BUSINESS INTELLIGENCE BRIEF
March 27, 2017
NATIONAL AND INTERNATIONAL NEWS
AFFECTING LOCAL BUSINESS
Short Items of Interest – US Economy
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Disappointment – In general markets around the world fell as the health care reform effort failed. It was
not because this move was expected to have a major impact on the global economy. This was considered
a first test of the Trump agenda and it didn’t turn out well. This has thrown doubt on the other elements
that have been driving overall enthusiasm. What happens to tax reform, trade adjustment, infrastructure
spend and deregulation now? The truth is that many in the investment community seem to have forgotten
how the system works and how hard it can be to effect major change. Every President has faced their own
crushing defeat and have had to shift gears. Obama tried to implement climate change legislation and was
thwarted repeatedly – Trump will have his losses as well. The real question is whether there is patience to
try the other plans.
Housing Sector Not Back to Normal – The latest data on housing has been better than expected with
higher rates of new home construction and some decent numbers as far as existing home sales but the
long-term assessment has been far weaker than in the past. The level of home ownership is close to a 50year low and if the normal pace of home building had been maintained last year the economy would have
grown by an additional 1.8% ($300 billion). This is according to a study from the Rosen Consulting Group.
In past years housing has been roughly 19% of the national GDP and last year it was just 15.6%.
Despair – Much has been made of the increased number of deaths among white middle aged males from
suicide. The culprit in general has been despair of some kind or another. This is an immensely complex
topic as there are very complex issues involved. The assessment is that white middle-aged men are feeling
the impact of the recession as they have lost jobs and with the job loss has come deep family chaos. The
men who have been identified as most vulnerable are those who have suffered serious economic setback
as well as broken family ties.
Short Items of Interest – Global Economy
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Iran Deals with Poverty – The appeal of Hassan Rouhani in his first electoral win was that he would bring
prosperity to the population as he would try to end the country’s global isolation. His efforts to accomplish
this have been thwarted by the hardliners in Iran as well as by the US and other nations that have been
reluctant to open their economies to Iran. Now Rouhani is trying to be reelected and those who expected
change are not happy. His standing in the poll has dropped and there is not much that he can do at this
stage although the hardline opposition has not been able to come up with a plan either.
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Bulgaria Faces Weak Coalition Politics – Boyko Borisov has managed to eke out the largest number of
seats in the Bulgarian parliament for his GERB party but that is just under 37% of the total and not enough
to form a government without a coalition partner. The Socialists have rejected his call for a grand coalition
and that will leave him with a cobbled together coalition that will threaten to splinter at every
opportunity. This is not what was hoped for when the campaigns started.
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Massive Protests in Russia – Vladimir Putin is facing some of the largest protests in years and reports have
suggested that 60,000 to 80,000 have been in the streets in almost every major Russia city. The focus of
their anger is corruption. The fact is that corruption has been a way of life in Russia for years but it has
become so extensive that it has all but collapsed the economy. Putin has stopped even trying to control
the oligarchs who have supported him and he has been aggressive as far as attacking those who would
oppose him. These critics are not only being sent to prison, many have been assassinated and that has
pushed the issue to a breaking point. It is expected the police and army will soon resort to extreme
measures to stop these demonstrations.
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Who’s In Charge Here?
From the very beginning of the Trump term it was clear he planned to organize his Presidency along the lines that Reagan and
perhaps Eisenhower preferred as opposed to the systems preferred by both of the Bushes as well as Clinton and Obama. Most of those
who enter the White House come with a team already in place as far as the major issues are concerned. These were the campaign
pledges and the voters generally expect a rapid set of actions to put these in place so the new team is chosen so that they are all
basically on the same page. The reality is there will be opposition from Congress and other quarters so it is good to have the core team
together. Trump surrounded himself with some good people and many have extensive experience. The problem is that they often have
their own agendas and they will not always match those of the President.
Analysis: There will likely be more than a few clashes in the weeks and months ahead (as we are seeing with the reform of the ACA) but
an area where the lines have been drawn already is that which surrounds and affects trade policy. In the campaign the Trump approach
was decidedly anti-trade with promises to tear up the TPP, rework all of the Nafta agreement, punish China for its currency
manipulation, and generally pursue what could only be termed a protectionist policy. As the new government formed there were
certainly people appointed to key posts who shared many of these goals. Peter Navarro was put in charge of a new trade advisory board
and he has a clear record of opposition to trade pacts and a deep distrust of China. Steve Bannon has been labeled an economic
nationalist and is clearly anti-trade. In the first days of the administration Trump executed the coup de grace for the Trans Pacific
Partnership but this had already been killed by Congress.
Arrayed against these anti-trade forces within the Trump team are some of the more traditional Republican thinkers and those with
closer ties to Wall Street. The most ardent defender of some of the current trade positions is the head of the National Economic Council
– Gary Cohn. He was last with Goldman Sachs and has countered many of the aggressive positions on China. He has been supported by
Treasury Secretary Steve Munchin as well as NEC aides such as Kenneth Juster and Andrew Quinn. Juster was a partner at Warburg
Pincus and Quinn actually worked for the Obama administration and negotiated much of the TPP. One can add Secretary of State
Tillerson who benefited over the years from trade deals that opened up oil exploration for his former company.
Those who supported Trump because they thought he would be very tough on trade are starting to get concerned now but those
who support the US as a heavily engaged trading state are heaving a big sigh of relief. The reality is that there will likely be positions
that will please and anger both sides in the next few years. This is classic CEO negotiation between departments so that neither one
feels neglected and neither one has too much influence. The only hitch to this strategy is that it leaves companies that do global
business very confused as to what to expect in the future and that generally inhibits investment and expansion decisions.
Economics and Politics Clash in Health Care Debate
The spinning has been intense and is not about to stop. Was this an epic defeat for the Trump administration? For the Republicans?
For Congress in general? Was this the worst outcome for the public that has been disappointed with the ACA or the best? As with many
political issues it all comes down to what side one was on in the beginning but throughout the debate and those that have come before
there has been the nagging position taken by many economic analysts. The whole health care reform effort has focused on the wrong
issue first – worrying about how to pay for something that is far more expensive than it needs to be
Analysis: By some calculations the US spends almost twice what other nations spend on health care and arguably gets less for that
outlay. The US spends close to 25% of its GDP on health care while other industrialized states spend around 10% to 15%. We have lower
life expectancy than these states and higher levels of disease. There are many culprits as far as the cost are concerned. There is the
expense of malpractice insurance, the high costs of drugs and other medical supplies, the costs of employing so many specialists and
highly trained personnel. The list is a long one but one factor tends to stand out for economists. The health care sector is among the
least productive sectors in the economy and has been dragging down the overall level of productivity in the economy as a whole (along
with education and government).
There are many factors to consider as far as productivity is concerned but one that stands out is lack of overall efficiency and the
impact of widespread redundancy. There are far too many medical facilities for the market to bear. Each and every hospital needs the
best and brightest to compete. They all need the latest technology and the highest quality specialists and that leads to wasted resources
if the local market is not demanding this level of service. This often leads to underuse of the most expensive operations and overuse of
those services that are not seen as vital to the competitive nature of the business. It is not just competition for the patients but there is
competition for doctors and nurses and other personnel and competition for the insurance company’s attention as well as all the other
pieces of the medical profession. This competition should be lowering costs but the nature of the business and its pricing model works
in exactly the opposite manner.
The bottom line is that it will be extremely difficult to figure out a less expensive insurance system as long as costs are as high as they
are and headed up. The options for control of this pricing are limited in the current system and that may be the biggest reform
challenge yet.
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Brexit Scheduled to Start on Wednesday
Amazingly enough Britain’s actual withdrawal from the European Union doesn’t start until this week as this will be the point that
Prime Minister Theresa May invokes Article 50 – the formal process by which a member can leave the organization. What has been taking
place prior to this official act is still based on speculation and what observers believe will happen now. Once the move is made there will
be turning back for the UK or for the EU – the process is inevitable but there will be plenty of opportunities to decide what the actual
withdrawal will look like.
Analysis: If there is no unanimous agreement to extend negotiations further the country invoking Article 50 will be out of the EU two
years from the moment of the invocation. What follows now are a long series of meetings and deadlines to work out the details of the
divorce. The first major meeting will be at the end of April when all the remaining members of the EU have to agree on their formal
response. One bone of contention that will come right away is that the British want to work on both the exit and a future trade deal at
the same time while the European position is for the exit to be determined first and a future trade deal only after that exit has been
established.
Formal talks will likely start in May and the two sides have differing deadlines with the UK wanting an agreement by March 2018 and
the EU thinking that October 2018 will be more realistic given the time needed for ratification. There are two major issues for the UK and
these have been the sticking points from the very start. The British want complete control over who is able to enter the country to work,
vacation, go to school or for whatever reason. This is directly counter to the core EU position guaranteeing free movement of people
throughout the EU member states. This is the core reason the UK is leaving as neither side will budge one inch on this subject. The second
issue is the British do not want the European Court of Justice to have power over the British courts or British law. This is especially
important to the business community given the number of EU regulations that have been promulgated over the years.
The British also seek a new trade agreement that preserves the business that takes place between the UK and Europe. The reality is
that Britain will lose a great deal more economic growth than will Europe if there is no agreement to replace the one that exists now. This
will be the point of leverage for the EU. The negotiations will hinge on how badly the British need this trade deal and that will depend on
whether the US develops as the alternative market the UK has hoped it would become. The challenge for the UK is the US is deeply mired
in an anti-trade and protectionist mood and is not likely to welcome an influx of cheaper British goods. There is no chance the UK will
become part of the EU again – at least not for a long while. There remains a chance that a new agreement would salvage some of the
past relationship – provided that cool heads prevail.
What Happens if Macron and Schulz Win?
Given the reports from the polls it is within the realm of possibility that in a few months the French would elect Emmanuel Macron as
President and the Germans would elect Martin Schulz as Chancellor. What would happen to both of these states and Europe in general if
that was to take place? The reality is that both would be highly constrained by the reality of politics in their respective nations. The
German government would still be a coalition of some kind and the powers of the legislature would still be formidable – especially if the
coalition is as fragile as it expected to be. Macron faces an even bigger challenge as he has no political party to back him – he will either
have to rely on the Socialists or parts of the center-right. The place where both may have the most significant impact is in terms of
Europe itself.
Analysis: Not that the future of the EU is the top priority for voters in either France or Germany but this issue is at the heart of many of
the key debates. Whether the topic is immigration or wages or economic growth, the EU is a key part of the conversation and both of
these men are pro-Europe as compared to their rivals. Schulz has been head of the European Parliament and has a more supportive
attitude that even Merkel. In France, the difference is stark as Macron is clearly more Eurocentric than either Marine Le Pen or Francois
Fillon. Even if he wins he will face a very skeptical National Assembly that will continue to keep the possibility of a “Frexit” in the public
eye. The strength of these men will lie in how much support they can gather from others in the EU that depend on an engaged Germany
and France.
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Four Things to Fear
There are doubtless many more than four but these are the four that strike terror in the heart of the person that travels to make
presentations for a living. The most distressing part is that all five are very likely to take place at some point in the course of the year.
Fear number One – The Out-of-Control beverage. On more than one occasion I have ended up wearing the coffee that some fellow
traveler has insisted on bringing on the plane. I don’t want to pack four or five spare suits so I just wear the one I need and have had to
make my presentation with some interesting stains
Fear Number Two – The Delay from Hades. I try to give myself time for delays of various kinds but that is not always possible and there
have been the occasions when an issue plays havoc with connections. On more than one occasion I have been seen running through a
lobby trying to get to a talk that is scheduled to start in two minutes.
Fear Number Three – Wrong Place at the Wrong Time. I have on occasion arrived at the wrong city or at the wrong time. This far I have
avoided disaster but it has been close. So far, I have arrived a day early rather than a day late or I have had time to get to the right place.
Fear Number Four – The TMI Conversation – I have saved the worst for last. Flying means getting closer to strangers than we usually
get to our loved ones and that means the opportunity to get pulled into the most inane conversations known to man. Such as the fully
grown man who went on for two hours regarding his collection of video games, his favorite moves in “Call of Duty” and his exciting life in
his grandmother’s basement. Even my headphones did not stop him.
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Quick Review of Where Jobs Were Created in February. Most of you know already that 235,000 jobs were created in February, this
was well ahead of analyst estimates and we got a January revision that pushed job creation from 227,000 to 238,000. The
unemployment rate fell to 4.7% and the U6 (which is what we prefer to watch) moved down to 9.2%. The Labor Force Participation rate
remained unchanged at 63%.
CBO Report on the American Health Care Act – the Real Story. To the degree possible, we wanted to try and give you the straight
answer as to what the CBO report on the AHCA said – and what it didn’t. Many analysts are going to be fighting for days over the impact
of the AHCA with many opinions (both pro and con) being weighed in on the issue. In our own bi-partisan way, we’ll try to offer up some
bulleted-takes on what we think is really being said by the CBO.
Producer Prices Higher in February. Core producer prices rose the most in more than 10 months according to the Labor Department
today. Prices for final goods rose by .3% in February. This was slightly lower than the .6% jump we saw in January. For the past 12
months, producer prices have risen about 1.8%. That’s slightly behind where we think the inflation rate is at 1.9% - but both have been
accelerating in the past four months.
February Transportation Demand Index Breaks Out. The transportation demand index for February came in surprisingly strong with
the composite figure jumping into the expansion zone at 51.1, a 4.1% improvement over January and a 24.6% improvement over
February of 2016. This was the first time since November of 2016 that the composite was in expansion mode. The transportation
demand index shows whether freight demand is increasing or decreasing across four modes of transportation. And, since it is an early
indicator of broader economic activity, we think it’s a strong barometer for good economic activity happening now.
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P.O. Box 733 – Lawrence, Kansas 66044 – [email protected]