USMCA v. YMCA Song
Among all the hot topics of the day, many highlights are being overwhelmed by updates on the war with Iran. Yet an incredibly important policy consideration is now beginning to garner more attention. The USMCA trade agreement must be renegotiated and updated by July 1. Mexico and Canada command the bulk of our trade activity along with China. The precursor to USMCA was NAFTA, which boosted trade flows considerably. But many pundits have opined that NAFTA opened the door to job losses in the USA while lowering prices of goods at the same time.
Recent articles have pointed out that for the most affordable segment of the automotive industry’s offerings, the bulk of the vehicles are assembled outside of the USA. Many of these vehicles are assembled in Mexico. Mexico and Canada also assemble some other models and are big suppliers of parts to the domestic manufacturers.
With the noise about tariffs providing the background, we would expect coming to a consensus agreement is going to be quite challenging. Some jobs may come back to the USA but the profit margins on the smaller economical auto models do not allow much margin for error.
Why YMCA? We are certain that the song will be on the playlist in the new White House ballroom along with a dose of ABBA hits. What is more interesting is that there is a deal on the table to construct the ballroom with donated foreign steel. I suppose exceptions must be made but the steel workers cannot be too pleased.
The change of the leader at the Fed is now proceeding apace. Given that inflation has remained over 3% no matter what measure is preferred, it will be interesting to see whether the goal of returning to 2% remains a goal. Most pundits are now gravitating to the view that there may not be any further cuts forthcoming this year. The pressures being generated by the war are also causing some officials to contemplate whether tightening is the next course of action. Of course there are multiple layers of politics to consider. We still believe that the Fed will maintain independence. Yet, the market is taking its own initiative to tighten by taking the ten-year Treasury to almost 4.5%. Rates are showing no signs of declining and housing and the mortgage market will experience slowing down due to the higher levels.
Financing the federal deficit will remain central to a well-functioning government. Now that the debt has attained the level of 100% of GDP, the interest cost consideration will be even more burdensome. Of course, funding the cost of the Iran war will add to the burden.
Having returned recently from Europe I was glad to see that the TSA process was working well despite the challenges. At least with the passage of recent legislation the workers will be assured of their next paychecks. Now if the price of oil eventually moderates again there is some hope that the summer travel season may be saved.
Municipal Matters:
We continue to grind closer to budget adoption time. There are many gaps out there that need funding. In select states there are proposals on the table to “tax the rich”. Taxing assets is the least popular approach. California is in the vanguard here. Momentum appears to be building towards an approval, but passage is far from certain.
Various proposals being considered are targeting additional taxes for segments at certain income thresholds. The challenge herein is that the proposals if approved often do not attain the estimated budget levels for receipts that are forecasted. Massachusetts is doing better than estimates in this regard.
Mayor Mandani continues to beseech the State of New York for more funding. I cannot blame him for doing so. However, the state may not be as robust as he believes. The outyear gaps for both NYS and NYC are sizeable and likely to grow. I suppose it would be too much to ask a democratic socialist to consider the more traditional approach of layoffs and a hiring freeze and other restrictions. The pied a terre tax would just not raise enough revenue albeit it would account for closing some of the gap.
In the meantime, municipal activity and volume are keeping the course.
John Hallacy
John Hallacy Consulting LLC
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