April 19, 2024

Thought of the Week:

We all live in a bubble of our own making. We surround ourselves with those who think like us, have similar backgrounds and family structures, and have achieved equivalent socio-economic status. Outside of family and the office, we spend the most time with those who belong to the same clubs, associations, and religious groups as we choose to do. We read, watch, and listen to the news outlets that confirm our own solidly held beliefs. And it’s the very rare occasion when someone or something pops this metaphorical bubble. I didn’t set out to do this consciously, but I do it too. With the time, financial, social, relationship, and all the other stresses of everyday life, who could blame any of us—creating a personal bubble is a natural defense mechanism that provides a certain degree of comfort, order, and security. A portion of my personal bubble comes from an MBA in Finance from what was at the time a relatively conservative business school, and it’s what led me to originally dismiss, scoff at, and remain extremely skeptical of the type of Modern Monetary Theory (MMT) used to justify increased government spending as nothing but a superhighway to runaway inflation (the truth being is that the events of the last few years provide plenty of evidence that my classical economic training was right on the money). Now, with the World Bank/IMF spring meetings in town, another unconventional economic theory is winding its way through official Washington. The crux of the premise goes something like this: as the U.S. economy continues to overperform, the Federal Reserve’s interest rate hikes over the past two years might not be slowing economic growth as intended but contributing to it. To bolster this view, proponents point out that GDP, unemployment, and corporate profits are as strong now as when the Fed first began hiking rates. Their argument is that as rates rose from 0% to 5% Americans were provided with significant income from bonds and savings accounts for the first time in decades, enough of which is now being spent to boost growth. In fact, U.S. households are receiving income on more than $13 trillion of interest-bearing assets, nearly triple the amount of the $5 trillion held in consumer debt, which translates to a net gain for households of $400 billion a year. So, are these new economic theorists on to something? Maybe/maybe not. In my opinion, probably no more so than the Modern Monetary Theorists were. Then again, I recognize that my personal bubble as an analyst is built on traditional theory. The point here is not that opening your mind to an idea, or ideas, outside your comfort zone will necessarily lead you to find some hidden truth that might otherwise go unfound. The point is that piercing that bubble every now and then might.

Thought Leadership from our Consultants, Think Tanks, and Trade Associations

 Trade Analyst Laura Chasen’s Recap of the Biden-Kishida Summit—A Strengthened Alliance and Collaboration Across-the-Board. President Biden hosted Prime Minister Kishida for a State Visit on 4/10-11, a summit that was seen as successful by both sides. It included a State Dinner and an address by Kishida to a joint session of Congress. The Prime Minister also had opportunities to speak to and meet with U.S. business leaders, including at a U.S. Chamber of Commerce roundtable in Washington, and in travel to North Carolina to visit Toyota and Honda plants, where he reminded Americans of massive Japanese investment in the U.S. At present, there are no high-profile trade or economic disputes dividing the U.S. and Japan—Japan has silenced its anger at being subjected to the Section 301 steel and aluminum tariffs that persist in the form of TRQs; the U.S. isn’t joining the CPTPP any time soon despite Tokyo’s cajoling; the sharp yen depreciation is not considered, as it was in the past, to be a deliberate attempt to gain a trade advantage; and Kishida is dealing with the Biden administration’s hostility to the Nippon Steel–U.S. Steel takeover bid by stressing the value of Japanese investments in the American economy. So, trade issues were not significantly on the summit agenda, although economic-related issues such as supply chain security, cooperation to restrain Chinese technology, cooperation on green technology, and weapons co-production were. The Kishida visit was widely understood to be part of President Biden’s efforts to intensify outreach to Asia and to shore up collaboration with close allies in facing challenges from China and Russia. Thus, almost all of the visit was centered on strategic matters, which led to a number of defense—and space—cooperation agreements, including weapons co-production. On space, Japan was invited to participate in NASA’s Artemis moon program, including having a Japanese astronaut be the first non-American to land there. In his address to Congress, Kishida stressed shared values and committed Japan to supporting and being a “global partner” with the U.S. in its leadership of the international order. 

 The Conference Board’s U.S. Economic Forecast. The economy entered 2024 on strong footing, but headwinds such as rising consumer debt and elevated interest rates will weigh on economic growth. While a recession in 2024 is not forecast, consumer spending is expected to cool and, overall GDP growth to slow to under 1% in Q2 and Q3. Thereafter, inflation and interest rates should normalize, and quarterly GDP growth should converge toward its potential of near 2% in 2025. Consumer spending held up in 2023 despite elevated inflation and high interest rates; however, this trend has softened, gains in disposable income growth are slowing, pandemic savings are dwindling, and household debt is increasing. In fact, consumers are spending more of their income to service debt and delinquencies are rising. Thus, it is forecast that consumer spending growth will slow in Q2 and Q3 as households struggle to find a new equilibrium between income, debt, savings, and spending. While labor market conditions should soften, they won’t deteriorate. As inflation and interest rates abate, consumption should expand by late 2024. Following a pop in early 2023, business investment slowed in H2 2023 as interest rate increases made financing activities more expensive. This trend should intensify in H1 2024 as the Fed resists calls to cut interest rates until June 2024 at the earliest. Looking ahead, do not expect residential investment to improve until interest rates begin to fall. Government spending was a positive for economic growth in 2023 due to federal non-defense spending associated with infrastructure legislation passed in 2021 and 2022. This tailwind has not abated and spending on these programs will continue to support GDP growth. However, political volatility surrounding fiscal policy, debt, and outlays could impact government spending over the next few years. Labor market tightness remains remarkably persistent. This trend is underpinned by the retirement of the Baby Boomers and the reluctance of businesses to lay off workers. On inflation, much progress was made in 2023 but recent data shows that momentum has slowed. Emerging trends in energy markets and certain service industries are serving as a headwind, but support from cooling rental prices remains in the pipeline. Given all these trends, a 2% inflation forecast has been pushed back to Q4.

Observatory Group Sits with Glen Bolger, Co-founder of Public Opinion Strategies, to Discuss the General Election. At present, it is very difficult to predict a general election outcome because polling shows that neither candidate has a clear advantage and both are widely disliked among the American electorate. In fact, it is unprecedented in American politics for each candidate to be so disliked at this point in the campaign. To illustrate, only 26% of voters say Biden should run again (70% say he should not), and just 35% think Trump should run again (60% say he should not). These are “huge numbers” that reflect a distaste for both candidates. The election is shaping up to be a “wide open” affair that could swing either way and potentially turn very late in the campaign. In the race for control of Congress, it is possible for both the House and Senate to switch control in opposite directions (the Senate flipping Republican, the House flipping Democrat), which has never happened before. However, if Trump were to win, there are better than 50% odds that the House would remain in Republican hands. Right now, 53% of voters see the election as more about Trump, while just 30% see it as more about Biden, suggesting that Trump’s persona, policies, threats, and perceived strengths are driving the election’s narrative. Overall, voters see Biden’s policies as hurting more than helping the average American; Trump’s policies as helping more than hurting; and a full 45% say they were better off financially under Trump, while merely 14% say they are better off under Biden. Interestingly, while Biden voters are motivated to vote against Trump (62%), Trump voters are motivated to vote for Trump (57%). The conclusion being that Trump voters are motivated by traditional pocketbook issues (an issue favorable to Trump), while Biden will need to energize his base around cultural issues like abortion and the defense of democracy to counter economic concerns. However, in such a close election, every issue matters. For some voters, the choice of Vice President could determine their vote; for others, recent geopolitical events could be determinate; others may be concerned about a candidate’s age; and others may be more concerned about a candidate’s ethics. Because polls underestimated Trump’s support in both the 2016 and 2020 elections, a key factor to pay close attention to is partisan enthusiasm. In 2024, the impact of third-party candidates should be discounted. As the election approaches, voters will decide against “wasting their vote” and end up choosing one of the two major party candidates. 

 “Inside Baseball”

 After a second GOP hardliner called for his ouster, Speaker Johnson (R-LA) took the extraordinary step of publicly announcing that he was “not resigning.” Rep. Massie (R-KY) said Johnson should clear out pending legislation and announce he’s resigning so House Republicans can choose a new Speaker. Massie said he would support Rep. Greene’s (R-GA) motion to vacate (MTV), which the Georgia Republican introduced several weeks ago. To date, Greene has not sought to make the motion privileged, which would trigger a vote over whether to oust Johnson; the same process used against former Speaker McCarthy. The current wave of angst is due to Johnson’s introduction of a package of bills to send aid to Ukraine, Israel, and Taiwan. House Republicans will need the minority’s support to clear the package, a vote on which is not expected until Friday at the earliest. Although Speaker Johnson reiterated that he wasn’t worried about an MTV, it’s not great when a speaker must publicly declare he’s not resigning just 174 days into his tenure. House Democrats are watching developments closely—they’re concerned with Johnson’s fate, what impact it may have on foreign aid bills, and whether they’ll have to intervene in any GOP attempt to oust another speaker. House Minority Leader Jeffries (D-NY) has signaled a willingness to support the foreign aid package and help pass the bills if there aren’t any poison-pills attached to the measures. But a vote to help Johnson stave off an MTV before the foreign aid package comes up is another matter. Johnson would have to state what the package would look like—and how many GOP votes he could deliver—before Democratic leaders would cut members loose on an MTV.  

 In Other Words

  1. ABC This Week Host George Stephanopoulos: “Just to sum up, you would support him for president even if he is convicted in classified documents. You would support him for president even though you believe he contributed to an insurrection. You would support him for president even though you believe he’s lying about the last election. You would support him for president even if he’s convicted in the Manhattan case. I just want to say, the answer to that is yes, correct?”
  2. New Hampshire Governor Sununu (R): “Yeah, me and 51 percent of America.”

“That I can’t go to my son’s graduation, that I can’t go to the Supreme Court, that I’m not in Georgia or Florida or North Carolina campaigning like I should be…it’s perfect for the radical-left Democrats. That’s exactly what they want. This is about election interference, that’s all it’s about,” former president Trump.

Did You Know

That there is no J street in any of Washington’s four quadrants. According to one urban legend, when Pierre L’Enfant laid out plans for the city, he was in a dispute with Thomas Jefferson; another says L’Enfant was upset about a treaty diplomat, ambassador, and Supreme Court Chief Justice John Jay made with Great Britain. The truth is that in the 1700s the handwritten letters I and J were nearly indistinguishable and including them both would have been confusing.       

Graph of the Week

A Geopolitical Risk Premium Will Persist Until OPEC Boosts Supply. Although oil markets had priced in Iranian retaliation against Israel and registered a muted initial reaction to the attack, the heightened risks of escalation threaten to push prices above $90 per barrel. Physical disruption could occur if the conflict expands, which now carries a 40% likelihood of major escalation. Regardless, tighter fundamentals in the second quarter will contribute to upward pressure on prices, and given the added geopolitical risk, prices are likely to push beyond $90 in the second quarter, with future price shifts depending on OPEC action.

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