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In This List

Killing NAFTA Would Hurt the U.S. Economy and American Manufacturers

S&P Global Ratings

COP24 Special Edition Shining A Light On Climate Finance

S&P Global Platts

Energy: What to Watch in 2019

S&P Dow Jones Indices

Considering the Risk from Future Carbon Prices

S&P Global Ratings

U.S. Bank Outlook 2019 Still Sunny, But The Good Times May Be Behind Us

Killing NAFTA Would Hurt the U.S. Economy and American Manufacturers

If President Donald Trump follows through on his promise to tear up the North American Free Trade Agreement (NAFTA), this could, counterintuitively, hurt U.S. manufacturers and trim billions of dollars a year from the world's biggest economy, according to S&P Global U.S. Economics.

Moreover, ending what the president has called "the worst trade deal" in U.S. history, as part of the administration's broader push toward de-globalization, could disrupt global supply chains and ultimately put pressure on the bottom lines--and thus the credit quality--of import-reliant firms in the U.S. (see "De-Globalization Could Disrupt U.S. Supply Chains," published May 30, 2017).


  • NAFTA has contributed several billion dollars to U.S. economic growth each year, with trade among the U.S., Canada, and Mexico having tripled since NAFTA was signed.
  • In our view, the end of NAFTA would hurt the U.S. manufacturing sector and the U.S. economy, as higher tariffs likely limit trade and investments. New tariffs would mean higher prices for consumer goods, with lower-income households hurt the most. The lost sales at businesses would, in turn, discourage them from hiring new workers and could even lead to layoffs.
  • Without the help from streamlined supply chains, S&P Global believes that more U.S. business would have been lost to competition abroad. Severed supply chains mean diminished production efficiency, higher costs, and, ultimately, lost competition--and less need to hire workers
  • U.S. manufacturing production is near all-time highs, but the sector lost jobs in recent decades, largely because of automation rather than trade. So, even if factories returned to the U.S. with the end of NAFTA, any jobs created will more likely be for robots, not human workers.

It's difficult to isolate the direct effects NAFTA has had on trade and investment from other factors, such as rapid improvements in technology and automation. Indeed, as an April 2015 Congressional Research Service study of the deal noted: NAFTA "may have accelerated the trade liberalization that was already taking place, but many of these changes may have taken place with or without an agreement." What is indisputable, however, is that trade among the U.S., Canada, and Mexico has tripled since the agreement was signed, to over $1.1 trillion in 2016 from just $290 billion in 1993. Cross-border investments among the member countries also grew significantly, to $731.3 billion from $126.8 billion in 1993 (see chart 1). The elimination of many costly tariffs and other trade barriers, particularly with Mexico (Canada was already in a free trade agreement with the U.S.), helps explain why trade between regional partners blossomed.

Source: Congressional Research Service, May 24, 2017; OECD, "Trade in Employment (domestic labor inputs sustained by foreign final demand," September 2016; Wilson Center, "Working Together: Economic Ties between the United States and Mexico, November 2011.

S&P Global agrees with most estimates concluding that NAFTA has had a modest but positive affect on U.S. GDP, adding several billion dollars to economic growth each year. Granted, that represents a drop in the bucket for the $18 trillion U.S. economy but it runs counter to the idea that the deal has been, in a word, a "disaster." Moreover, without the help from streamlined supply chains, S&P Global believes that more U.S. business would have been lost to competition abroad.

The Myth Of Manufacturing's Return

While critics claim that overseas products are squeezing out domestic goods, U.S. manufacturing conditions are, in general, better than they were in the lackluster years leading up to the implementation of NAFTA, when the sector's annualized pace of production slowed. Since the agreement was signed into law on Dec. 8, 1993, manufacturing production picked up dramatically with the Great Recession temporarily slowing, but not ending, what has been a mini-renaissance of sorts.

But in contrast to claims that the sector is in freefall, U.S. manufacturing production overall is near all-time highs. Although the Great Recession brought about a sharp decline in manufacturing production and significant job losses, the country's manufacturing remains on a long-term growth path (in inflation-adjusted dollars). In fact, from 2010-2016, U.S. manufacturing output grew 14%, or roughly 2.3% annually in line with the economy as a whole, which expanded 12%, or 2.1% a year, during that period.

This is not to say that American manufacturers haven't suffered. The sector has lost more than one-third of its jobs, falling to about 12 million today from the peak of 19.6 million in June 1979. Manufacturing jobs, which accounted for 24% of total jobs in 1974, now represent only 8.5% with certain industries faring far worse than others. Hit the hardest from competition abroad was the U.S. apparel industry, which shed 85% of its jobs from 1991-2016, as employment at textile mills tumbled 76%, according to the Bureau of Labor Statistics. So it's no surprise that many Americans see the appeal of tighter trade policies that would help shore up certain industries, primarily through taxes and tariffs that would make imports more expensive.

The problem with this view is that the number of job losses directly caused by cheap imported goods represents a small fraction of the normal churn in the U.S. labor market. According to a January 2016 research paper by Daron Acemonglu, David H. Autor, David Dorn, Gordon H. Hanson, and Brendan Price, and published in the Journal of Labor Economics, imports (such as apparel) from China displaced as many as 985,000 workers in U.S. manufacturing industries from 1999-2011. But S&P Global U.S. Economics notes that, while the loss of nearly 1 million manufacturing jobs in a dozen years is significant, there are about 1.7 million layoffs the U.S. labor market every month under normal conditions in a jobs market that employs around 150 million people. Additionally, the U.S. economy has added 994,000 manufacturing jobs through September since the figure bottomed out at 11.5 million in early 2010 (see "Automation Marches On: Do Jobs Need To Be Collateral Damage?," published June 7, 2017). China's growing trade strength against U.S. producers gave the U.S. more reason to align with its regional partners in order to keep its competitive edge. Indeed, losing its comparative advantage in a global market may have meant more lost jobs as China's manufacturing power gained strength.

Lost manufacturing jobs are likely more the result of technological updates than trade. Indeed, "The Myth and the Reality of Manufacturing in America" June 2015 study by the Center for Business and Economic Research at Ball State University found that technological change rather than trade was responsible for 85% of that total. It noted that this should be viewed as an example of the impact of productivity growth, not actual lost jobs from productivity.

Overall, it's hard to deny that manufacturers are producing more with fewer people thanks to the help of Mr. Robot. That helps explain why Deloitte found in its 2016 Global Manufacturing Competitiveness Index that U.S. manufacturing is now the second-most competitive in the world, behind China. But not for long. Deloitte expects U.S. manufacturing to surpass China by the end of the decade, largely thanks to increased productivity from advanced technologies.

To A Large Degree, "Hecho En Mexico" Means "Made In America"

In a further sign that blaming trade for sweeping job losses is misguided, consider that many items with tags saying they're made elsewhere include a significant amount of stuff made in the good ol' U.S. of A. In fact, for every dollar spent on Mexican imports, 40 cents goes toward services or products provided or made in America, according to a November 2011 Wilson Center report, with the U.S. exporting twice as much money to Mexico as to China. That figure is a still-significant 25 cents for Canadian products and highlights the unbreakable links between the U.S. economy and those of our neighbors.

Higher prices on imports from Mexico and Canada could crimp U.S. consumer demand, hurting businesses' revenues and resulting in less need to hire workers particularly in low-skilled jobs. Severed supply chains mean diminished production efficiency, higher costs, and, ultimately, lost competition and, again, less need to hire workers. According to a 2017 ImpactEcon report "Reversing NAFTA: A Supply Chain Perspective," the tearing up of NAFTA could lead to the U.S. losing more than 250,000 low-skilled jobs over three to five years. (Mexico would fare far worse, reportedly, losing almost 1 million low-skilled jobs in the same time frame.) Assuming skilled U.S. workers are exposed to a NAFTA withdrawal, the U.S. may loss an additional million jobs.

As trade representatives from the three member countries continue their efforts to rewrite NAFTA, it's worth remembering that American jobs were already heading out the door, or sailing across the oceans, to China and other cheap-labor regions. In fact, NAFTA may have helped keep some jobs in place and may even be responsible for creating employment as the U.S. continued its decades-long march toward being a services-heavy economy, rather than a goods-producing one.

While dismantling NAFTA might protect some jobs in certain segments of the U.S. labor force, other Americans would feel the pain. Many of the millions of jobs that benefit from free trade would be in jeopardy forcing people who transport, stock, and sell these products on U.S. soil to look for other work. The Organization for Economic Cooperation and Development found that 2.8 million U.S. jobs that involve storing or shipping final goods could be lost if NAFTA is unwound. The U.S. Chamber of Commerce said that trade with Canada and Mexico supports nearly 14 million U.S. jobs. They found that nearly 5 million of these net jobs are supported by the increase in trade generated by NAFTA, which would be threatened if NAFTA is reversed. And American consumers would see higher prices at stores, with low-income households suffering the most. In short, it's difficult to see the economic benefits of increasing prices on Mexican and Canadian imports for 45 million low-income Americans (as well as everyone else) in an effort to save just some of the jobs in an industry that accounts for roughly 85 of every 1,000 full-time jobs in the U.S. labor force.

All of this assumes that the unwinding proceeds without any retaliation, and that all actors abide by World Trade Organization rules on tariffs. Either way, it seems clear the U.S. would have continued to bleed manufacturing jobs, even if NAFTA had never succeeded. And succeed for the U.S. economy it has, in our view.

Writer: Joe Maguire

COP24 Special Edition Shining A Light On Climate Finance


− Green loans are evolving, with the Climate Bond Initiative forecasting nearly $1 trillion in green bond issuance by 2020.

− Despite the uptick in green bond and loan issuance, the market still remains relatively small, especially compared to the universe of assets comprising CLO 2.0 transactions.

− In our view, a green CLO market has large growth potential, boosted by regulatory initiatives and emerging interest from both issuers and investors in 2018.

− We built a hypothetical rating scenario for a green CLO to compare and contrast the underlying portfolio and structure with a typical European CLO 2.0 transaction.

− Our hypothetical green CLO analysis showed that green loans may have different fundamental characteristics to corporate loans, such as lower asset yields, higher credit quality, and higher recovery rates assumptions.

The global collateralized loan obligation (CLO) market has experienced a rebirth (2010 in the U.S. and 2013 in Europe). New issuance continues to increase due to investor familiarity with the product, as well as low historical default rates. While a market for green assets, such as green loans and bonds has been established for a while, although still of a relative size, a sustainable securitization market is still in its infancy. Considering the challenge in financing the amounts, S&P Global Ratings expects green CLOs to play a role in increasing the private sector presence in the sustainable finance market.

Following the Paris Agreement that came into force in November 2016, 184 parties have ratified the action plan to limit global warming. For this purpose, developed nations have pledged to provide $100 billion (about €87 billion) annually until 2025. As part of this deal the EU has committed to decrease carbon emissions by 40% by 2030. In March 2018 the European Commission (EC) proposed the creation of environmental, social, and corporate governance 'taxonomy', regulating sustainable finance product disclosures, as well as introducing the 'green supporting factor' in the EU prudential rules for banks and insurance companies.

Read the Full Report

Energy: What to Watch in 2019


S&P Global Platts Analytics Issues Two Special Reports

Pricing across the global energy markets will face headwinds in 2019, with a weaker and more uncertain macroeconomic framework deflating price formation in general, according to two special reports just issued by S&P Global Platts Analytics. Such headwinds will require the industry and portfolio managers to take a big-picture approach.

See the Executive Summary of the S&P Global Platts Analytics special report 2018 Review and 2019 here. Access the full S&P Global Platts Analytics Top Factors to Look Out For in 2019 for Energy here.

"One of the key lessons learned in 2018, painfully by some, is that market sentiment can shift violently without much change in fundamentals, requiring a steady, holistic perspective," said Chris Midgley, global head of analytics, S&P Global Platts. "It is clear that this volatility will remain a feature across the energy markets in 2019, particularly as IMO 2020 nears."

Particularly blustery headwinds are in store for markets where prices finished 2018 at elevated levels, and well above costs, such as North American natural gas and global coal. However, if the supply side can adjust to the reality of slowing demand growth, energy prices can find support. For natural gas liquids (NGLs), the ongoing logistical constraints at the US Gulf Coast are likely to manifest on continued price volatility, particularly for ethane and liquid petroleum gas (LPG), over the next year despite strong global demand.

LPG, such as propane and butane and used in transportation fuel, refrigeration, heating and cooking, is rapidly facing US export capacity constraints, especially along the US Gulf Coast. For LPG feedstock propylene, there is clear potential for high volatility globally over the next 12-18 months.

Analysts at S&P Global Platts see weakening prices of Henry Hub natural gas. The slowdown in US demand growth will exceed that of supply. But if winter temperatures prove to be colder than normal, near-term prices will need to move higher to bring on enough supply to replenish depleted storage levels.

For global liquefied natural gas (LNG), it will be end-user-backed LNG demand that faces particular struggle to cope with the speed and force of new supply entering the market in 2019. Non price-responsive demand in Asia will be easily met and JKM spot physical prices (reflecting LNG as delivered into Japan, Korea and China) will sag next year.

Access the full S&P Global Platts Analytics Top Factors to Look Out For in 2019 for Energy here. Among the 22 key take-away themes:

  • NGL supply growth will strain the North American energy system
  • Saudi Arabia will need to be nimble to balance 2019 oil supply
  • US oil supply limited by pipelines
  • Oil demand slowing: trade war, industrial slump
  • 2019 LNG supply additions largest since the Qatari mega-trains
  • US gas supply growth to exceed demand growth even with LNG exports
  • Global solar growth slowing
  • Shipping disruption looming - IMO 2020
  • New Russian gas pipeline advantage over Ukraine
  • US coal demand to decline again in 2019
  • Growth in new refineries and complex capacity likely to weigh on refinery margins especially in Asia

Year 2019 will certainly be one of transition for crude and refined oil products as it will lead into 2020 when roughly three million barrels per day of high-sulfur fuel oil must be “destroyed” (including enhanced usage of HSFO in power generation) due to the International Marine Organization (IMO) mandate of eco-friendly shipping fuels in use at sea. A similar amount of middle distillate/low sulfur fuel must be created (by refinery changes and by running more crude oil. The increase in refinery capacity between now and 2020 is large, but mostly needed to cover normal demand growth. Expect prices of light sweet crudes to be bid up in 4Q19.

Considering the Risk from Future Carbon Prices

Along with the advent of the 2015 Paris Climate Agreement has come a growing understanding of the structural changes required across the global economy to shift to low- (or zero-) carbon, sustainable business practices.

The increasing regulation of carbon emissions through taxes, emissions trading schemes, and fossil fuel extraction fees is expected to feature prominently in global efforts to address climate change. Carbon prices are already implemented in 40 countries and 20 cities and regions. Average carbon prices could increase more than sevenfold to USD 120 per metric ton by 2030, as regulations aim to limit the average global temperature increase to 2 degrees Celsius, in accordance with the Paris Agreement.

S&P Dow Jones Indices launched the S&P Carbon Price Risk Adjusted Indices to embed future carbon price risk into today’s index constituents.

Read the Full Report

U.S. Bank Outlook 2019 Still Sunny, But The Good Times May Be Behind Us


- S&P Global Ratings expects U.S. banks to face continued market volatility in 2019 stemming from a slowdown in economic growth, policy uncertainty, rising rates, and monetary tightening.

- Although it is not our current base, we believe we are incrementally closer to a turn in the credit cycle in 2019. When the credit cycle does turn, bank profitability will come under pressure as imbalances brought on by years of excess liquidity and low rates will flow through banks' income statements and balance sheets.

- Key areas of concern in credit are commercial and industrial (C&I) -- particularly leveraged lending, commercial real estate (CRE), and pockets of consumer credit -- credit cards, auto, and personal loans.

- Separately, fee income could come under pressure as the economy slows and if market valuations decline. Bank revenues in areas like assets and wealth management may also decline because they are tied, in part, to market valuations. Fees for originating and selling mortgage loans could also drop.

- Nevertheless, U.S. bank balance sheets are sound, with higher capital and liquidity levels, and we believe rated banks are well prepared to withstand potentially weakening credit conditions.

- New regulation may result in lower capital and liquidity levels for some (mainly regional) banks. On the other hand, the stressed capital buffer (SCB) proposal could prompt some global systemically important banks (GSIBs) to continue to face higher capital requirements.

- Longer term, from a business standpoint, it will be important for bank management teams to remain vigilant to disruption from technologically sophisticated competitors (fintechs), as well as to the threat of cyberattacks.

- Under our base-case scenario, we expect bank ratings to remain largely stable through 2019. 83% of our operating company ratings currently have stable outlooks, 8% have positive outlooks, and 9% have negative outlooks.

Our Fundamental Forecast For U.S. Banks In 2019 Remains Slightly Positive

Current U.S. Bank Ratings Distribution

Current Bank Ratings Outlooks

Bank Profitability Trends

Loan Growth Trends

Flattening Yield Curves And Rising Deposit Costs Should Lead To Decelerating NIMs

Asset Quality Is Excellent But Likely Will Deteriorate Incrementally As Rates Rise

Aggregate Net Charge-Off Rates Remain Below Historical Levels

Investment-Grade Loans Moving To Speculative-Grade Could Pressure Banks' C&I Portfolios

Low Interest Rates Have Helped Keep Debt Service Low For Consumers, But Trends Could Be Less Benign As Rates Turn Higher

The Evolving Composition Of Consumer Debt

Postcrisis Credit Card Loan Growth Has Been Robust

Capital Levels Are Likely To Decline For Regional Banks But May Increase For Some GSIBs

All Eight U.S. GSIBs Are Above Their Required Regulatory Minimums

Bank's Funding Profiles Remain In Good Shape

Liquidity Looks Decent, But Regional Banks' Liquidity Could Decline Due To A Recent Regulatory Proposal