Relational Contracting Part II: Four Numbers to Be Concerned About in Global Economics
Jason Schenker, a worldwide leader in global economic forecasting, brought a spirit of levity and predictive insights to a subject that is often mired in gloom: economics! Jason, who founded the Futurist Institute, commented on some of the major changes that lie ahead.
Specifically, he talked about why he is currently obsessed with four numbers: 3.9, 29, 120, and 0.
3.9. Economic debate was more pleasant when the economic outlook and the global growth forecast by the IMS for 2018 and 2019 was 3.9 in January. This seemed reasonable as growth was 3.7 in 2017. Commodities were strong, equities were high. Also in January, the GDP growth number published by the Atlanta Fed showed 5.4% for first quarter. This was before the tariffs – and since then, the forecast has been dampened to 2.0 after Trump and China announced the tariffs they intended to move forward with.
2.9 This number was the wage inflation of January job reports on Feb 2m which triggered equity sell-offs. Equity markets declined as bonds, copper, aluminum, rubber, and everything except the dollar declined. Remember – this was BEFORE the tariff announcements. Wage inflation has been trending for some time as unemployment rates are at their lowest (4.1%) ever. If the 2.9 number sticks it will be the highest wage inflation for three years. The biggest risk perceived by companies who take Jason’s survey was labor costs – out of 20 different risks. This is the biggest risk in 9 quarters! Years ago it was the Chinese slowdown – due to the fact that China was in a recession in Q1 of 2016. The fact that next biggest risk since then is labor cost is a cause for concern as it relates to inflation. The reason it is a problem is that companies are faced by two choices (Hobson’s Choice): 1) do we hire in good people above normal rates and bust salary caps and make people unhappy or 2) do we forgo profit and not expand our capacity? If the former, companies will hire subpar workers who are overpaid and will have to do less with more.
120 The 120 day moving average is one of the primary measures used to assess volatility in the Dow industrials index. The challenges around wages and higher federal funds rate and inflation concerns all occurred BEFORE the announcement of tariffs. The 120 day moving average is extremely volatile. In Jason’s words, “these markets are Newtonian. The trend is your friend. While the trend has been slow growth (getting rich slowly) for 6-7 years, the moving average is definitely headed downward since January. Higher interest rates, slowing automotive sales growth, and slowing home sales are new developments for many market analysts. A lot of Goldman Sachs executives have never seen a federal funds rate above zero! Corporate profitability is under siege from higher labor costs, higher costs of capital, and higher raw material costs. It is therefore unlikely that we will see equities rise, as the trend is not your friend in this case. Jason noted that “I have never seen more risk then in the last few weeks – across markets, currencies, and trade forecasts. Every forecast is all over the place.”
ZERO (0). There are a few zeroes to think about when considering global trade. The first zero is the amount the IMF changed their 3.9 % GDP number from their January forecast. They essentially left the global growth forecast unchanged this week, despite the multiple warnings about the risks to global trade unleashed by the volleys of tariffs between the US and China. The US GDP forecast was raised to 2.9%, with essentially no weight given whatsoever to tariff risks! The massive downside risks to the global economy were ignored by the IMF.
But wait – the Fed also held a press conference last week, and released their own forecasts on trade. They noted that “we agreed not to consider trade and tariffs in our expectations, and so we are raising our GDP forecasts, ceteris paribis (excluding it all!). Another zero (weight) given to impacts of tariffs. “We don’t do trade policy here!”
There are other zeros to think about this week. Zero is the amount of money that Facebook gave back to US taxpayers from the funds they received from the Russians I manipulating the elections. Zero is the amount they gave Facebook account holders for selling their account information to multiple third parties. Zero is the number of people that the President of the United States needs to speak to before making tariff and global trade policy. That’s right – Trump doesn’t need to consult with anyone before launching tariffs.
These four numbers have significant implications, given that we have now cut taxes, and are rapidly growing our debt. Fiscal conservatism is essentially dead in Washington DC. Before signing any big contracts, be sure to include lots of room for uncertainty ahead!