"Kee" Points with Jim Kee, Ph.D.

The big news last week was the big jump in retail sales for April, which is published by the US Census Bureau under the Department of Commerce. The “retail and food services” sales category increased 1.3% in April and is growing at about 2.8% for the past 12 months. The story here continues to be the growth of online sales at the expense of brick-and-mortar store sales. The “internet and catalog sales” category is growing at +10.2% per year, three times as fast as overall sales. Meanwhile, “old school” department store sales growth is down -1.7%. As a fun fact, Wal-Mart is the largest apparel seller in the US, while Amazon is second (US Census Bureau; WSJ).


Checking in on some data points: Not surprisingly, most economists are revising their second quarter GDP numbers upward. The Atlanta Fed’s GDPNow model is at 2.8%, the importance being that this and other models are indicating an acceleration from the low +0.5% first quarter GDP growth number. As for the election, PollyVote (a combination of various prediction methodologies)continues to favor Democrats over Republicans in the US presidential election by 53% to 47%, but this indicates a slight narrowing from a month ago, when the odds were 53.9% and 46.1%. That’s kind of interesting. Looking globally, I also find it interesting that the various financial stress indices (e.g. St. Louis Financial Stress Index) have come down over the past month. It is important to check in on these from time to time because the headlines can have a pessimistic bias.


Global trade note: I’ve talked before about the economics of free trade and won’t reiterate that here. Less rigorous on the theoretical and empirical (i.e. “just the facts”) front is the notion of “regulatory arbitrage,” or the idea that companies will leave areas (states or countries) where the regulatory burden is increasing and relocate to areas where the regulatory environment is more attractive. This occurs more readily for business models with few immobile assets, e.g. buildings and people. Critics of global trade argue that regulatory arbitrage contributes towards a “race to the bottom.” That means companies will move to locations that have weaker environmental laws and labor laws. Fans of global trade argue the opposite, that there is a “race to the top” as countries with superior corporate governance (i.e. shareholder/owner protection) and financial institution/capital markets attract firms and force countries to compete by offering higher standards of living (i.e. water/air quality…access to education, etc.). A third possibility, often referred to as “the California effect,” is that firms cannot forgo lucrative local markets (for customers and workers) and so will be relatively insensitive to regulatory burdens. I have followed this line of thinking for decades, and recently Naomi Lamoreaux (Yale) and Bruce Carruthers (Northwestern) published what in my opinion is the best empirical research to date on the subject in the Journal of Economic Literature. Their findings? There is on balance evidence for all three!


China currency manipulation note: I have also mentioned that a key part of China’s success was due to the fact that they linked their currency to the US dollar about 20 years ago (1994) , giving them instant currency credibility. When China was growing extremely fast there was a lot of upward pressure on the yuan, so they allowed some small amount of appreciation over their dollar peg. As China has slowed they have allowed some small amount of depreciation around their dollar peg. In 1994 the exchange rate was 8.5 yuan to the dollar. It is currently at about 6.5 yuan to the dollar, so the yuan has actually appreciated by about 25% over that time period (it takes fewer yuan to buy a US dollar). That’s not what you hear from the Presidential candidates, all of whom have bashed China for currency manipulation. I think the following from technology writer George Gilder (referring to Nobel Laureate Robert Mundell who advises China) is a little closer to the mark:


“Mundell was a supporter of Bretton Woods gold exchange standard and he believes in fixed currencies. And while Donald Trump and others attack China for supposedly manipulating their currency, Hillary [Clinton] and Bernie Sanders also attack China for manipulating their currency. In fact the reason China has done so well is that it refuses to manipulate its currency. It has pegged its currency on the dollar and created a dollar zone where trade could flourish. And this has been the great coup that the Chinese have followed, they followed Mundel, the supply-sider, and that has greatly benefited their economy.”