Short Items of Interest—U.S. Economy
China Makes First Move
It has not come as a great shock, but it seems that China has been the first to blink in the trade war. The concession made by China has to do with removing some of the barriers to U.S. car imports. This was not seen as one of the most important areas of dispute between the U.S. and China, however, as this does not deal with the protection of intellectual property, technology transfer or even the issue of state subsidies. Yet, it does allow the U.S. to sell more to the Chinese market. The interesting part of all this is that GM is likely to be the big winner from this deal as they are the largest U.S. carmaker active in China. They actually employ more people in China than in the U.S. right now.
Some Dissent Within the Fed Ranks
The Board of Governors has remained united when it comes to the Fed's plan to keep hiking rates, but there have been dissenting voices from within the ranks of the regional leaders. One of those has been the head of the Minneapolis Fed—Neel Kashkari. He has been consistent in his dovish outlook and asserts the Fed's determination to head off inflation may well push the economy back into recession. His warnings carry some weight as he was the man who was tasked with running the TARP program and later became a major critic of that effort. His assertion is simply that the threat from inflation doesn't warrant immediate action.
Bush and the Tax Legacy
Some are referring to the four-year term for the senior Bush as a cautionary tale for Trump and the GOP. Bush went from being a critic of the Reagan tax cuts to a supporter, but only as long as he could stomach what those cuts had done to the deficit and debt. As with the current tax cut discussion, the idea under Reagan was for tax cuts to boost the economy. They did work to a degree—just as the current tax cut has. The question then and now is whether the boost was worth the cost. The deficit ballooned to record levels as the growth was not fast enough under Bush to pay for the tax cut. In the end, he was forced to hike taxes and deal with the debt and deficit. Today, the deficit and debt issues are far worse than back in the Bush years. Sooner or later there will be a need to deal with it.
Short Items of Interest—Global Economy
The demonstrations that erupted over the French plan to hike the price of gas have quickly devolved into chaos. The radical elements of both the left and right have been taking to the streets in an eruption of violence and destruction. The ostensible target is Emmanuel Macron and the economic reforms he has tried to introduce, but the real issue is that the far left and far right were marginalized by his surprise win two years ago. They are now bent on destruction as a means to bring his government down. This has become a real test of his ability to rally the center.
Cheap Oil Is Not in the Best Interests of the U.S.
Trump has been demanding that Saudi Arabia and other oil states maintain production to keep oil prices at low levels. This is a logic that would have been appropriate for the U.S. a decade or so ago, but not now. The U.S. is now the world's leading oil producer and the sector is among the most important in the country. The U.S. motorist has proven they can handle pump prices at near $3. The cheap oil does more to harm the U.S. economy than it helps.
In the end there was a communiqué, but it is nearly absurd. The group that promotes trade eliminated any statements condemning protectionism or unfair trade practices as demanded by the U.S. and China. Essentially the statement says, "We will probably do something that might, sort-of, make some kind of trade possibly easier at some point for someone."
Credit Managers' Index Trends Back Up a Little
Each month we assess the data collected by the National Association of Credit Management. This data is drawn from surveys sent to credit managers all over the U.S. and from a wide variety of industry sectors. Credit managers are in key positions in a company and have insights into the conduct of business and the state of the economy as they are the ones who will be determining whether a customer will be able to purchase goods and services on credit. A good economy will stimulate more credit opportunities and a bad one will make credit managers more cautious. As with the Purchasing Managers' Index, a score of 50 or above will indicate growth and one under 50 means contraction.
It was not a big bounce back, but the good news is the data certainly didn't get any worse. This is not an unusual pattern for this year—comparisons have been made to a rollercoaster for months. It seems that a dip one month is followed by a recovery the next. Thus far, there have been few longer-lasting trends. The more pertinent data is showing some consistent concerns within the nonfavorable categories as well as some consistently good news within the favorable categories. The reason for this split in performance is that some sectors are doing very well (the oil and gas business, automotive and health care), but other sectors are consistently struggling (some retail, agriculture and aerospace).
The combined score moved from 54.5 to 55.8. This takes the measurement back to levels last seen in August. In fact, there has been quite a lot of consistency with the overall data. The lowest point in the last 12 months was the 53.7 notched in April. The high point was 56.6. That was reached twice—once in February and again in May. The important thing is these readings have all been close to the mid-50s for the last couple of years. That means general expansion has been in place. The index of favorable factors also rebounded—moving from 61.6 to 63.2. This is not as robust as it had been the last two months, but it is headed in the right direction. The index of unfavorable factors crept back into expansion territory with a reading of 50.9 up from 49.7 the month previous. There has been a consistent pattern with these nonfavorable readings as the range has been from 49.4 to 50.9. This month actually marked the highest reading in the last 12 months.
The detail is, as always, the most interesting data. The sales category made something of a comeback with a reading of 64.5 up from 62.7 last month. This is still a little short of where the readings stood in August (65) and September (68.8), but trending in the right direction. The new credit applications data also improved as it went from 61.7 to 62.2. The dollar collections data moved back into the 60s with a reading of 60.9 compared to the 57.5 last month. The amount of credit extended shifted up as well (64.5 to 65.3).
There was also some interesting and encouraging data coming from the nonfavorable categories. The rejections of credit applications remained static at 51.4, which leaves this category just slightly under the norm for the last several months. The accounts placed for collection reading worsened just a little and remained in the contraction zone (dropping from 48.8 to 48.2). The disputes reading emerged from contraction territory, but only by a hair as it went from 49.9 to 50.1. The dollar amount beyond terms made a bigger leap out of contraction with a reading of 52.3 after one of 47.7 the month prior. The dollar amount of customer deductions was little changed with a reading of 49.6 after the previous month's reading of 49.5. It is still in contraction territory, but at least it is slowly heading in the right direction. There was more progress in the filings for bankruptcies category as it has moved from 52.1 to 53.6.
The overall sense of the reading this month is there has been some progress, but nothing to suggest the pattern of ups and downs will be broken anytime soon. The other data coming out regarding the economy looks similar to this. The Purchasing Managers' Index has slipped a bit the last few months and there have been declines in measures like durable goods orders and factory orders. This is the time retailers do the bulk of their work, but the news has not been all good. The fact is that sales are up, but with all the discounts and sales, the profits have not been as solid. Revenue is up and the hope is those shopping later will be less attuned to those discounts and sales.Manufacturing Sector
The manufacturing sector continues to expect the other shoe to drop at any moment, but thus far, the impact has been delayed. From the moment the steel tariffs were announced, there was an expectation prices would surge to the point that many manufacturers would have to lose money by holding prices constant to hang on to market share, or they would have to jack up those prices and risk alienating consumers. The tariff is 25% for steel and 10% for aluminum, but the price hikes have been far greater than this. On average, the hike has been between 40% and 45%. The full impact is just starting to be felt as many companies sought to buy as much steel as they could prior to the price hike. That inventory is now vanishing. That will mean buying the much higher-priced steel. This month the data has been solid enough and an improvement over what it had been the month before, but the issues and concerns are starting to manifest.
The combined score went from 54.4 to 55.6, back to the levels seen in the last few months (although not yet back to the 56.4 reading in September). The favorable factors improved from 61.5 to 63.2, but remained below the 64.4 that was noted in both August and September. The unfavorable index climbed free of the contraction zone with a reading of 50.5. Last month it had fallen to 49.6. The more indicative data is in the subcategories.
The sales category recovered from the 62.3 reading in October—the lowest level seen since July. It is now at 64.2. That is still lower than it has been for several months, but at least the trend is in the right direction. The new credit applications numbers (61.7) remained very close to what they had been in October (61.5). There was a significant improvement in the dollar collections data as it climbed back into the 60s with a reading of 61.6 after sinking to 58.5 in October. The amount of credit extended also improved with a reading of 65.4 compared to 63.7.
The activity within the unfavorable data was instructive as well. The rejections of credit applications improved and worked its way up into the mid-50s with a reading of 53.1. This is exactly the same as was noted in September and an improvement over the 51.9 reported the month prior. The accounts placed for collection stayed mired in contraction territory with a reading 49.2—slightly better than the 49.1 noted in October. The disputes category got a bit closer to escaping the contraction zone with a reading of 49.6 from last month's 48.7. The dollar amount beyond terms escaped the contraction zone going from 49.1 to 50.3. The dollar amount of customer deductions moved up slightly from 48 to 48.6 and the filings for bankruptcies clambered back to near respectability with a reading of 52.2 after a slide to 50.9.
As expected, the manufacturing sector is in flux. It is likely this will start showing up in next month's CMI as well as the ones to come in 2019.Service Sector
It is a confusing time as far as the service sector is concerned. It is the very peak of the year for the retailers—hence the reference to Black Friday. This is supposedly the day retailers start to see their ledger books shift to being in the black. It is not quite that dramatic these days, but this remains the critical season for retail as compared to any other time of the year. At the same time, another sector of the service community well represented in the CMI shifts downward as there is less activity in the construction industry. The data this month is similar to that of the overall CMI with some gains that suggest a return to patterns observed earlier in the year.
The overall CMI for service went from 54.6 to 56, nearly as positive as the data showed in September. The index of favorable factors improved as well—moving from 61.7 to 63.2, but that remains short of the 65.9 level hit in September. The index of unfavorable factors escaped contraction territory by moving from 49.8 to 51.2, back to levels that have been common these last several months.
There has been the usual variability in the specific categories. The sales data improved with a reading of 64.9 as compared to the 63.2 the month before. The new credit applications category also went back up a little—from 61.9 to 62.7. The all-important dollar collections data jumped back into the 60s with a reading of 60.1 after slumping to 56.4 last month. This is not at the exalted levels seen in September when it hit 66.5, but the current numbers are about where they had been prior to the surge. The amount of credit extended stayed right where it was last month—at 65.2
The unfavorables moved around some as well. The rejections of credit applications fell back into contraction territory with a reading of 49.7. Last month the category was holding on with a 50.9 score, but the last time this category was under 50 was in May of this year. The accounts placed for collection went from 48.4 to 47.2—deeper into contraction territory. The sense is that some retailers are under some stress. There has been a lot of buying from China with the expectation that many of these goods will be hit with tariffs and other trade restrictions. The category of disputes emerged from the contraction zone with a reading of 50.6 after languishing at 49.1 the month prior. The dollar amount beyond terms made a truly spectacular comeback from the month before. It was buried in contraction with a reading of 46.3 and this month the number is 54.3. There is evidence many retailers were doing their best to get caught up in advance of the big selling season to come. The dollar amount of customer deductions slipped a bit from 51.1 to 50.7, but stayed out of contraction. The filings for bankruptcies improved a little from 53.2 to 54.9—still less robust than it has been for the last few months.
If the retailers have the holiday sales they are expecting, there should be some good readings in the December CMI, but there might also be weaker data from construction given the early arrival of winter.
There was a divergence this time around. The favorable factors showed considerable improvement, but the unfavorable categories were slumping.
The Combined Sectors Chart
This issue of the newsletter features the commentary that accompanies the monthly Credit Managers' Index. This chart is one of those that appear in the CMI. There is also a breakdown for manufacturing and the service sector. This provides some of the historical background and allows the reader to see the bigger patterns that appear from month to month.
Never Take Loved Ones for Granted
My wife's older son passed away recently. He was only 59. He had just made it through the snowstorm to work and collapsed. Suddenly there is a void. Life is precious and all too often it is too short. My father died at 57, when I was 31. I still miss him every day. Now his son is without his Dad and best friend at 32. Not that we should need reminding, but we all get busy and think we have endless tomorrows. We really don't. I am reminded once again that I must not neglect the friends I have. They need to know how much they mean to me. I urge all my faithful readers to hug their loved ones tight sometime today and to reach out to those that mean so much to them.