SHI 8/2/17: Where’s the Beef?

SHI 7/26/17: Food for Thought
July 26, 2017
SHI 8/9/17: Fact, Opinion or Fiction?
August 9, 2017

Japan and the SHI are both reliant on US beef.

 

So when I see beef in economic news, clearly, I’m naturally drawn to it.    Consumer spending beefs up US GDP, a fact made eminently clear on Friday with the BEA released the first of three second quarter, 2017, GDP readings.  The “Advanced” reading was as expected:  Fairly strong at 2.6%.   (The Q1 reading, on the other hand, was revised downward slightly, to an annualized rate of 1.2%.)   Will Q3 maintain this swift pace?   The SHI is predicting NO.   According to the SHI, Q3 GDP growth is expect to be weak. 

 

Welcome to this week’s Steak House Index update.

 

As always, if you need a refresher on the SHI, or its objective and methodology, I suggest you open and read the original BLOG:  https://terryliebman.wordpress.com/2016/03/02/move-over-big-mac-index-here-comes-the-steak-house-index/)


Why You Should Care:   The US economy and US dollar are the bedrock of the world’s economy.   Is it expanding or contracting?

The world’s GDP is about $76 trillion.   Our US GDP is almost $19 trillion — about 25% of  the total.  No other country is even close.  And we’d like to keep it that way.

The objective of the SHI is simple: To help us predict US GDP movement ahead of official economic releases — important since BEA data is outdated the day they release it.

‘Personal consumption expenditures,’ or PCE, is the single largest component of US GDP. In fact, the majority of all US GDP increases (or declines) usually result from (increases or decreases in) consumer spending.  Thus, this is clearly an important metric to track.   The Steak House Index focuses right here … right on the “consumer spending” metric.

I intend the SHI is to be predictive, anticipating where the economy is going – not where it’s been. Thereby giving us the ability to take action early.


Taking action:  Keep up with this weekly BLOG update.

If the SHI index moves appreciably -– either showing massive improvement or significant declines –- indicating expanding economic strength or a potential recession, we’ll discuss possible actions at that time.


The BLOG:

Intense conflict, it appears, is commonplace today.

Whether at the national and international political level, within the White House, or in general economic discussion, disagreements abound.   Perhaps, when viewed in historical context, this isn’t an unusual state of affairs, but the dialog accompanying the conflict seems — at least to me — far more acrimonious than in the past.

It seems no one can agree on anything.

Except beef.

Japan consumes a lot of US beef exports.  And, as we all know, US consumers purchase plenty of  Japan’s exports. The US and Japan have enjoyed an excellent trade relationship for years.

Then why, you might wonder, on Friday of last week — the same day we had a glimpse of the “advanced” reading of Q2 GDP — did Japan informed Washington they will impose a “temporary” 50% tariff on frozen beef?  Unfortunately, the answer is quite simple:   At present, the US does not have a “free trade” agreement in place with Japan.  The ‘Trans-Pacific Partnership’ was planned to fill that gap, but as you know, the Trump administration chose to veto US membership in that partnership.   The TPP would have established a bi-lateral trade agreement with Japan, and 11 other “Pacific” nations.

International trade is nothing new.   Not are tariffs.    Conceptually, tariffs are intended to balance the scales, so to speak.   In theory, permitting a country to import what they lack, export what they have in excess, and when all is said and done, leave the country with a fairly neutral balance of trade.   Wilbur Ross, our Secretary of Commerce, in an article entitled “Trade is a Two-Way Street” makes a fairly impassioned argument that the US has been traveling on a one-way street for years — against the traffic.  His claim is simple:  The US has been playing by the rules but China and Europe have not.   Ross claims the tariffs charged by China and the EU on US imports are excessive and protectionist.  And he claims these tariffs contribute to the massive US trade deficit.   Is he right?

 

To some extent.

Trade deficits have many causes.  Tariff levels can certainly impact consumption in the importing country.  The higher the tariff, the higher the ultimate sale price of that good or service.  And the opposite is true as well.   But I would argue the problem is not as much with the EU and China overcharging.  Here within the US, I believe we’re undercharging by comparison.

Take a closer look at the chart above.

China’s tariffs are higher than those of the U.S. in 20 of the 22 major categories of goods. Europe imposes higher tariffs than the U.S. in 17 of 22 categories — and not by a small amount.   The tariff rate differences are, in some cases, staggering.

Take Cotton, for example.   The EU charges no tariff on the cotton imports.   China, on the other hand, charges a 22% tariff.    Dairy and Animal products are two more areas with wide divergence.   The US has a minor import tariff on animal products.   Both the EU and China are close to 15%.    And in Dairy products, China slaps a 33.5% tariff on all imports!

Autos aren’t on the chart.  But here are the facts:  The EU charges a 10% tariff on imported US cars.   The US, alternatively, charges only a 2.5% tariff on cars imported from the EU.    It’s hard to do an apples-to-apples comparison here, but on a $40,000 car that 7.5% difference amounts to an additional US consumer savings of $3,000 and an additional $3,000 cost to a US car buyer in, say, France.

All things being equal, when offered a lower-cost alternative, buyers pick the lower cost.   Which  might, to some extent, account for the large quantity of foreign cars bought in the US today.  And the obstacle US car sales face in Europe.

If the US simply raised the foreign car import tariff to 10%, thereby creating parity, this act alone might dramatically reduce the trade gap.  Effectively, our low import tariff rates subsidize foreign imports to the US.    Look at the above chart again.  The US could easily increase tariff rates on imported animal products, coffee/tea, “other agricultural” products, cotton, fish products, metals, etc.   And by doing so, make American made goods far more competitive with foreign imports.

But it might also piss off a lot of Americans.  Because European cars and many other imports would become significantly more expensive overnight.

Therein lies the challenge.   The problem is truly decades in the making.  Unwinding this disparity in a year or two, moving to a more equitable “trade” playing field, may cause more pain than Americans are willing to bear.

Particularly now, as US wage and income growth are both relatively stagnant.  And, once again, according the the August 1st news release from the BEA, both the PCE and ‘personal income’ showed no growth in June.  Zero.  As a result, the Y-O-Y PCE inflation rates has fallen again, now down to 1.4%:

Inflation, it would appear, continues to fall, and income growth is near zero.   This, in spite of record lows in the US unemployment rate.   The June results continue to lend support for my contention that the ‘Phillips Curve’ isn’t working this time — conditions today are different.   Our current level of unemployment does create a challenging landscape for employers, but so far, they have proven adept at finding solutions or alternatives to paying out higher wages.   Because corporate profits are soaring.

Take a look at this chart of the Y-O-Y change in S&P 500 company earnings:

The latest quarter — the ‘light blue’ bar on the right — according Thomson Reuters, contains a few estimates.   But it’s easy to see the Q2, 2017 10.7% corporate profit increase, which follows a 15.3% increase last quarter, is pretty lofty.  Will increased corporate profitability help increase future wages?

Perhaps.  But not necessarily.  Increased corporate profitability does lend more ‘pricing power’ to corporate bosses, but they may be more interested in returning profits to shareholders than to their workers.  Time will tell.

We’ve wandered far away from the topic of this BLOG:   Beef!   Let’s head back there.  As I said, folks in Japan really enjoy US beef.   They are one of our largest importers:

In 2016, they enjoyed over $1.5 billion of US beef exports.    Japan is responsible for about 25% of annual US beef exports, according to the USDA.   That’s a lot of beef — for a country we usually associate with fish consumption.   In 2016, according to the World Bank, Japan had 127 million citizens.    Which means in 2016, every man, woman and child in Japan consumed about $12 worth of US beef imports last year.  Not bad.

But they don’t hold a candle to US beef consumption.   It seems we can’t get enough.   We don’t stop at burgers and steaks.   Not us.    Have you heard about the latest Starbucks creation:  The ‘Pepper Nitro with a Jerky Twist.’  Yes, Starbucks is now offering, on a limited basis, a coffee drink paired with beef jerky.   Yum!  🙂

Hmmm…I think I’ll pass.  If you try one, let me know what you think.   I’ll stick with Mastros.

But this week, I won’t be eating there.   Mastros is fully booked between 5:45 and 9:00 pm.   But all 3 of our other princely pubs are wide open.   Not a single booked time slot between them.    This condition is a significant departure from last year at this time:

This week our SHI reading is negative <-15> — 17 points below the reading from last year.   I find it interesting that week after week, Mastros ‘Ocean Club’ remains the only heavily booked extravagant eatery in our survey.   Reservations at the other 3 seem to have fallen off a cliff.   Last year, Mastros and The Capital Grill seemed to define the spectrum end points — one nearly always booked; the other, nearly always available.   But no longer.   Mastros’ demand seems to occupy a lofty perch … and consumer demand for the other 3 seems to have completely vanished.

Why?   I attribute SHI weakness to consumer fatigue.  The same fatigue that seems to be impacting auto/truck sales.  Other durable goods sales had a strong showing, however, according the the Census Bureau.  In their July 27th press release, they commented:

“New orders for manufactured durable goods in June increased $14.9 billion or 6.5 percent to $245.6 billion, the U.S. Census Bureau announced today. This increase, up following two consecutive monthly decreases, followed a 0.1 percent May decrease.”

Some good news.   Our fatigued consumer continues to buy washing machines and refrigerators.

Here’s our SHI trend report:

 

 

A few final thoughts on the US GDP.

In the first of 3, the BEA ‘advanced’ reading for Q2 GDP growth was 2.6% on an annualized basis.  As you know, the SHI predicted a fairly strong Q2 growth rate.  It’s the Q3 growth rate the SHI is concerned about.

But remember:  The US economy isn’t driven by a “one cylinder” engine.   So if one, or a few, cylinders are under-performing, others may continue to drive GDP growth forward.   Resulting in positive GDP growth.  However, the growth rate may be lower than pundits might be predicting, or the Trump administration is trumpeting.   (Yes, that was a pun.)

The final number for Q1, 2017, is an annualized rate of 1.2%.   Averaging the Q1 result with the Q2 forecast, we have an annualized GDP growth rate of 1.9%.   Still below 2% and, in the opinion of the SHI, likely to stay there.  And while a sub-2% rate may not be optimal, its certainly not bad and, more importantly, seems to be the high end of potential GDP at this time.    The US economy, it seems, is just chugging along…slow and steady.

  • Terry Liebman

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