-->
Michael Nagle | Bloomberg | Getty Images
Pedestrians carrying an American flag umbrella pass in front of the New York Stock Exchange.
Wall Street is regrouping. Easy money has been made. The fiscal stimulus has been priced in for a long time. The Fed is an ongoing game, but the slightly easing price pressures along the U.S. yield curve are signaling surprisingly stable inflation expectations.
The current mix of easy fiscal and monetary policies has produced an improving outlook for jobs and incomes: the two variables that, along with credit costs, drive three-quarters of the U.S. economy.
Despite some areas of persisting weakness, the labor market situation is probably as good as it will ever get over the near term. At this point in the business cycle, we are witnessing a fully-employed economy hitting the limits of a disappointingly low labor supply.
The growth of household incomes is also picking up. A 2 percent annual growth of inflation-adjusted after-tax incomes in the first four months of this year is a noteworthy improvement over a 1.7 percent gain during the prior four-month period.
Surplus countries to solve trade problemsThe Fed’s carefully paced rate hikes will most probably keep that powerful growth engine moving along in the months to come. Assuming a continuation of steady labor productivity gains, observed since the beginning of last year, a strengthening demand and output should brighten the profit outlook, especially if President Donald Trump could get some better trade numbers out of China, Europe and Japan.
Most of those things are in the markets — they are discounted by efficient market pricing mechanisms.
And that could be pretty boring because traders need news as a betting fodder. That’s where trade disputes provide plenty of war room excitement.
So, expect more sound and fury, but do keep the investment focus on economic activity and inflation.
Yes, America’s trade problem will be front and center for some time. That is an old and devastating story that cost the country (a) $8 trillion in net foreign debt, (b) part of those 96 millions of Americans who are out of the labor force and may now be unemployable, (c) huge and ongoing losses of intellectual property and (d) a ridicule of the U.S. markets serving as dumping grounds for countries brazenly ignoring the rules of the international trade adjustment.
It is, therefore, all to the credit of the current administration to have finally screamed “enough."
But, having forcefully raised the problem, the White House dropped the ball. Instead of controlling the trade issues through the highest-level political dialogue with China and Europe, the president’s office has allowed that essential item of national security to slip into a maze of bureaucratic channels, recriminations and clumsy tariff hits.
Now, the White House looks like a supplicant when it tries to retrieve the control of the trade negotiating process with pleas to the Chinese and the Europeans not to retaliate.
That’s unfortunate, but China, Europe and Japan should see some silver lining here. They should relent and bring the trade issue back up to the policy level where the White House should have kept it all along. Playing the role of self-appointed champions of the rules-based multilateralism and unbridled globalization, they should recognize that they have to bring down their destabilizing and unsustainably large $595.4 billion surplus on American trades.
Follow South Korea’s examplePutting aside Washington’s rhetorical excesses, China and Europe know that the U.S. does not want to destroy the current world order. Having used, and abused, the present international trading system — and America’s unforgivable indifference to decades of its mounting debts and deficits — China and Europe should accept to rebalance a relationship that has served them so well.
South Korea has shown how that’s done. After the U.S. free-trade agreement with South Korea was signed on March 15, 2012, the year ended up with the Korean trade surplus of $16.6 billion. Over the next two years, the surplus soared to a record-high $28.3 billion in 2015.
That’s when the Koreans probably began to realize that was too much of a good thing. And, when one of the U.S. presidential candidates used colorful language during the election campaign in 2016 about America’s excessive trade deficits, Seoul saw the writing on the wall. Last year, the trade surplus with the U.S. was down to $22.9 billion, and in the first four months of this year the surplus was running at an annual rate of only $15.9 billion — 4.2 percent below its 2012 level.
Recently, one could hear the Chinese making promises that sounded like a replica of what Seoul did. But things have changed since, and there's now belligerence. Beijing is even making light of American “petulance” as Trump threatens another round of punishing trade measures that would affect $200 billion of Chinese exports to the U.S.
Trump could do that: He has the upper hand, legally and morally, in this dispute. Still, diplomacy and a bit of respectful interaction could be much better, and more productive, with the Chinese core leader.
Apart from that, U.S. trade relations with China are bound up in a web of war and peace issues where mistrust and mutual suspicions reign supreme.
That now makes it inevitable that, at some point — and the sooner the better — Trump and his Chinese counterpart will have to negotiate an agreement on bilateral trade and investments as part of a complex set of issues, including China’s contested maritime borders, peace and disarmament on the Korean Peninsula and Taiwan as a centerpiece to the sacrosanct “One-China” policies.
Things are very different with Europe. We are back to Henry Kissinger’s old quip: “Who do I call if I want to call Europe?”
The European Commission is the member countries’ technical secretariat. All policy decisions are taken by the European Council (a forum of heads of state and government) in a unanimous vote of 28 sovereign nations.
And don’t count on Germany. The country is virtually leaderless. Chancellor Angela Merkel is challenged even within her own party, and her Bavarian “sister party” wants her to step aside.
Without Germany, France cannot do anything. Its president is now embroiled in an invective-laden discourse with Eastern Europeans and Italians, and is largely ignored by countries that usually vote with Germany.
That means trade issues with Europe will have to remain at technical levels to iron out differences on market access and tariff and non-tariff barriers to trans-Atlantic flows of commerce and finance.
Investment thoughtsNoisy trade disputes won’t materially change America’s economic fundamentals. And neither will they lead — with all due respect to worried American generals — to a shooting war with China.
Accelerating inflation is the only big threat to the U.S. economy. Bond markets’ benign inflation expectations are difficult to square with the pickup of the core personal consumption expenditure index to 1.8 percent in April from 1.5 percent in January, and with the core CPI at 2.2 percent last month.
Russia and the Saudi Arabia seem willing to pump more oil to bring down America’s double-digit energy price inflation. That’s fine, but that won’t do anything to keep the U.S. service sector (90 percent of the economy) prices from rising.
Commentary by Michael Ivanovitch, an independent analyst focusing on world economy, geopolitics and investment strategy. He served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York, and taught economics at Columbia Business School.
