August 2019 Volume 1

ECONOMIC UPDATE

FIA Quick Read Economic Update By Christopher Kuehl, Ph.D.

Industrial Production Remains Constant. The overall industrial production numbers stayed flat but that was only due to the fact that some sectors went in opposite directions. There was an improvement noted in both manufacturing and in mining but there was a decline in the utilities sector. The cooler than usual weather meant that power use was slacked (something that is not going to last long now that the summer heat is building).The mining sector includes the oil and gas industry and there has been solid movement here as demand ratcheted up with the arrival of the summer driving season. The part that was not expected was the gain in manufacturing and that offset the utility slowdown all by itself. Latest Fed Appointee Runs into New Problems. The latest attempt by the Trump team to flesh out the Fed’s Board of Governors has met with slightly more enthusiasm than the previous try but not as much as suggested last year. In 2018 the two candidates that were waiting for Senate approval were economist Marvin Goodfriend from Carnegie Mellon and Nellie Liang from the Brookings Institution and formerly of the Fed itself as head of the Office for Financial Stability. They were not renominated in 2019 nor was Herman Cain, former CEO of Godfather’s Pizza and Stephen Moore, an economic commentator and former head of the Club for Growth. Both of these dropped out after it became clear they lacked support. Now the nominees are Judi Shelton – an economic commentator and advisor to Trump as well as Chris Carpenter – the research head for the St. Louis Fed. Shelton is controversial for both her views on the gold standard and her engagement as Trump’s advisor but she is also being criticized for her lack of attendance at meetings of the EBRD. She is the US delegate to the group and has missed 42% of the meetings in her first year. Rate Cut Watch. There has been no definitive statement as far as when or even if the Fed will cut rates but some structure to that decision has started to emerge. Chairman Powell has stated that a slowdown in the global economy would be a trigger and Dallas Fed Chief Kaplan states that he will be influenced by what the bond markets are saying. Charles Evans of the Chicago Fed has indicated that he thinks that two cuts will be warranted this year – taking the rate from 2.5% to an even 2.0%. He is the most dovish of the four regional Fed heads that are on the Open Market Committee this year. Global Economy Mexico Slides Towards Recession – Traditionally the Mexican economy follows the US lead. When the US economy is doing well so is the Mexican economy and vice versa. The connection has been lost and now Mexico is slipping fast even as the US economy holds its own. The problem has been a combination of US trade and tariff pressure, the costs of dealing with the immigration crisis and fallout

from the anti-business policies of the new President. The AMLO that railed against foreign investment and capitalism is in charge and Mexican business is in full retreat. The only option will be big cuts by the central bank and likely a peso devaluation. EU Puts Pressure on Maduro. For most of this year the government of Nicolas Maduro has been mostly concerned by the moves under discussion by the US but now it is apparent that the EU is joining the fray in earnest and will begin to impose heavy sanctions if Maduro doesn’t attempt to find some way to leave office peacefully. Europe has been a lifeline for Maduro and he will not survive long without it. Italy Goes After the Roma. It is always popular with parts of the European population to focus attacks on the Roma (often referred to as the gypsies). They are persecuted everywhere and intensely in Eastern Europe as well as Italy.They are now being targeted again by the Salvini government. Good and Bad Factors as Far as Q2 Growth The second quarter numbers will be out soon and the sense is that they will be substantially less impressive than those from Q1. The data collected thus far shows that two of the motivators for that rapid growth in Q1 slowed drastically as the first quarter ended and second quarter got under way. The biggest decline was in the trade area as both exports and imports dropped and that pattern has only accelerated. The global economy has been affected badly by the trade wars that have involved the US and almost every trade partner. It is not just that the US has severely limited the business done with China but the slowdown in the Chinese economy has created a ripple effect that has come back to hurt the US. Countries that sell to China have been unable to sell as much as they are accustomed to and that means they have been unable to buy as much from the US. Therefore, the US is selling less to these nations.The other factor that has been less robust is the decline in investment in newmachines and technology. The level of capacity utilization has been tantalizingly close to levels considered ideal (between 80% and 85%) but they have been stuck in the upper 70s for over a year now and that has been an inhibiting factor as far as growth is concerned. To top it all off there is the fact that business inventories are far higher than they should be. Many companies started accumulating excess inventory earlier in the year as a hedge against the impact of the tariff and trade war and now they are saddled with too much of that inventory as the tariffs have been exceedingly uneven and unpredictable. Analysis: The bright spot has been the consumer and nobody is quite sure how long the sector will continue to hold the economy up. It has been repeated ad nauseum but it still remains significant that the US economy is over 80% dependent on consumers. Their mood and most importantly their actions will drive the pace of growth

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