September 22, 2023

Thought of the Week

Do you remember the ice-bucket challenge? I do, and I even remember where I was when I was called out, and the three others I nominated to follow me. Viral trends come around every now and then on social media, and the latest involves women asking the men in their lives how often they think about ancient Rome. In the videos, women are shocked to discover that men think about the Roman Empire on a semi-regular basis, ranging from monthly to weekly to even daily. Hey, I’ll admit that Gladiator is one of those movies I have a hard passing on when I’m channel surfing. This past week, the Washington office visited Chicago to give a presentation at the annual Credit Manager’s meeting. There, we answered a few questions that have plagued mankind for decades, including which is the best airline seat; how many holes a straw has; and whether a hotdog is a sandwich. We also touched on minor details such as the U.S. economic outlook and the upcoming 2024 presidential election. You can find the slides to our presentation linked to the blog.  

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

American Chamber of Commerce in Shanghai Says U.S. Business Optimism in China at All-Time Low. U.S. companies have less optimism about their prospects in China than ever before, according to a new survey on the business climate there. According the American Chamber of Commerce in Shanghai’s 2023 China Business Report, the results are a mixed bag. The report shows that amid U.S.-China bilateral tensions, Covid disruptions, and macroeconomic pressures, member companies report worsening business results and a less optimistic outlook for China. An increasing number of members are trying to strengthen their resiliency by diversifying supply chains; yet, the end of Covid has stabilized revenue expectations and more companies plan to increase investment in China this year than in 2022. Only 52% of companies that participated in the survey said they were “optimistic about the five-year business outlook,” which was the lowest in the survey’s history. AmCham Shanghai Chairman Sean Stein’s assessment: “China is becoming more challenging for foreign investors. What businesses need above all else is clarity and predictability, yet across many sectors companies report that China’s legal and regulatory environment is becoming less transparent and more uncertain.” COVID disruptions and U.S.-China tensions are the main reasons for the deteriorating business climate in China, according to the report. Specifically, 22% of respondents are decreasing their investments in China, mainly because of U.S.-China tensions as well as slower growth expectations; 40% of respondents are redirecting investments away from China, a 6% increase from last year; and 19% of respondents are considering moving some of their current operations out of China over the next one to three years, largely due to uncertainty about U.S.-China relations.

Inside the EPA Reports that the White House is Directing a Broad Use Of SCC Beyond Regulatory Analyses. The White House is directing agencies to apply the social cost of carbon (SCC) metric to a variety of federal procurement, budgeting, and project-review decisions, a move that will almost certainly spark opposition from industry groups that have long sought to limit use of the cost-benefit analysis tool to national rulemakings. The decision, which comes as Biden officials continue a broad update of the metric that is likely to boost estimated climate damages from a marginal ton of greenhouse gas emissions, means agencies will now have to use the SCC when developing and implementing their budgets, taking procurement actions, and conducting National Environmental Policy Act (NEPA) review. The administration’s directives about the role of the SCC come two years after the White House originally hoped to issue guidance on the topic, pursuant to the January 2021 executive order from President Joe Biden on climate change. While the U.S. Chamber of Commerce, American Petroleum Institute, and National Association of Manufacturers pressed for a narrow use of the SCC, Democrats and environmentalists pressed for the tool’s broad application.

According to the Observatory Group’s September FOMC Review, the FOMC has in Effect Gone Full Soft Landing. Although Chairman Powell does not want the soft landing view to be considered a baseline, nonetheless, it is now the baseline. However, without a sharp slowing in the economy, policymakers now think that the stance of policy needs to remain restrictive a little longer than the June policy medians suggested. Accordingly, the median 2024 policy projection is consistent with two rate cuts before year end 2024, down from the median of four cuts projected last June. Expect no rate move from the Federal Reserve at the November 1 meeting unless there is stunningly bad core inflation data due in mid-October. This builds the case for a December rate hike, but still will require worrisome core inflation in the subsequent inflation reports. Note that if there is a partial Federal government shutdown, the official inflation data may be delayed, and depending how long any shutdown lasts, the dearth of clear data could reinforce the case for the Fed to remain sidelined in November.

“Off the Record”

That sound you hear in the halls of Congress is the House about to get jammed by the Senate, even if it’s too late to prevent a government shutdown. While House Republicans cycle between leadership offices, Senate Majority Leader Schumer and Senate Minority Leader McConnell are working to send the House a bipartisan Continuing Resolution (CR) that yes, will include billions of dollars in Ukraine aid, disaster relief funding, and plenty of other provisions that conservatives abhor. At that point, Speaker McCarthy will have a choice to make. He could bring up the Senate-approved CR and pass it with a mix of Democratic and Republican votes. He could try to amend it and see if the Senate will bite (they won’t)? Or he could ignore it and shut the government down. This is a decision that could define McCarthy’s speakership. It didn’t have to be this way if House Republicans had passed their own CR with border security funding. Instead, the Republican Conference rebelled, forcing the Speaker into a prolonged debate about topline spending for next year. Although, finally, it seems moderate Republicans are getting annoyed at the influence the right flank is having on the rest of the conference, a Senate-led process may have always been inevitable. Any bill to fund the government must, by definition, be bipartisan, and Speaker McCarthy has been unwilling to put a bipartisan funding bill on the floor in order to avoid an open war with hardline conservatives. When the House and Senate return next Tuesday, lawmakers will have just five days left to avoid a shutdown.

In Other Words

“There are sensitive times during a negotiation where you don’t actually get to open your kimono to Punchbowl…as arousing as that would be to me personally,” Rep. Johnson (R-SD) when asked by a reporter about progress on spending negotiations. [Punchbowl is an industry journal read by many Washington insiders. The term “Punchbowl” is the Secret Services’ code name for the Capitol building].

Did You Know

 I’m always asked about unique sight-seeing spots beyond the National Mall by people visiting Washington. I usually point to Ford’s Theater, the Jefferson Reading Room at the Library of Congress, and Martin’s Restaurant. Martin’s is in Georgetown, and it is where Senator John F. Kennedy proposed marriage to Jacqueline Lee Bouvier on June 24, 1953. Similarly, in front of a Subway sandwich franchise at 53rd and South Dorchester in Chicago is a rock with a metallic plaque on it. Although not the most romantic place in the country, it is the spot where President Obama first kissed his future wife Michelle. 

Graph of the Week

Eurasia Group: White House in Difficult Spot with UAW Strike. The United Auto Workers (UAW) union has gone on strike, taking limited action against each of the Big Three automakers; the small-scale walkout will have limited immediate impacts on the broader economy, but could exacerbate existing shortfalls in vehicle inventories and increase inflationary pressures. If the strike escalates it could put pressure on the White House to intervene: although unions typically form a major part of the Democratic base, Biden-backed government subsidies for electric vehicles (EVs) have placed the president in de facto alignment with auto management rather than workers. Trump, whose 2016 win reshaped the political map by bringing Midwestern white working class voters in the GOP tent and moved the party in a populist direction, is actively trying to siphon off union votes by opposing EVs, which are typically assembled with fewer, lower paid workers in right-to-work (and redder) states. Progressives like Vermont’s Bernie Sanders are showing up to support workers at the picket lines, but the federal government has no statutory power to intervene. The White House will push for the UAW and auto management to negotiate, but if the walkout expands, pressure on the White House to get involved will mount, creating a dilemma for President Biden.