Possible Futures.

The stock market surged after the election of Donald Trump.  This seems to have reflected a belief that he would begin the laborious process of rolling-back Barack Obama’s massive extension of federal rules and regulations, and that President Trump would support the Republican default strategy of tax cuts.  The Trump administration projected rapid growth as a result of his election: a big, long-overdue infrastructure program; an additional 10 million jobs by the end of the first term; and significant tax cuts whose revenue effects would be off-set by the accelerating growth rate.  “Bliss it was in that dawn to be alive,….”

In reality, the American economy appears to be slowing in its growth under the Trump administration.  The average monthly pace of job creation in 2016 ran at 187K.[1]  According to the Labor Department, the American economy can be expected to add 162K jobs per month in 2017.  It added only 138K jobs in May 2017.  The labor participation rate has fallen from 83 percent a decade ago to 81.5 percent in May 2017.  The unemployment rate fell to 4.3 percent. That is the lowest level in 16 years.  In short, wages should be starting up.

But they aren’t.  Wages increases for the last year have averaged between 2.5 and 3.0 percent, scarcely ahead of the inflation rate.  Why?  Well, productivity growth—a perennial problem since the 1980s—continues to drag.  Price inflation is very low.  To the extent that nominal wages are frozen—as are mine—real wages have been falling in recent years.  This real deflation then drags on consumption.

Similarly, mergers and acquisitions (M&A)–often taken as a stand-in for corporate confidence in the economy—are at their lowest level since 2013.[2]  Because 80 months of increasing hiring has occurred, people have a reasonable concern that we are headed toward a new slump.  I think the smart thing to do would be to “buy in” to the slump.

On a totally different front, consumer demand for the Ford Focus is weak: American drivers prefer SUVs and pick-up trucks; gas prices are low, so those vehicles don’t cost as much to drive; and Focus sales have fallen by 20 percent.  In late June 2017, Ford announced that it would shift production of this dog of a car to China (rather than to Mexico).  The Chinese-made cars would then be re-exported to the United States.  The one-time Focus plants in the United States will be converted to produce even more SUVs and trucks.[3]

This announcement raises several questions.  First, why to China?  Ford already has Focus plants in China (where the car is seen as much better than a bicycle) and because labor costs are lower in China than in Mexico.  Second, why off-shore them at all, rather than just cutting back production to reflect the market?  Because, under Obama administration regulations, Ford gets to average the mileage of the Focus with the mileage of the F-150 and the Explorer when calculating how to meet the average miles-per-gallon (mpg) requirements set by the Environmental Protection Agency (EPA).  Ford has to make a lot of cars no one wants in order to be able to sell the vehicles that people do want.  What if no one buys the Focus?  I think that Ford still gets to average in the Focus mpg so long as it has made the cars and they are sitting in some vast parking lot near a sea-port.  So, Ford is trying to cut to the bone the production costs of a car that will not be bought.  That is, the Obama administration planned to force losses on an entire industry so that it could pretend that it was meeting its climate change goals.

[1] “Issue of the week: The jobs report’s red flags,” The Week, 16 June 2017, p. 34; Greg Ip, “Paychecks aren’t growing,” The Week, 30 June 2017, p. 14.  .

[2] “The bottom line,” The Week, 23 June 2017, p. 31.

[3] “Autos: Ford shifts its Focus to China,” The Week, 30 June 2017, p. 32.

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