our US economy for reaching its tenth birthday. I hope you lit 10 candles and sang the traditional song and had at least one JD toast.  It turns out that recessions don’t usually get that old so many of us are wondering just how long this thing can go. I was warned a long time ago that one should not forecast recessions with a calendar. And I won’t today join that crowd and predict a coming economic tsunami.

Biological and medical science helps us to understand why most of us won’t live past 80 much less reach 100.  There exists a lot of science that helps us to explain why our bodies and minds finally get old and cease to function. Sadly, there is no such science to help us understand why expansions do not usually hit their fifth anniversary much less their eleventh. There is, of course, a lot of pop science but like pop music, pop science has its limitations and annoyances.

Consider what seems to be accepted lore when it comes to recessions. Like a runner in the last mile of a marathon, the economy gets pooped because it runs out of gas. The runner keeps asking her body to take more steps, but the process of running the first 25 miles has eliminated a lot of internal resources. The carbs are gone. The fat is gone. The tank gets empty.

Even worse is when the runner tries to catch up to the top runner and sprints to the finish line. The picture is not pretty.

Why not apply this runner stuff to the economy? In that case we would say a recession comes after a time period of strong growth in which we deplete a lot of resources. As we try to keep the economy running hot, it finally simply cannot grow as fast because we have fewer extra resources laying around to bring into the production process. The economy then sags.

It’s a very intuitive narrative. I decided it was time for me to get back into the data. This time I looked at some macro statistics that might shed some light on this resources/recession story. I could have tried a lot of different approaches, but I chose this one. This blog is not a dissertation and it isn’t even a good journal article. So whatever conclusions I draw here today should be subject to a lot of hemming and hawing if not outright laughing and giggling. But it is food for thought and your reactions might lead to subsequent attempts to marshal data relevant to our topic of recessions running out of steam.

The table below assembles some real GDP data for out purposes. I am looking at macroeconomic growth before each of the seven recessions in the USA between 1969 and 2019. In the first column is a number that I calculated to represent the strength of recent macroeconomic growth. I calculated the average of the growth in the economy for the 10 quarters before the start of each recession. The simple idea is that a large number suggests a strong tax on resources before the beginning of the recession. 

Notice that before the 73/74 recession the economy grew by 6 percent per year on average. That’s very strong growth. Notice also that the economy averaged growing at a mere 1.9% per year in the 10 quarters before the beginning of the 81/82 recession.

These  seven numbers in the first column alone do not shed enough light on former growth rates of the economy and a resulting recession. Sometimes the economy grows rapidly before a recession; sometimes it does not. Here is where we could try a lot of other approaches and I chose one.

The second column in the table is the average annual growth rate of the US economy in the 10 quarters before the most current 10 quarters. Comparing column 1 to column 2 let’s us see if the economy grew faster in the latest 10 quarters before each recession. It creates a little more perspective than just looking at column 1. The third column subtracts column 2 from column 1. A negative result means the US economy grew slower in the latest 10 quarters compared to the previous 10. What do these additional numbers tell us?

First, the 1973/74 10 quarter growth average was not only large absolutely but it was much stronger than the 2% annual growth rate prior to that. Clearly there was a strong increase in economic growth before that recession.

Second, the case of the 81/82 recession shows that the 1.9% rate of growth was not only low in the 10 quarters before that recession but it was also very low compared to the annual growth in the previous 10 quarters of 5.3% per year.

These first two points suggest that both stronger and weaker economic growth can precede a recession. The resources issue is thus unresolved.

In four of the seven recessions, the economy slowed in the 10 quarters before the recession compared to the ten quarters before that.

Your minds are spinning. Is this the only way to test if strong or stronger growth causes resource restrictions that lead to recessions? Clearly not. Why choose 10 quarters? What happens to the results if I chose 8? Or 12? Or maybe real GDP is not sufficient for the task. Perhaps we could compare real GDP growth to a measure of total productive capacity like potential Real GDP? Or maybe one could examine prices of key resource inputs like labor or energy.

This case is not closed. But it was fun getting it started. After 10 quarters, is the US economy going to run into resource constraints that lead to a recession? Or is that pop science? If not resource constraints, then what else might cause the eighth recession since the early 1960s. 

Notice I have a line in the table for the 2019 recession. If one started in 2019 it would not be because of resource constraints. The economy has been averaging around 2.6% per year over the last 10 quarters and the last 20 years. I don’t see a recession coming because of that.

Table

Recession    Average Annual Change Real GDP 
Years    10 QTRS**         10 QTRS***    Diff

69/70                3.7                             5.6                -1.9
73/74                6.0                             2.0                 4.0
80                     4.7                             4.1                 0.6
81/82                1.9                             5.3                -3.4
90/91                3.8                             3.9                -0.1
01                     4.4                             4.4                  0.0
08/09                2.4                             3.7                -1.3
19*                   2.6                             2.6                  0.0

* 2019 is not a recession year. This line assumed a recession began in that year.   
** 10 Quarters before the recession began
*** 10 Quarters previous