There are two ways to look at the strength and health of the American economy. The first is by analysing data such as the Federal Reserve Bank’s monetary policymakers will be considering when they meet three days hence to decide whether to lower the Bank’s benchmark interest rate. The second is to consider the economy’s ability to produce the goods and support the services that are crucial to preserving the nation from the evil intentions of its enemies, particularly appropriate on this day that “will live in infamy”, as FDR described December 7, 1941, when the Japanese attacked Pearl Harbor without troubling themselves to declare war. These two ways of looking at our economy are, of course, related: it takes a strong economy to support a strong defence establishment.
The first test reveals an economy with a labour market that is coming off the boil. ADP, a payroll platform, regularly processes reports from 26 million private-sector employers. In November, those firms shed 32,000 jobs, the sixth negative number in the past seven months. Big businesses added workers but “small establishments”, those with fewer than 50 employees, showed the door to 120,000 workers.
The November report of the Institute of Supply Management, which publishes a variety of reliable economic indicators, is no cheerier. The manufacturing sector contracted for the ninth consecutive month in the face of “tepid consumer demand, sluggish employment and elevated prices that are the result of — or exacerbated by — US trade and tariff policy”.
The service sector is doing better, but service-sector employment, nevertheless, contracted for the sixth month in a row. Job market weakness worries Fed chairman Jerome Powell, which is why markets are assigning an 85 per cent probability to a rate cut next week.
Reports indicate that Powell will muster a majority in favour of a rate cut, but that there will be important dissenters. Herding his policy-making cats adds to the strain of his job, and likely has Powell looking forward to his personal liberation day in May of next year.
The chalice is likely to be passed to the able Kevin Hassett, director of the National Economic Council. Hassett is a good economist, knows the Fed should limit itself to its remit rather than engage in social engineering, will work closely with Treasury secretary Scott Bessent to co-ordinate monetary and fiscal policy, will attempt to set pro-growth interest rates, and will politely preserve the Fed’s independence. Sighs of relief and of applause echoed on Wall Street, and markets for federal debt recorded approval by remaining unchanged.
If Bessent is right that retroactive tax cuts contained in the so-called Big Beautiful Bill will stimulate demand and investment, and if foreign promises made, prove to be foreign promises kept, Hassett will inherit a healthy economy next year. But it is one that, absent a major policy change, will not result in adequately funding our under-resourced military and defence-manufacturing infrastructure. Not with politically attractive benefits rattling begging bowls. We might have a per capita GDP more than three times that of China, but our major adversary is building a mighty, modern navy while we have to ask South Korea to teach us how to build boats.
Which brings us to the second way of looking at the US economy. China has been fighting Cold War 2 since the 1990s, steadily implementing a long-term plan to achieve monopoly power over rare earths and other materials that gives it the power to slow the US economy to a crawl. The Center For Strategic and International Studies reports: “The US industrial base is not prepared for a possible war with China.” In a war game with China “the United States expended its inventory of long-range anti-ship missiles within the first week of the conflict …. It takes nearly two years to produce a long-range anti-ship missile…”.
Fortunately, Trump’s exposure to Xi Jinping’s power and determination during tariff negotiations has prompted the president to launch a programme of government subsidies, price floors and investments for minerals producers, incentives to which our entrepreneurs and investors are responding. JPMorgan Chase plans to launch a $1.5 trillion initiative focused on strategic industries. “I don’t think anyone in the sector is having a challenge getting private capital”, the CEO of a company that refines rare-earth metals told The Wall Street Journal.
During Cold War 1, Ronald Reagan decided to spend 6 per cent of GDP on defence, twice the current level. That set a pace of military production too high for the sclerotic Soviet Union to match. It dissolved. We won, they lost. As Admiral Isoroku Yamamoto, who planned the Pearl Harbor attack is depicted in the film Tora! Tora! Tora! as saying, “I fear all we have done is to awaken a sleeping giant and fill him with resolve.” Which Xi might have done with his recent parade of military hardware and ban on exports of essential minerals.
On December 7, 1941, two songwriters penned a new hit, We Did It Before (and We Can Do It Again). Time to make that tune relevant in Cold War 2.
irwin@irwinstelzer.com
Irwin Stelzer is a business adviser
Source link