washing machine tariffs

I’m not an expert on washing machines.  I am fascinated by the local Baby Bubbles laundromat, though.  I know how to get tokens, put them in the machines and push the right buttons.

What prompts me to write this post is the release by the University of Chicago of research findings about the tariffs placed on imported washing machines by the administration in Washington last year in the name of national security (?).

background

The US washing machine market has three leading competitors, each with a market share of around 15%: Whirlpool, a US-based company, and LG and Samsung, two Korean firms.

During the Obama administration, Washington applied tariffs to washing machines made in Korea.  LG and Samsung countered by shifting production to China, which is a typical “country-hopping” response.  Ironically, this made the two even more competitive in the US, and consumer prices here continued to decline.  The Trump administration took a more heavy-handed approach, by applying a blanket tariff of (to keep the story simple) 20% to all washing machine imports.  LG and Samsung responded this time by accelerating the completion of US factories.

winners and losers

Basic economic theory says that increased costs will either be absorbed by the manufacturer or passed on to consumers, in proportions determined by who has market power.  In this case, however, all three firms raised washing machine prices by close to 12%   …and they raised the price of dryers, which were not subject to tariffs (but which are typically paired with washers when people buy) by the same.  That meant both Korean firms recovered the entire tariff plus a bunch.

The net effects:  consumers paid $1.5 billion more for washer/dryers in 2018; market shares for LG and Samsung remained unchanged; the government collected $82 million in tariffs; 1,800 new jobs were created (in a workforce of 150 million+).  The yearly cost to consumers for each of these new positions?  $815,000+.  

The winners:  LG, Samsung and Whirlpool (although analysts think Whirlpool’s 2019 earnings will remain below 2017 levels).

The losers:  the American public.

my take

This is the way protection typically works.  It sounds good but has perverse effects.  A domestic firm flexes its political muscle to prevent better/cheaper products from entering the country from abroad.  In theory, this is supposed to buy time for it to innovate.  Most often, however, the protected firm uses government action as a substitute for creating new, better products. The poster children in the US for this type of behavior–and its negative consequences for the economy–are the Big Three automakers of Detroit.

There is a pressing issue in the trade arena–preventing the theft of intellectual property in areas like computer software, advanced electronic manufacturing and biotech.   The current administration seems to have abandoned any effort to do so, however, in favor of protecting the income of industries of the past.  As an American, this is a worry.  As an investor, it argues that one should make a greater effort to explore opportunities in greater China and in Europe.

 

 

 

trade wars

Recently President Trump announced plans to impose tariffs of 25% on imported steel and 10% on imported aluminum, citing national security reasons.  He followed this up with a Twitter comment that, for the US, trade wars are good–and easy to win.

My take:

–much of modern economics stems from study of the causes of the Great Depression of the 1930s.  The key factors:  the wrong fiscal and monetary response, world wide; and the imposition of tariffs to “protect” local industry.  These did substantial economic damage, deepening and prolonging the global slump instead.  The idea that Mr. Trump may not be aware of this is the really worrisome aspect of the current situation.

 

–the first-order effects of the proposed tariffs will, in themselves, likely be miniscule.  Domestic prices for both metals will rise.  As a result of that, and of possible tariff payments to the government, income will shift from the users of the two metals to Washington and to domestic producers of steel/aluminum.  Because of this, at least some metal fabrication will shift away from the US to other countries.  One EU-based maker of appliances has already suspended plans to increase its manufacturing capacity in the US.

–second-order effects will likely be larger.  The EU, for example, is indicating it will retaliate by placing large tariffs on several billion dollars worth of goods that it imports from the US.   Presumably, other affected countries will do so as well.

 

–there was a similar incident during the Obama administration involving Chinese-made truck tires.  Economists estimate that it resulted in the loss of 3,000 American jobs.  If there was anything good about that situation, it was that it was isolated–Washington understood this was a one-off payment to a domestic union for its political support.  Today’s concern is that, despite overwhelming economic evidence to the contrary, Mr. Trump actually believes that trade wars are good–and will continue to act on that belief.

 

 

Employment Situation, July 2017

This morning the Bureau of Labor Statistics released the latest monthly installment of its Employment Situation report, a long-standing series that monitors the state of the labor market in the US.

The report, a compilation of data from a large number of employers around the country,  estimates that a total of +209,000 new jobs were created last month (I’ve corrected a typo from an earlier version of this post).  Revisions to the prior two months’ data added another +2,000 new positions to that.

The unemployment rate came in at an ultra-low 4.3% of the workforce.  This figure is in line with recent experience, but one which would traditionally be regarded as indicating full employment plus a lot (the idea being that there’s a certain level (4.5%?) of frictional unemployment, basically people quitting one job to take another but not having yet started).

 

In the past, reaching full employment has also made itself known by accelerating wage gains, as employers bid up the price of the additional workers they need and raise wages all around for existing employees to ward off job poaching from rivals.

In perhaps the most perplexing aspect of this recovery, however, there’s still no sign of wage acceleration.  Wages are rising by a tad more than inflation but the rate of growth has remained steady at about 2.5%/year for a long time.

Although the +220,000 figure is 20% higher than the consensus guess of Wall Street economists, the stock market is regarding the ES with a shrug of the shoulders.  Only a sharp uptick in wage growth will make an impact (probably negative, at least at first) on stocks and bonds from this point on.

 

a new casino for Connecticut, good or bad?

Shortly after I retired as a portfolio manager, I went to work part-time at the Rutgers business school in Newark.  No, it wasn’t to teach investing or portfolio management–accreditation rules effectively rule this out for anyone without a PhD in (the alternate reality of) academic finance.  Instead, it was in a practical management consulting class run by adjuncts with real-world experience and advising mostly small businesses.  (We were all fired several years later and the program–the only profitable area in a school dripping red ink–dissolved.   …but that’s another story).

Anyway, one of the projects I mentored involved a casual dining restaurant.  A student had a connection with a very successful pizza restaurant whose approach might serve as a model for our client.  The pizza owner said he had superior results.  How so?  …he had cloth tablecloths and fresh flowers on each table; the food was good;  he spoke with every customer himself to make sure everyone knew they were welcome.  In fact, he drew customers from as far as 15 miles away.

How far was the closest competing pizza restaurant?   …30 miles.

Put a different way, in this state customers hungry for pizza went to the closest restaurant, despite what this owner thought was his special charm!

It’s the same with a lot of other things, including local casinos.

In the case of Connecticut, the two existing operators are coming under threat by the decision of Massachusetts to legalize gambling in that state.  In particular, it’s allowing MGM to open a casino just on the northern border of Connecticut in Springfield, MA.

Hartford has just responded by authorizing a new casino in East Windsor just on the Connecticut side of the border from Springfield, to be jointly run by the two incumbent operators.

This is an interesting case.  Let’s take a (simple) look:

My pizza rule says customers go to the closest casino.   If that’s correct, the new Massachusetts casino will reduce the existing Connecticut casinos’ revenue by a substantial amount.  Hartford estimates that amount at a quarter of the current business, about $1.6 billion.   If they want to keep the remaining 75%, however, it seems unlikely to me that the casino operators will be able to reduce their costs by much.  So their profits could easily be cut in half.

And when the proposed East Windsor casino opens?

Figure that East Windsor will take back from Springfield half of the revenue initially lost.   That’s $200 million a year.  From the state’s point of view, any revenue gain means higher tax collections–in this case, about another $35 million a year.  So it’s understandable why East Windsor has gotten a legislative seal of approval.  It’s not clear, however, that the casino operators are going to be better off–because they’re taking on the expense of a third location in order to protect 12% of their current revenue.

 

We’ve also seen this movie before in the northeast US, with the effect on Atlantic City of gambling legalization in Pennsylvania, and on Pennsylvania of legalization in Ohio and Maryland.  One additional complication in this instance is that both of the incumbent operators are Native American tribes, for whom maintaining/expanding employment may be more important than profits.  A second is that the new CT casino will be run by two in-state rivals.  That should be interesting to see.

 

 

 

 

 

 

Employment Situation, February 2017

This morning at 8:30 est, the Bureau of Labor Statistics of the Labor Department issued its Employment Situation report for February 2017.

The Bureau estimates the economy added 235,000 new jobs last month.  This is a very strong result.  However,it is most likely influenced by unseasonable warm temperatures in February, which typically allow outdoor construction work to get started earlier than  usual.  So maybe the “real” figure should be 200,000–which would still signal significant economic strength.

Revisions to the prior two months’ data were +9,000 positions.  Most other data–like the labor participation rate, the number of long-term unemployed…–were relatively unchanged.

The unemployment rate fell to 4.7%, a level that twenty years ago would have set off alarm bells warning of incipient wage inflation.  Nevertheless, wages grew at the same steady yearly rate of +2.8% we have been seeing for a while, and are showing none of the acceleration that labor economists fear.

We know from the BLS’s Job Opening and Labor Turnover (JOLT) survey that the number of current job openings is more than 20% higher than at the pre-recession economic peak in 2007.  This makes the lack of wage acceleration look even more peculiar (more about this on Monday).

Nevertheless, the Fed has made it clear that it thinks there’s nothing further that maintaining emergency-room low interest rates can do to stimulate the economy.  That ball in in the court of fiscal policy, the province of Congress and the administration, where it has resided unmoved for several years.

Especially given Mr. Trump’s promises of corporate income tax reform and renewed infrastructure spending, the biggest economic hazards lie in not continuing to normalize interest rates.

So I think we can pencil in three hikes of 25 basis points each in the Fed Funds rate both this year and next.

 

 

Employment Situation, January 2017

This morning at 8:30 est, the Bureau of Labor Statistics of the Labor Department issued its monthly Employment Situation report for January 2017.

The important parts, in my view:

on the positive side

— the +227,000 new jobs added is an above recent trend figure

–the workforce expanded by around half a million people during January, implying that sa significant number of previously discouraged workers are resuming their search for employment

–wages are rising at a 2.5% annual rate.  Some have expressed disappointment that wages aren’t rising faster, pointing out that the ES estimate of wage gains was higher a month ago.  On the other hand, the overall trend is in the right direction and these numbers can be quirky month-to-month.

on the negative

–the situation for the long-term unemployed is little changed over the past year

—-The number of long-term unemployed (those out of work for 27 weeks or more) is down by about a quarter-million.  But it’s still 1.9 million people, and makes up about 25% of all unemployed

—-The number marginally attached to the workforce (meaning have looked for work sometime within the past year, but not within the last four weeks) is down by 15%.  But their number is still 1.8 million.  Of that figure, 532,000 are discouraged workers (people not looking for work because they think no one will hire them), the same as this time in 2016.

 

As I’m writing this, the reaction of Wall Street is to emphasize the positive.  However, as the presidential election results show, the economically left behind are increasingly making their voices heard demanding help.

 

 

disappointing 4Q16 sales for Target (TGT)

TGT just announced that its 4Q16 sales (the fiscal quarter ends in about two weeks, on January 31st, which is normal retail practice) will fall below its previous estimate of +1/- 1%.  The company now figures that sales will be down by -1.0% to -1.5%.

Online sales grew year-on-year by 30%+ during November/December, while sales in physical stores fell more than -3%.

In its press release, TGT also gives a breakout by major categories.

The company doesn’t say explicitly what the split is between online and physical store sales, but a little arithmetic will will get an approximate figure.  And that’s the core of the company’s sales growth problem, in my view.

The Commerce Department hasn’t yet released its calculation of the percentage of retail sales in the US that occurs online.  We can safely assume, though, that the number–which continues a steady upward march–will be around 9%.  This is the portion of overall retail that’s growing, and carrying the waning physical store business.  The TGT online figure, in contrast, is just slightly over 1%.