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The US economy is fine, but trade storms are gathering

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Workers assemble cars at the newly renovated Ford’s Assembly Plant in Chicago, June 24, 2019.

Jim Young | AFP | Getty Images

A former colleague of mine at the OECD (a Paris-based public policy research organization financed by member country governments) smiled at me over a five-o’clock beer with a cutting remark that reports of economic analysis were “a dime a dozen.”

I felt like wiping the floor with him, but gulping down my drink, I thought again how low a once revered profession of “worldly philosophers” had fallen.

Economists, of course, bear the onus of that reputational collapse. The person who put the imprimatur on our reports had no formal economic training, and his main criterion for the reports’ passing grade was that they should be “pleasingly non-strident.”

So, in that spirit, here are a few thoughts on the current state, and, bravely, on the outlook of the U.S. economy, based on the evidence available at the close of trading in New York last Friday.

Steady activity and strong drivers

The latest comprehensive survey evidence on 90% of the U.S. economy, reported earlier this month by the Institute of Supply Management (ISM), showed that output continued to grow during July in 13 out of 18 non-manufacturing industries under review. 

The activity for the sector as a whole indicated uninterrupted growth for 114 consecutive months.

According to that survey, employment was growing, supplier deliveries were slowing, inventories were falling and prices were declining. All those are encouraging signs for a steady growth of output and employment in the months ahead.

The ISM also reported that the index of manufacturing activity last month remained in the positive territory, while staying on a downward trend for nearly three years. The manufacturers’ employment grew, customers’ inventories were too low and prices decreased at a faster rate, the index showed.

And there was more evidence last week on the largely outsourced U.S. manufacturing sector. The monthly survey of the Federal Reserve showed that the industrial output was stagnant since the beginning of the year, but it still eked out a 0.5% increase in the 12 months to July.

That is the freshest snapshot of the U.S. economy we have at the moment.

Now, to gauge where the economy is likely to go in the months ahead, we have to look at the variables driving demand, output and employment.

Jobs, household incomes and credit costs directly underpin private consumption, residential investments and business capital outlays — and make up 87.2% of the U.S. economy in the second quarter of this year.

With an unemployment rate of 3.7% in July, most people agree that the U.S. has a fully-employed economy. Others may beg to differ, because the real unemployment rate is 7.1% — if you add 4 million involuntary part-time workers (because they cannot find a full-time job) and another 1.5 million who are no longer looking for a job, to the 6.1 million people who officially reported out of work.

Things get worse and uglier if you consider that only 63% of the U.S. civilian labor force is in the labor market, while 96 million of Americans are wasted resources.

Trade disputes and hybrid wars

With all those caveats, it seems that jobs are plentiful, with some sectors of the economy, such as retail trade and public administration, reporting labor shortages.

The real after-tax household incomes are also looking good – growing at an annual rate of 3.3% in the first half of this year, with savings as a percentage of disposable personal income hitting a stellar 8.1% as of last June.

Credit flows? A real bonanza, with the Fed’s high-powered money hitting last week a mind-boggling $3.3 trillion, and excess reserves in the banking system (money banks can lend) at $1.4 trillion. The right-hand side of the Fed’s balance sheet is now four times larger than during the pre-crisis months in 2008.

And that’s not enough. President Donald Trump wants more, much more, while the Fed’s cacophony of contradictory statements fails to deliver an authoritative and compelling defense of one of the most important parts of American public policy.

Exports — 13% of the U.S. economy — are the only other major GDP component I left out because they are mainly determined by demand coming from the European Union, China, Japan, Canada and Mexico. In the first half of this year, those economies took $537 billion of American goods sales abroad — about two-thirds of the total — and 2% less than a year before.

China looms large in the U.S. trade picture owing to a systematic and outsized trade surplus on American goods trade, running at an annual rate of $334 billion in the first six months of this year.

The China trade story is a comedy of errors. The U.S. is left holding the bag for squandering an unassailable case where Beijing had to yield — and was apparently willing to yield until Washington tried to use trade to impose changes on China’s economic and trade policies under a permanent threat of American sanctions.

As a result, problems of China trade have now gone far into the political and security minefields. Beijing believes that the ongoing violent social unrest in Hong Kong is being spearheaded by the U.S., and is suspecting that Washington wants to open another front with large arms sales to Taiwan. The Korean Peninsula and Japan are also part of the U.S.-China confrontation, with potentially highly damaging economic implications for Tokyo and Seoul.

China is cutting down purchases of American goods and services, and is ready to retaliate against any further impositions of American tariffs on Chinese goods shipped to U.S. markets.

In spite of that, Trump says that the U.S.-China trade war will be a short one, and that any trade deal will be on Washington’s terms. Don’t believe a word of it.

Investment thoughts

A fully-employed U.S. economy, operating above its noninflationary growth potential, needs no further help from an already extraordinarily easy monetary policy with negative real short- and long-term interest rates.

The monetary policy has nothing to do with tanking equity markets.

The problem is elsewhere, because traders see no end to America’s unfolding trade disputes with Europe and China. Markets are also watching the burning fuse on tinderboxes in the Persian Gulf, Hong Kong, Taiwan, the Korean Peninsula and the contested maritime borders in the South China Sea.

Will the French President Emmanuel Macron summon the courage and wisdom, during this week’s G-7 summit in the French city of Biarritz where leaders of U.S., Japan, Germany, France, U.K., Italy and Canada will meet? Will Macron be able to calm down an American president furiously pushing his European allies into open hostilities with China and Russia?

Macron’s pointedly scheduled meeting on Monday, Aug. 19 — five days before the G-7, with Russian President Vladimir Putin at his summer residence on the French Riviera is a message that France wants Europe out of a senseless military confrontation with unmovable European and Asian nuclear superpowers. He apparently wants to do that with no concession to Russia — a repeat of his frank and robust talk with China’s president in Paris last March.

Commentary by Michael Ivanovitch, an independent analyst focusing on world economy, geopolitics and investment strategy. He served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York, and taught economics at Columbia Business School.

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WeWork’s on-again off-again IPO delayed again

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People walk out of the co-working space WeWork in the Williamsburg neighborhood of Brooklyn in New York.

Spencer Platt | Getty Images

After a series of setbacks on the road to an initial public offering, the parent company of real estate start-up WeWork is delaying the move, sources told CNBC Monday.

However, no plans have been set on how long it’s delayed for, the sources said.

The move comes days after the We Company, WeWork’s parent company, announced sweeping corporate governance changes in an amended S-1 filing made public Friday.

The company is expected to decide on Monday evening whether it will proceed with the IPO this week, sources told Reuters requesting anonymity because the matter is confidential. The sources also told Reuters the We Company is considering delaying its initial public offering until October at the earliest, concerned that its stock market debut would be snubbed by many investors, people familiar with the matter said on Monday.

The Wall Street Journal first reported on the potential IPO delay.

On Friday, We Co. announced plans to curb CEO and founder Adam Neumann’s voting power. The company said it changed its high-vote stock from 20 votes per share to 10 votes per share.

The company also eliminated a key provision that would have allowed Neumann’s wife, Rebekah, to lead the search for his successor should he ever become permanently disabled or deceased. Instead, WeWork’s board would pick a successor.

In addition to the power struggle at the company, the last $47 billion valuation for the real estate start-up was being slashed by $20 billion or even lower. SoftBank, WeWork’s biggest outside investor, was also reportedly pushing to shelve the IPO.

WeWork previously said it will list its shares on the Nasdaq under the ticker “WE.”

WeWork did not immediately respond to a CNBC request for comment.

CNBC’s Leslie Picker and Reuters contributed to this report.

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Saudi Arabia has to explain how its oil assets in Abqaiq were attacked, says ex-US diplomat

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Smoke billows from an Aramco oil facility in Abqaiq after drone attacks sparked fires at two Saudi Aramco oil facilities.

AFP | Getty Images

Saudi Arabia has “a great deal of explaining to do” on how it could not defend its “most critical” oil facility from drone attacks at the weekend, said Gary Grappo, former U.S. ambassador to Oman.

The Kingdom spent an estimated $67.6 billion on arms in 2018, according to Stockholm International Peace Research Institute. Saudi Arabia was just behind the U.S. and China in terms of defense spending, Grappo told CNBC’s “Squawk Box” on Tuesday.

“I think the Saudi leadership has a great deal of explaining to do that a country that ranks third in terms of total defense spending … was not able to defend its most critical, and I can’t underscore that enough, its most critical oil facility from these kinds of attacks,” said Grappo, who was previously in senior positions at the U.S. embassies in Riyadh, Saudi Arabia, and Baghdad, Iraq.

Saudi Arabia is one of the world’s largest oil exporters, and damage to its oil facilities ignited fears of supply disruption around the world.

It’s a bit alarming that these folks got through … they were exquisitely precise, they knew exactly what to hit, they hit it perfectly,

Bob McNally

Rapidan Energy Group

Oil prices jumped after the Saturday attack on Saudi Aramco’s oil processing facility at Abqaiq and the nearby Khurais oil field. That knocked out 5.7 million barrels of daily crude oil production — which is more than half of Saudi Arabia’s global daily exports and over 5% of the world’s daily crude production.

The U.S. and Saudi Arabia have blamed Iran for the attacks.

“We’re talking about drones. Now, drones are not so easily detectable but, nevertheless, they had to be able to see that this was a strong possibility given the previous attacks they’ve experienced in previous oil facility, airports and elsewhere,” said the former diplomat who is now a distinguished fellow at the University of Denver.

Saturday’s attack was not the first time that the Abqaiq oil processing plant was targeted. In 2006, security guards blocked an attempted attack by al-Qaida militants on the facility.

Bob McNally, founder and president of consultancy Rapidan Energy Group, said he was “disappointed, but not surprised” by the attack. He said he had expected Riyadh to “raise defenses,” especially after al-Qaida’s previous attempt to attack its facilities.

“It’s a bit alarming that these folks got through. We looked at those photos that were released by the Trump administration — they were exquisitely precise, they knew exactly what to hit, they hit it perfectly,” he told CNBC’s “Squawk Box” on Tuesday.

“For all we know, they could come back. So, no grounds for complacency, in my view.”

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Hong Kong digital banks launch may face delays due to protests

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From left, the flags of the Hong Kong Stock Exchange, China and Hong Kong are seen flapping in the wind on May 6, 2019.

Anthony Wallace | AFP | Getty Images

The launch of new online-only banks in Hong Kong is expected to be delayed in part due to anti-government protests in the city, people with direct knowledge of the matter said.

Most of the eight newly licensed digital banks in Hong Kong, including joint ventures involving Standard Chartered and Bank of China Hong Kong, had aimed to begin operating before the end of 2019.

But as protests stretch into a fourth month, the new banks, seen triggering the biggest shake-up to Hong Kong’s retail banking sector in years, will now launch early in 2020, the people told Reuters.

A delay would be the latest sign of the damage being wrought on the Asian financial hub’s economy due to the political turmoil that erupted in June.

Some of these so-called virtual banks had aimed to launch brand promotion campaigns as early as this month, but these plans have now been put off, the people said, on condition of anonymity given the sensitivity of the matter.

“This form of banking service is mainly aimed at the youth, millennials, and many of them are out on the street these days joining the protests,” a senior executive at a licence winner said.

“It will be difficult to launch a brand campaign around them and attract their interest when their priority is clearly not having another bank account,” said the executive, declining to be named as he was not authorized to talk to media.

More than 100 days of sometimes violent protests were sparked by a bill that would have drawn the semi-autonomous Chinese territory closer to the mainland Chinese legal system. The bill was withdrawn earlier this month, but the protests have since broadened into calls for universal suffrage.

Virtual banking permits

Hong Kong awarded virtual banking licences to three groups in March — joint ventures led by StanChart and BOC Hong Kong, and a subsidiary of the international arm of Chinese online insurer ZhongAn Online P&C Insurance.

The banks intended to launch services in six-to-nine months, the Hong Kong Monetary Authority (HKMA) said at that time.

Five more licences were issued later to joint ventures led by smartphone maker Xiaomi and Tencent, and a unit of Ant Financial among others.

HKMA said starting six-to-nine months after authorization was “not a rigid requirement”, but services were expected to be rolled out to the public in the fourth quarter at the earliest based on the virtual banks’ latest indications.

StanChart said its virtual bank joint venture was working towards a launch in early 2020. Livi VB Ltd, the virtual banking joint venture led by BOC Hong Kong, said it was working towards the launch in the near future. ZhongAn declined to comment.

A spokeswoman for the Xiaomi-led joint venture said the virtual banking business was in the preparation stage, while Ant said that work for its bank was progressing smoothly. Tencent led-Fusion bank did not respond to a request for comment.

Soft launch

A couple of the licence winners could still ‘soft launch’ in 2019, restricting services to staff and their families ahead of a full launch, the people said.

The virtual banks plan to offer savings accounts, credit cards, personal loans and travel insurance, and will try to take market share from HSBC, StanChart and some Chinese lenders who currently dominate retail banking in Hong Kong.

The launch delay is also partly due to the time required to build technology infrastructure, compliance and customer acquisition processes, and hire staff, the people said.

“This is about building a new bank from ground zero, with regulatory standards that are similar to traditional banks,” one person said.

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