June 23, 2023

Thought of the Week:

Besides the shared medium popcorn, no butter, and large Diet Coke, my wife and I have a ritual we go through when attending movies at the theater. We make sure we get there early enough to catch all the previews, and then, based on the trailer alone, rate on a scale from 1 to 5 whether we’ll actually see the full film. Ratings of 4-5 mean we’re likely to see the picture, either at home or the theater; a 3 is definitely an at home only showing; and 1s and 2s mean we’re unlikely to watch the movie at all. Earlier this week, I received my own preview of next month’s Americas Leadership Conference (ALC) when I attended the Conference Board’s Quarterly Economic Outlook Briefing. The briefing featured the same Dana Peterson, Chief Economist, Conference Board, who will speak at the ALC; you may remember that Ms. Peterson also spoke last year. Among the highlights from the briefing were:

  • The Leading Economic Indicators index points to a recession within the next 12 months;
  • The Consumer Confidence Index fell in May, indicating that consumers expect a recession;
  • 87% of CEOs expect a “brief and shallow” recession sometime in the near future;
  • Although real income growth has turned positive, pandemic-era excess savings is dwindling;
  • Excess savings will be exhausted by year-end and no longer able to support growth;
  • Bottom line: the U.S. economy will tip into a short and mild recession within the next 12 months.

According to the Conference Board, there are certain drivers of inflation relief appearing, particularly in the form of materially cooling supply chain pressures. However, while goods inflation is waning, the services sector remains hot, which is just now appearing in the metrics. In fact, we are now seeing “revenge” spending on services similar to the goods spending in 2021-2022. The path ahead on inflation will be bumpy, and consumer price inflation is unlikely to return to its 2% target until the end of 2024, meaning the interest rates that are helping drive inflation down will stay high for some time. There is some market sentiment that the Fed could pivot and lower rates by end of this year. This will not happen; in fact, we are likely to see one more hike this cycle followed by a pause to May of next year. The annualized inflation rate will not approach 2% until mid-2024; only at that point will the Fed begin to consider loosening. Even when rates begin to come down, they will stay above 3%, which is considered restrictive. The U.S. may not get down to a neutral interest rate until 2025 due to persistent inflation drivers such as semiconductor chip shortages, housing demand, work from home dynamics, labor shortages, de-globalization, and the transition to renewables. Regarding interest rates, the Fed believes that additional tightening will be needed this year. In fact, they’ve indicated that two more 25 basis point hikes are on the horizon. Opposed to an indication that the tightening cycle is over, the Fed’s most recent inaction on rates was characterized as a “skip” and part of a natural progression in the deceleration of the tightening cycle. However, the Conference Board sees things differently. Their assessment of the economic outlook is more pessimistic, and they anticipate only one more 25 basis point hike this year. Businesses should expect interest rates to remain high for the duration of 2023. Furthermore, the Fed’s work to tighten monetary policy, coupled with the reverberations from the banking crisis, will continue to make credit availability scarce, meaning that loans may become even more challenging to secure for businesses and consumers moving ahead.

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

Eurasia Group Says Hunter Biden’s Plea Deal Sets Up Dueling “Crime Family” Narratives in 2024. The Department of Justice has announced that President Biden’s son Hunter will plead guilty to misdemeanor charges regarding his failure to pay income taxes. Hunter was also charged with unlawful possession of a firearm but will enter into a Pretrial Diversion Agreement, with the charges being dismissed if he adheres to certain conditions. While tax fraud and gun charges were featured in House Republicans’ push for investigations into Hunter Biden, they are secondary to allegations that Hunter and Joe were involved in a bribery scheme in which Ukrainian energy executives paid for policy while Joe was vice president. The plea deal is already being framed by Trump-aligned Republicans as a cover-up to avoid more serious allegations, and will amplify the narrative of a “Biden crime family” popular among conservatives. This will play directly against former President Trump’s ongoing legal battles in New York, federal court, and potentially Georgia, and the dueling “crime family” narrative will likely dominate at least a part of 2024 election messaging, setting up a potential opening for a third-party candidate among voters who are exhausted at the current set of choices. Amid these serious allegations from the House GOP, the DOJ’s minimal charges will play into wider narratives on the right about the federal government being biased in favor of Democrats and “weaponized” against conservatives.

Observatory Group’s Takeaways from Secretary of State Blinken’s Meetings in China. While the meetings between Secretary of State Blinken and Chinese leaders may lead to some near-term stabilization in the US-China relationship, any cooling of tensions is likely to prove temporary and vulnerable to fresh stumbles. Overall, the outcome of Blinken’s trip to China was mixed. It did help restore open lines of communications between the two governments in various aspects of the relationship (economics, trade, anti-narcotics, climate change, and people-to-people communication) and paved the way for more senior level visits in the coming months, including President Xi’s visit to San Francisco to attend the APEC Summit in mid-November. However, wide gaps still remain on key issues. In fact, it would seem that Chinese officials are either unsatisfied or unconvinced by Blinken’s reiteration of the U.S. “One China Policy” about Taiwan and his stated opposition to Taiwan’s independence. What’s more, Beijing’s refusal to restore military-to-military exchanges was a clear disappointment to Washington. American officials have been extremely worried about increasing aggression by China’s military towards U.S. military vessels operating in the international waters and airspace of the Taiwan Strait and South China Sea. Accordingly, the overall relationship will remain fraught, even if there are some signs of a thaw. While a potential Biden-Xi Summit during the November APEC meeting in San Francisco is likely to become an important anchor for the bilateral ties, the outlook for relations between the two countries in 2024 is considerably more complicated, depending in part on both the results of the Taiwan election early next year and the U.S. Presidential election in November 2024.

“Off the Record”

As drama between Speaker McCarthy and hardline conservatives agitates the House, Democratic leaders are watching with fascination. For years, their caucus fell in line behind a master politician, Nancy Pelosi, who bent over backwards to protect her most vulnerable members—and by extension, her majority—often steamrolling progressives in the process. Today, as Democrats see it, Speaker McCarthy is doing the exact opposite in order to protect his gavel. Since becoming speaker, he has exposed his “majority makers” to tough votes on everything from cuts to federal programs to reversing a rule cracking down on a gun accessory used in several mass shootings. While both were priorities of the hard right, the votes exposed members in swing districts to Democratic attacks. House leaders typically give vulnerable members leeway to break with leadership on these kinds of votes to protect themselves politically, but with just a five-seat majority, Republicans need every vote. Going forward Democrats believe the votes will only become tougher, particularly with appropriations, talk of impeachment, and multiple efforts to restrict abortion on the horizon. Democrats are already targeting Republican members from districts that President Biden carried in 2020, and the pressure on those members will only increase once the 2024 campaign begins. While protecting vulnerable members from challenging votes seems an incredibly low priority for Speaker McCarthy, centrist Republicans privately admit there’s a simple solution: ignore the right’s demands and don’t allow votes on bills that have no chance of passing the Democrat-controlled Senate. 2024 could be a “winner take all” election with one party controlling all of Washington. However, with a thin margin for error, Speaker McCarthy seems more interested in pleasing his right flank and protecting his gavel, than shielding vulnerable frontliners.

In Other Words

“The reason why Xi Jinping got very upset in terms of when I shot that balloon down with two box cars full of spy equipment is he didn’t know it was there. That was the great embarrassment for dictators, when they didn’t know what happened,” President Biden.

“Before I send the boxes over, I have to take all of my things out. These boxes were interspersed with all sorts of things: golf shirts, clothing, pants, shoes,” former President Trump explaining why he didn’t immediately return boxes with classified documents.

Did You Know

Since Republicans and Democrats became the dominant parties at the dawn of the Civil War, a divided Congress has never seen both chambers flip party control. Although both chambers have flipped in the same election cycle nine times, most recently in 2006, in each of those cases both chambers flipped from unified Democratic control to unified GOP control, or vice versa in wave elections—never from split control one way to split control the other way.   

Graph of the Week

A federal indictment does not seem to be hampering former President Trump’s lead in the GOP presidential primary, according to the latest Quinnipiac University poll. The national poll of Republican voters found Trump leading the field at 53%, followed by Florida Gov. DeSantis (R) at 23%, and all other contenders coming in at 4% or less. As most GOP rivals rally around the embattled former president, Republicans voters seem to be doing the same.  

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