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Saturday 3rd December 2016
Hi Friend,
The Economic Consequences of Mr Trump ...
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Who will carry the cost of Carrier ...
President-elect Donald Trump was back in Indiana this week. A victory tour of sorts. Carrier had cancelled the planned move of the hot furnace plant to Mexico. @ We are pleased to have reached a deal with President-elect Trump & VP-elect Pence to keep close to 1,000 jobs in Indy. More details soon. Twitter explained.The President popped in to share the great news with the workforce.
Part of United Technologies Corporation, a leading provider to the aerospace and building systems industries worldwide, Carrier is a world leader in high-technology heating, air-conditioning and refrigeration solutions. The Sistine Chapel in Vatican City, the Great Hall of the People in Beijing, the Great Library of Alexandria are some of the high prestige projects. Don't expect a repeat order from China anytime soon, the caveat.
Planned savings of some $60 million dollars would have been achieved by the move to Mexico. Labour rates of $10 dollars an hour offered a significant reduction to the $20 - $30 dollars payable in Indianapolis. The decision will affect around 1000 jobs in the short term. The decision just before Christmas was a huge boost to morale at the plant. "Some people are crying back there" said Trump. Probably the ones who would still be losing their jobs. As the letter explained, the decision is good news but not for everyone. Part of the Illinois workforce would still be losing their jobs as a result of the decision to relocate to Monterrey. |
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What cost the deal ...
A generous $7 million dollar tax deal proved to be the key factor in the decision to stay in state. That and the prospect of a punitive tariff charge of 35% on imports from Mexico. UTC is also dependent on 5% - 10% of revenues from the Pentagon largely as a result of the Pratt Whitney engine business. Did this figure in the conversation Trump was asked. "It wasn't mentioned. I didn't feel I needed to". Fair enough. Greg Hayes the CEO of UTC understood all too well, the implications of "Incurring the wrath of an incoming administration".
Is this the start of a new deal for U.S. manufacturing? Not really. Headline deals from incoming administrations are nothing new. JFK wrangled with the steel barons to forestall a significant price hike. Reagan introduced a bike tariff to protect Harley Davidson. Obama slipped in the tariff on tires to protect the domestic motor trade. Not all job losses were saved at Carrier, Ford still plans to establish a small car plant in Mexico and the iPhone assembly won't be repatriated anytime soon. Oreo cookies will relocate to where the mouths are. Trump may threaten and menace the manufacturing base remaining in the U.S with threats of sanctions and tariffs, such tariffs are counter productive.
Seven years ago, the Obama administration accused China of unfairly subsidizing tires. It imposed tariffs reaching 35 percent. A subsequent analysis by the Peterson Institute for International Economics, calculated the effect. Some 1,200 American tire-making jobs were preserved but American consumers paid $1.1 billion extra for tires. That prompted households to cut spending at retailers, resulting in more than 2,500 net jobs lost. Businesses are dependent on international trade for essential components in manufactured goods. Tariffs on trade increase costs of domestic manufacture at the expense of local jobs. The U.K. computer industry protected by a tariff on semi-conductor components is witness to that. Higher wages and higher costs will accelerate investment in automation and robotics. A Big Mac and Fries delivered thanks to Artificial Intelligence, the outurn. Trump protectionism and moves to hinder free trade will hamper job creation in the long run.
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Haldane urges caution on rate rise ...
No such qualms in the short term, the U.S unemployment rate fell to 4.6% in November, the lowest since August 2007. U.S. employers added 178,000 jobs in the month largely in the service sector. Manufacturing has lost 54,000 jobs over the past year and mining jobs have been cut by over 80,000 over the period. Construction has increased employment by over 150,000. Professional and business services added nearly 600,000 jobs in comparison and the healthcare workforce increased by over 400,000.
Trump will inherit a strong economic base into which will be injected further infrastructure spending, tax cuts both personal and corporate. Time to share the wealth with the rest of the world, especially south of the border. GDP per capita in Mexico is less than one third of the U.S.A. Improving economic growth will eliminate the wage gap, encourage democracy and drive out corruption. The drug industry is worth some $20 to $30 billion to the Mexican cartels. 90% of the weapons used to protect the gangs are imported from Texas. Walls and tariffs will not impede the development of the drug trade any time soon. Trade protection and Trumpeter economics offer a King Canute approach to economic progress on a much broader scale.
The latest jobs data suggests the Fed is likely to make the move to hike rates at the meeting at the December meeting. Andy Haldane Chief Economist at the Bank of England has urged for caution before the MPC makes a similar move. Inflation is set to spike. Oil price Brent Crude closed at $54 dollars this week. The average price in December last year was $38.53. Dollar spot was $1.50. A 70% increase in oil prices will impact on CPI next quarter. It really is time to follow the Fed ...
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So what happened to Markets?
Markets, were mixed - the Dow closed at 19,172 from 19,125. The FTSE closed at 6,730 from 6,840.
Sterling was up against the Dollar to $1.268 from $1.245 and up against
the Euro to €1.188 from €1.175. The Euro moved up against the Dollar at 1.067 from 1.059.
Oil Price Brent Crude closed at $54.12 from $47.56 The average price in December last year was $38.53.
UK Gilts
- yields moved down. UK Ten year gilt yields closed at 1.40 from 1.41. US
Treasury yields moved to 2.39 from 2.37. Gold closed at $1,175 from
$1,245.
John
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