In previous Vlogs we have talked about both wages and savings being down. This week we are looking at retail sales and trying to determine if the consumer will be spending despite a lack of wage increases. So, why is this important? Some information came out this weekend that addresses this point. In the first quarter, the consumer household debt rose to a record 12.7 trillion dollars. This is an all-time high, surpassing the 2008 mark. To put this into context, that is larger than the entire economy of China and nearly four times the size of Germany. As consumer debt grows, which occurs when savings are falling, spending is going up and wages aren’t going up, that becomes untenable. At a certain point, people can no longer finance or pay for their debt and that starts to harm the economy. Without a push to wages, fall in retail sales, or any impact to that debt it could become a larger issue down the road.
The productivity of the worker, simply the amount of output of GDP that the worker produces, has been very anemic for the last 5 years, around 0.6% annualized. Historically, that is the third worst 5 year period since World War II. Somehow, we need to shape up the productivity.
The renegotiation of NAFTA starts this week on Wednesday. This was a big campaign promise by President Trump. Some of the goals of the renegotiation are to lower trade deficits with Mexico, tighten labor laws and raise the tax threshold for e-commerce purchases by Mexico. These are important for the economy because 14 billion jobs depend on trade with Mexico and Canada.
We put out a special communication last week regarding North Korea. The US is a massive economy which takes a lot of inertia to move it. Usually, when you have a geopolitical event like this, it has the tendency to make markets go down some but not damage them permanently. A perfect historical example of this is the Cuban Missile Crisis. The market indices averaged about a 6% drop during that time but quickly recovered.
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