Silence of the canaries

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The news over the past few months has been riddled with updates regarding the possibility of a recession. The yield curve has proven itself to be a reliable signal, as it successfully predicted the past seven recessions. However, viewing one part of a large, complex machine may not tell the whole story. Many other indices and sources of information should be taken into consideration when deciding whether or not a recession is likely.



US Trade Balance

The tensions between the United States and China are an integral part of this puzzle. Greg Ip, chief economics commentator for the Wall Street Journal, explains that from 2000-2017 import tariffs were below 2 percent, but President Trump’s tariffs bring that figure close to 6 percent.

This has direct implications on the international logistics industry, too. Fewer goods being made due to higher prices leads to less demand on the delivery of such goods.

On September 18, 2019, Fedex announced reduced earnings and reduced forecasted profit and revenue. As a result, shares took a 13 percent dive in their prices to $150.91. This fall was the largest decline in share price the company suffered since 2009, as it lost $6 billion in market capitalization. CEO Frederick Smith attributed this loss to decreases in shipping volume to China, while CFO Alan Graf pointed at Europe.

The Trade Balance chart above details that the US is importing more than it’s exporting – hence the negative signs by the digits. Here, the farming industry is a rather large factor to these statistics.

According to the United States Department of Agriculture, the US’s largest agricultural export to China is soybean. Soybean accounts for $12.3 million in export revenue and 63 percent of agricultural exports. 

Since China implemented tariffs on US soybeans, the price and export of soybean has plummeted. In September 2012, soybean prices reached an all-time high of $17.36 per bushel. The price of a bushel of soybean as of October 7, 2019 is $9.15.

Prior to the trade war, the US and Brazil had roughly the same amount of market share in terms of agricultural goods to China: approximately 40 percent. As of May 2019, the US has only 10 percent market share due to the tariffs imposed by China. That explains some of what is happening in the current negative trade balance.

Farmers are suffering as a result. It is predicted that farmers will lose $130 per acre after rent as a result of the tariffs. If they can’t sell their products, then they can’t pay for costs of any kind such as: rent, equipment, maintenance, sustenance, power. If farmers who don’t own their own land can’t pay rent, then they will have to relocate. That on its own is devastating to any farmer. To think that if farmers were evicted from their rented land in droves, one can easily think that agricultural real estate prices would crumble, unemployment would rise, and GDP would drop.



Purchasing Managers’ Index

While US exports decrease, new purchase orders have come to a screeching halt, as shown in the chart above. The editorial board of the Wall Street Journal says “uncertainty about demand, prices and tariffs is causing business to scale back new equipment purchases.”

The PMI has steadily decreased from 2018 and even more so in 2019. Using the data on the chart, 2018 averaged a PMI of approximately 58-59.

This year has, so far, seen the most contraction since the Great Recession.] January rang in the year with 56 percent. September registered a PMI of below 48 percent. This is a relative decrease of 15 percent.

When the months of 2019 are compared to the respective months of 2018, the difference is striking. August 2018’s PMI registered above 60 percent while this year’s August PMI registered below 48 percent – a 20 percent relative decrease.

            Domestic logistics are feeling the pinch. As trucking companies nationwide feel strapped for cash, orders for new heavy-duty trucks fell by 79 percent. Since July 2019, the trucking sector has also slashed 9,600 jobs.

           ACT Research president and senior analyst, Kenny Veith, said, “…there will be layoffs up and down the truck manufacturing supply chain as a result of falling demand.”

Manufacturing Production Index

Above is the latest Manufacturing Production Index. Declining over the past year, September was “the steepest month of contraction for the manufacturing sector since June 2009” due to the effects the US-China trade war had on imports, exports and the prices of raw materials.

            While the US is facing contraction in manufacturing, purchasing and a trade imbalance, automotive manufacturing has been in the news recently. United Auto Workers’ strike has been an on-going disaster for nearly a month.

The strike started on Sept. 16, 2019, as a result of the expiration of its labor contracts with American automotive manufacturers. The union demands higher wages, healthcare, opportunities for temporary workers and profit sharing – General Motors (GM) achieved record profits of $2.4 billion in second-quarter earnings (a 1.6 percent increase from the previous year).

When 46,000 union workers go on strike, the cars won’t make themselves. GM is losing as much as $100 million per day as the strike continues. The effect of the strike is not limited solely to GM. It is destroying its home, Michigan. As the strike goes on, state income-tax revenue drops $400,000 per day.

           The latest data shows the US produced 2.55 million units in August 2019, which was a drop compared to July’s 2.67 million units. The US automotive manufacturing industry reached its bottom point of 1.29 million units in January 2009 – the Great Recession. The disparity between the amounts of units produced in 2009 and 2019 is narrowing, and the US hasn’t officially gone into a recession yet. The Federal Reserve Bank of Atlanta estimates a 1.8 percent growth for the third quarter. The Bureau of Economic Analysis released its estimate on October 30: 1.9 percent.

Oil & Geopolitics

            While the US-China trade war is an intertwined battle of politics and economics, geopolitical matters also have huge sway on markets. Above is a chart from www.oilprice.com that displays Brent Crude oil prices over the past month. The beginning of the chart shows a spike in prices from approximately $60 to $67.50 per barrel during mid-September. This spike was a result of a supply shock after Saudi Aramco’s facilities were attacked by foreign agents. These attacks disrupted 5 percent of global production. Ip claims that “investors and economists see supply shocks as a threat to growth.”

            Brexit is another international matter that has American investors on-edge. Nobody can see the future or reliably predict the outcome of Brexit – whether deal or no-deal. Brexit has serious implications to supply chains and financial markets. Goods won’t transport as easily and people can’t travel as conveniently, and that affects overall production and output.

As Jon Hilsenrath and Josh Zumbrun of the Wall Street Journal, say, “businesses react to uncertainty by pulling back on investment and employment, and a slew of economic data in recent months strongly suggest the theory has become reality.”[

           Hilsenrath and Zumbrun go into detail about this data in their article. August 2019 saw a fall in job openings of 7.5 percent. They also mention truck and heavy machinery orders facing a decrease, which was briefly explained in the PMI section. British demand on American goods has decreased by 2.6 percent in the past year, which was made evident by US export data.

            On top of the US economy’s internal contraction, international disruptions of this magnitude send the US economy into a panic mode. This psychology further affects the economy, as everyone believes that it’s going awry. As mentioned above the Federal Reserve Bank of Atlanta estimates third-quarter results at 1.8 percent. The BEA estimates third-quarter results at 1.9 percent. Seeing as both those number are lower than Q2’s 2.1 percent, it seems as though all indicators officially point to a recession.

Brain Drain: the Spiraling Issue

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In our current era, more countries are entering stages of industrialization and development to compete with already developed countries. This process of development has many growing pains, some of which can hinder or discourage continued progress and can cause problems that lower rather than raise the standard of living and life expectancy.

One of the more prominent growing pains is brain drain: a process by which the growing educated elite of a region or country emigrate to typically more-developed countries with better opportunities, thus removing the skilled labor workforce from the country’s population. 

This reduction in the skilled labor population often translates to a vacuum in necessary services required for development, including education, healthcare, and engineering, among others. This can ultimately decelerate or even stagnate growth. If left unaddressed, brain drain can compound and lead to worse problems.

When a portion of the educated elite leave, there is a higher stress on the remaining skilled workforce to fulfill the demands in services those emigrants were meant to fill. This worsens working conditions and increases the disparity between the actual value of the service provided and the compensation service-providers are ultimately given. These problems then push more of the workforce to emigrate elsewhere, accelerating the rate of brain drain. 

This is the case in Nigeria, where improved education has created a swathe of healthcare professionals ready to enter the workforce. In recent years, however, a majority of this workforce has left for developed countries such as Canada, Australia, and the U.S. after completing their education. Of the 72,000 doctors and dentists registered under the Medical and Dental Council of Nigeria, over half of them work outside of the country. This has left the medical industry with one doctor for every 5,000 Nigerians. 

Why are Nigerian’s health professionals leaving? 

Many health professionals cite a lack of resources—including basic utilities such as water and power— poor working conditions, and poor compensation. They criticize the Nigerian government for allocating only 4 percent of their national budget to healthcare despite the desperate need for such services.

PHCs, or Public Healthcare Centers, are the lifeblood of Nigerian healthcare. They face a litany of issues in basic services, which then affect the quality and capacity of the service provided. Infographic c/o: Premium Times Centre for Investigative Journalism.

This is despite the fact that, according to Onwufor Uche, consultant and director of the Gynae Care Research and Cancer Foundation in Abuja, “eight of 10 Nigerians are presently receiving substandard or no medical care at all”.

Doctors themselves are payed N200,000 monthly ($560)—a paltry sum compared to the compensation in Canada.  With more doctors leaving, the disparity of how much value doctors bring to the economy versus how much they are compensated becomes even greater. 

The government of Nigeria has attempted to remedy this situation by providing education subsidies to generate more health professionals. This naturally creates an incentive for more to enter the healthcare industry, but it doesn’t exactly address why people emigrate in the first place. 

It is not as if Nigeria’s economy is struggling to generate the funds necessary for a proper compensation program either. As an OPEC country, Nigeria’s profits from petroleum have boomed since the 1970s. Yet, governmental corruption has failed to allocate and invest those economic resources into infrastructure, basic utilities, and key service industries such as healthcare. Many also cite that, while education may be sufficient in creating a healthcare workforce, getting residency and certification from the government is such a grueling process that lead many to either give up or move abroad.

How do we tackle the core issues that lead to brain drain?

Taking on the process of developing infrastructure and industry is a big task– one that is often not done on the government’s participation alone.

Several decades ago, China was in a similar situation as Nigeria is currently. Despite its burgeoning population and the leading regime’s incentives and directives to increase industry in the form of factories, China saw its educated elite fleeing for other developed countries. This was in part due to the oppressive measures in censorship by the government that discriminated against the educated in China.

This discrimination hindered the education system and the emergence of entrepreneurial exploits, particularly in the STEM field. Frustrated by the blocks and the lack of support, particularly during the technology boom of the 1990s, many left China for the U.S. and Japan to participate in the research and development opportunities there.

As China began to experience the effects of this exodus in the stagnation of its industries, particularly in competing in the technology landscape, the Chinese government decided to use the opportunities abroad as leverage. They began a subsidy program which would help Chinese nationals study abroad. Over the next ten years, they focused on generating capital through their exploits in industry and exports. In the early 2000s, the government created economic opportunities competitive to those in other developed countries to entice Chinese nationals back. They specifically targeted sectors they wanted to stimulate, such as solar power.

The number of returning nationals shot up from 1 million in 2001 to 4.8 million in 2017. Chinese nationals who went through this program were dubbed “sea turtles”, as they would bring innovation and education from other sources to enrich China’s economy.

Now, however, some ‘sea turtles’ are struggling to compete with China’s own locally educated youth. Research innovation and infrastructure were built up in such a way that have since made them also educationally competitive on the global stage. Perhaps it is in these conditions that China is can be considered a “developed” nation. 

What if developing countries have not acquired enough capital to offer such competitive opportunities?

The development process for a country’s economy may take years, and the effects of brain drain slowing that process only further drains resources (including capital) and time.

The mass emigration of the Filipino workforce, particularly in the nursing and hospitality sector, is a case in which the country of origin simply does not have the resources necessary to remain competitive enough to retain their skilled population. In 2013, the Philippines deployed approximately 1.8 million workers– about 10 percent of its population— to other countries. In that sam year, the country itself was ranked number one for exporting nurses and number two for sending doctors overseas.

Poor working conditions include temporary contracts which lead to unstable career path, high nurse-patient ratio, a lack of resources, and understaffed hospitals and clinics. Infographic c/o: Filipino Nurses United.

Such high statistics are a result of poor working conditions juxtaposed with a remarkably strong nursing and healthcare service education system. Essentially, the Philippines is an example of the extreme implementation of Nigeria’s current plan.

Healthcare in the Philippines continues to suffer the same problems as that in Nigeria– where there is a deficit of healthcare workers for Filipino citizens and infrastructure is still poor. The government attempted to counter such issues by “overproducing” skilled professionals through its highly specialized nursing and healthcare programs.

The large population of abroad workers, however, also has made the remittances those workers significant enough to contribute to the economic growth of the country– up to $25 billion annually. This contribution has led the Filipino government to further encourage migration. This is in part due to the fact that remittances is a steady income that is often unaffected by the regional economic fluctuations. Despite how beneficial remittances have proved for the Filipino economy, there are concerns about the dependency these transactions bring to the country as a whole.

As a means to combat that potential risk, the Filipino government is looking to begin return programs much like China’s “sea turtles,” but face little progress due to the fact that their resources and compensation remain noncompetitive and unstable compared to opportunities abroad. Whilhe the Philippines may still suffer through the growing pains of economic development, they have crafted a way to utilize its brain drain to boost economic development and mitigate the process’ larger problems. This ultimately can encourage its continued development and the aspiration towards a better standard of living.

While these strategies may have worked for China and the Philippines, it is unwise to assume that they will be the save-all for Nigeria. By looking at these examples, however, we can begin to gauge how governmental powers may target one aspect of infrastructure or policy to lower the barrier and reduce push factors.

The Popcorn Index—What Box-Office Sales Tell Us About the Economy

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Traditionally, recessions result in higher unemployment rates, lower incomes, and downturns in business opportunities. The exception to these trends is unexpected—movie theatre ticket sales. The entertainment industry accounts for a significant portion of consumer spending in the United States. According to Statista.com, the United States film business will generate $35.3 billion in revenue in 2019. In times of financial crisis, box-office sales increase and the entertainment industry reaps the benefits of the United States’ economic turmoil. Historically, the entertainment industry has performed better than other industries during financial downturns. A 2019 Variety Magazine article notes that box-office sales increased during five of the last eight recessions and set domestic records in 2001 and 2009, both of which were years of significant recession in the United States.

Photo Courtesy of The Hollywood Reporter

The surge in box-office ticket sales during economic downturns seems counterintuitive, but the logic behind the sales boosts is sound. Economists have surmised that this trend likely occurs because going to the theatre is one of the cheapest forms of entertainment available in times of economic uncertainty. When Americans want to escape from the dreary reality of financial instability, the movies provide a cost-effective solution. The entertainment industry tends to lean into this concept when producing movies during times of economic hardship, opting for feel-good content rather than somber, depressing films.

In the most recent United States recession that spanned from December 2007 to June 2009, Hollywood thrived, with both movie ticket sales and attendance increasing. According to The New York Times, box office sales increased 17.5 percent, to $1.7 billion in sales, and attendance jumped up 16 percent within the first few months of 2009. Meanwhile, the general economy struggled to stabilize and most other business’s profits steadily declined.

Photo Courtesy of The Hollywood Reporter

The economy is currently showing signs of a potential upcoming recession. As the country considers the possibility of an economic downturn, many industry insiders are nervous about box-office performance moving forward.  According to a 2019 article posted by The Hollywood Reporter, the average price of a movie ticket has increased from $8.97 in 2017 to $9.11 in 2018. In addition to this median cost, many theaters charge extra for premium seating, 3D and 4XD showings, and additional amenities. At LA Live Regal Cinema, the theatre closest to USC campus, adult tickets cost $17.50. For context, the cost of a standard subscription to Netflix for a month is only $12.99, according to Business Insider.

As movies begin to present a greater price barrier, the idea of going to theatres as a cost-effective entertainment avenue is becoming more far-fetched. Entertainment conglomerates such as Comcast and Disney continue to accrue debt through company and content acquisitions, which could result in financial strain if this economic indicator fails to hold up during a future recession. According to Variety Magazine, industry leaders such as Adam Aron, CEO of AMC, and Jeff Goldstein, head of domestic distribution at Warner Bros., maintain that regardless of shifting factors, the movie industry will continue to prosper in recessions and prove to be a steadfast economic indicator in years to come.

Sources

Cieply, Michael, and Brooks Barnes. “In Downturn, Americans Flock to the Movies.” The New York Times, The New York Times, 28 Feb. 2009, https://www.nytimes.com/2009/03/01/movies/01films.html.

Fuller, Steve. “Topic: Movie Industry.” Www.statista.com, https://www.statista.com/topics/964/film/.

Griffith, Lou. “Data.” NATO, 24 July 2018, https://www.natoonline.org/data/.

Johnson, Dave. “’How Much Does Netflix Cost?’: All of Netflix’s Subscription Plans, Explained.” Business Insider, Business Insider, 30 May 2019, https://www.businessinsider.com/how-much-is-netflix.

Jones, Candice Lee. “10 Quirky Economic Indicators.” Www.kiplinger.com, Kiplingers Personal Finance, 13 June 2009, https://www.kiplinger.com/ article/business/T019-C000-S001-10-quirky-economic-indicators.html.

Lang, Brent, and Rebecca Rubin. “Recession Fears Grip Hollywood: Can the Movie Biz Survive a     Downturn?” Variety, 2 Jan. 2019, https://variety.com/ 2019/biz/news/recession-hollywood-movie-business-trump-1203096883/.

L.A. Live, “Movies.” L.A. LIVE, https://www.lalive.com/movies.

McClintock, Pamela. “Average Price of a Movie Ticket Rises to $9.11 in 2018.” The Hollywood Reporter, 23 Jan. 2019, https://www.hollywoodreporter.com/news/average-price-a-movie-ticket-soars-911-2018-1178410.