Strategic Global Intelligence Brief for August 31, 2018

Short Items of Interest—U.S. Economy

Canada Pact Near?
By most accounts, the U.S. and Canada are close to reaching a deal that will continue the connection between the three nations of North America (regardless of what it gets called). The interesting thing about the pact that has been proposed with Mexico and the ideas that seem to be swirling around the Canada agreement is they are only offering very minor changes to the NAFTA agreement. Most of the big changes suggested by Trump during the campaign have been abandoned. Now, the deals are basically tweaks. This may be due to the fact that any change in a trade deal has to be ratified by Congress. At some point, President Trump has to face that reality and back away from the controversial parts. It may also be recognition that all three nations have leverage over one another to some degree and can exert pressure to get what they want most.

Consumer Spending Up by 0.4%
This is good news, right? In a society whose economy is close to 80% dependent on the consumer sector, it is always good news when that consumer is spending more money. And it is indeed good news now, but with a caveat or two that one should be aware of. The increase in spending is partly due to the fact that inflation has increased. The consumer may be spending more, but they are not getting more for what they spend. That is not such good news.

Federal Pay Freeze?
It seems an inopportune moment, but the president is now suggesting he will order a pay freeze next year for all federal employees. The rationale is a familiar one—concern about a larger outlay in terms of federal spending. However, a pay freeze of this kind will barely make a dent in the deficit much less the national debt. Spending on employees is way down from what it was even 10 years ago as there has been considerable attrition—many of those who have retired have not been replaced. The upshot is that many government functions are not being handled very well as the staffs are often too small for the workload. There is no doubt that government spending needs to be curtailed, but this is really a churlish gesture and will make little difference. Until there is change as far as spending on Medicare, Medicaid, Social Security and the Defense Department, there will be no progress of significance on the burgeoning federal budget.

Short Items of Interest—Global Economy

EU First to See Reason?
One of the most irritating rituals of the year is the requirement to fiddle with clocks and watches to adjust the time between daylight savings and standard time. Poll after poll indicates that people either hate this process or they really hate it. The opposition in Europe is now such that there may be a focused effort to get rid of this antiquated response to the needs of farm kids. The purpose of the shift has been lost over time and now gets justified by references to energy conservation, but most of those claims are dubious. Meanwhile, evidence continues to build that shows drops in worker productivity, frequency of accidents and the like.

WTO Is Latest Trump Target
The World Trade Organization (WTO) grew out of the General Agreement on Tariffs and Trade (created at the same time the International Monetary Fund (IMF) and World Bank were started). It is the inheritor of the Bretton Woods goal of promoting free trade. For many years, it has been a real champion for the U.S. way. The WTO has ruled in favor of the U.S. far more often than it has ruled against it as the policies in the U.S. promote free trade—or at least they used to. Now, the Trump approach has shoved the U.S. towards blatant protectionism, while the WTO has been calling it for what it is.

Argentine Peso Plunges Further
Global investors have been thrown into turmoil by the decision on the part of the Argentine government to ask for IMF help early. The loss of confidence in the economy has caused the peso to lose half its value in a matter of weeks and 12% in one day.

A Steady Report From the Credit Managers' Index
It is that time again. The latest edition of the Credit Managers' Index (CMI) has been released and the news is pretty solid for a change. These are the executive summaries for the overall index as well as the manufacturing and service sectors. To see the whole report along with the nifty graphs and charts you need to go to the website for the National Association of Credit Management—www.nacm.org. Search for the Credit Managers' Index or CMI.

Steady as she goes. Right at the moment, it feels good to have a month without a lot of drama. There has been quite a lot taking place affecting the progress of the economy now and in the future. As far as the data from the CMI, there has been some stability with August readings looking a lot like last month. Where there has been change, it has been in a positive direction. Given all the turmoil surrounding trade issues and the mercurial behavior of the president, it might be expected this drama would be affecting the overall performance of the economy. The assessment is that the economic drivers are mostly shrugging off these issues and have been reacting to more traditional motivators. This state of calm is not likely to last, however, given the appearance of some inflation indicators and the potential impact of various trade deals, which have been on-again and off-again.

Analysis: The combined score for the CMI this month was 55.8, nearly identical to the 55.5 notched last month. There was significant similarity between last month and this month in the index of non-favorable factors as well. This month it fell slightly to 50.1 after a reading of 50.5 in July. There was more variation in the index of favorable factors with improvement in all four categories. It was at 63.1 in July and is now at 64.3—just below May and June of this year. The real news, as always, is in the details and the sub-index readings.

The sales category perked back up. That is always good news as it is the sale that starts the whole process in motion for a credit manager. Last month, the reading was down to 63.9, the lowest mark since the 63 set in January. It is now back to 65, but not yet in the exalted territory reached in May and June when the levels were over 69. It always seems a little picky to look at readings in the 60s as troublesome—these have been spectacular numbers for a few years. What matters now is the trend. It is always good to see these readings improve. The new credit applications numbers also improved a little, increasing from 61.2 to 62.5. The often volatile dollar collections data improved as well (61 to 62.6). This reading is one of the best this year with only February and June exceeding this month. The amount of credit extended also saw a small improvement from 66.1 to 66.9. The good news for this sector is it has been above 66 for seven months in a row. That means good customers are asking for some considerable amounts of credit.

There was not quite as much drama as far as the non-favorable factors. There was a slight dip in the rejections of credit applications (52.5 to 52.2), but this was a minor shift and comes at the same time that overall applications have been up. There was also a slip in the accounts placed for collection category as it went from 49.9 to 49. It had been hoped that it would break past the 50 barrier (anything above 50 is expansion) this month, but there are obviously still distressed creditors. Likewise, there was a dip in the disputes category from 47.7 to 46.4. The dollar amount beyond terms saw an improvement—good news although the reading is still in the contraction zone at 48.5. However, this is better than the previous month's reading of 47.4. The dollar amount of customer deductions also saw some better numbers (47.9 to 48.7). Finally, there are the numbers for filings for bankruptcies. They looked a bit weaker, falling from 57.4 to 55.9. Readings in the mid-50s are good and this category is firmly in the expansion zone, but the trend is not where anyone would want it to be.

There has been a lot of drama surrounding the manufacturing sector over the last several months. Some of that volatility has been seen in the data. Not as much variability as one would expect though. The volatility seems to signal that most manufacturers are reacting to solid consumer demand from within the U.S. and outside. The worry stems from the near constant threat of new tariffs and trade disputes. The steel and aluminum tariffs are still biting hard. Then, there is the roller coaster strategy that has tariffs imposed on cars and other products one day and those restrictions being lifted the next day. Despite that storm, there has been some manufacturing stability.

The combined score for the manufacturing sector improved over last month's reading and is back to what it was in June (55.9). Even last month was not a huge dip, falling to just 55.4. For the past year, the sector has been strong with only one month under 54 (53.9 in December). The index of favorable factors improved as well, reaching 64.4 after slipping to 62.1 the month prior. There was a slight decline as far as the index of unfavorable factors from 50.9 to 50.2. This category has been hugging the border between contraction and expansion for the past year. There is nothing to suggest this will alter any time soon.

The sales category shifted up from 62.4 and hit 66.5 this month, bringing the reading back to what had been seen as normal over the last year. This year, the reading has been below 63 only twice; in May and June the numbers were over 69. The new credit applications category also saw an improvement when the numbers jumped back into the 60s after a reading of 59.5 last month. It is now sitting at 61.4. The dollar collections data improved from 61.5 to 62.4. This has been a vexing area for the last year and seems to move in tandem with the non-favorable category of dollar amount beyond terms. The fewer slow pays, the better the dollar collection. There was also an improvement in the amount of credit extended (65.1 to 67.1).

There has been some movement in the non-favorable categories as well. The rejections of credit applications stayed very close to previous readings (53.5 to 53.7). That is good news given that new applications went up. This means those who are applying for credit are getting approved. The accounts placed for collection reading fell a bit and is now in contraction territory. It was at 50.6 and now sits at 49.6. The last time this was in contraction territory was April when it hit 49.8. The disputes category fell deeper into contraction with a reading of 45.8 compared to last month's 47. This is not a good sign as disputes nearly always lead to more serious issues, like collection and even bankruptcy. The dollar amount beyond terms stayed close to what it had been, with a reading of 48.4 compared to 48.1 in July, but at least it was an improvement. The dollar amount of customer deductions improved by quite a bit, but is still mired in the contraction zone. It was 46.9 and is now 48.1. The filings for bankruptcies category fell back quite a bit from what it had been, moving from 59.1 to 56. These are still very good numbers and suggest that most companies are finding a way to survive.

As with the manufacturing data, there was not a lot of change in the service sector readings. That likely shows the diversity of this category as much as it suggests the activity within the sector. The service area is vast and diverse as there are contributions from retail, construction, health care, finance, entertainment and more. It is not likely that all these sectors will be moving in lock step, so growth in one area can temper lack of growth in another. For example, the retail sector is looking awfully robust these days, but the same can't be said for construction as it starts to enter a slump.

The combined score for services was very close to what it was last month, shifting from 55.6 to 55.7. The index of favorable factors improved but very slightly (64 to 64.2). The non-favorable index also showed some minor movement dropping from 50.1 to 50. This was the month for stability in services, but on closer examination, it resembled water acrobatics with calm above the water hiding the chaos underneath.

The sales category slipped a little as it fell from 65.3 to 63.4. This month's reading is the lowest since January. The new credit applications reading improved very slightly from 63 to 63.5. Likewise, there was an improvement in the dollar collection category—62.9 after last month's 60.5. The amount of credit extended moved down just a bit, but dipping from 67.2 to 66.7 is hardly a crisis. The real significance of this is all the readings have been above 60 since April of this year.

The rejections of credit applications category fell a bit from 51.5 to 50.7, but managed to stay out of the contraction zone for another month. This is good news given there was improvement in the number of new applications. The accounts placed for collection sank a little deeper into contraction territory with a reading of 48.5 as compared to 49.3 in July. The disputes category also took a bit of a tumble deeper into the 40s with a reading of 47 after 48.3 last month. The good news was that there was an improvement in the dollar amount beyond terms. As with the manufacturing data, there is often a connection between this category and the dollar collection numbers. The slow pay reading this month was 48.6 and in July, it was 46.8. The reading for dollar amount of customer deductions was 48.8 and is now 49.3—still in contraction territory, but moving in the right direction. The filings for bankruptcies category almost stayed right where it was with a reading of 55.9, following the 55.8 notched last month.

The month-to-month change was negligible, but that doesn't entirely capture what has been taking place in the world of credit or the economy as a whole. There was a lot of position shifting in the various sub-categories.

Inflation Data Finally Shows Up
Economists have been feeling a bit like Chicken Little of late. There has been a steady drumbeat warning of impending inflation as all the signs seemed to point in that direction. There was the Philips Curve that asserts low levels of unemployment automatically yield higher wages as business competes to hire from a dwindling pool. There were signals suggesting that both the Consumer Price Index and Producer Price Index were on their way up. The index the Fed relies on to signal inflation hasn't risen at quite the same pace and there had yet to be inflation that came close to the Fed's goal. Now, the personal consumption expenditures price index has indeed moved to the 2% level.

Analysis: The important factor is that this index has increased because there has been additional consumer and business spending. It may seem that producers can hike their prices whenever it suits them, but the reality is they can't hike them too far if the consumer resists the hike. People will either find a cheaper substitute for the high-priced item or they will elect not to buy anything at all. The fact is there has to be capacity and willingness to buy. That has only recently been the situation facing consumers.

Yes, I Am Going to Get All Sappy
Fair warning to readers—especially those who do not have the interest in cats that I do (and especially those who don't really get the connection people have with their pets). I met a woman last week at a conference and we got to talking about the felines in our lives. She mentioned that her lovely girl was not feeling herself and was headed for the vet. A few days later, I get an email from her indicating the malady was far more serious than first assumed. She had to put her down. I immediately had a sick pang in the pit of my stomach as I know too well that pain. We have had to make that end of life decision for Smudge, Squeak and Scamp. Thinking about the loss of these companions still hurts.

I don't know what it is about losing a pet—it can hurt even more than losing a person. I think it has to do with the utter trust they have in you. Their innocent faces have been looking to us their whole lives as we have always been there to protect them from the injuries of the world. I feel almost guilty when I can't protect them any longer. I don't play favorites with my feline five and strive to give them all equal time and attention, but they most definitely play favorites with me and my wife. Snip and Smoky like Mom's lap the best, while Spike and Sven are tuned in to whoever is able to meet their demands at a given moment. Scoot is the Daddy's cat that focuses her attention on me. As I read my new friend's note I could not help but look at Scoot and briefly consider life without her. She is not an old cat (still in her prime middle age), but I know that someday I will have to lose her too. I know for a fact that will be the saddest day of my life. In the meantime, I will enjoy the days I have with her, the other four and the people that mean so much to me. Sometimes it takes the possibility of loss to remind a person to treasure what they have while they still have it to treasure.