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Strategic Global Intelligence Brief for December 30, 2019

By Chris Kuehl, Ph.D., NACM Economist

Short Items of Interest—U.S. Economy

Will Business Investment Bounce Back?
Much of the progress for the economy this past year has been due to the activity within the consumer sector. Consumers have been reacting to the good job numbers and the lack of inflation. The news has not been as good as far as the business community has been concerned, however. The level of investment has been down for a variety of reasons related to everything from trade wars to labor shortages and even changing consumer tastes. There is some hope of a recovery in the coming year, but that will depend on factors such as progress in ending the trade war with China, cementing the new trade relationship with Mexico and Canada and having some reassurance from the Fed that borrowing costs will not rise. It will also depend on consumers remaining upbeat in an election year; that could be a tough one.

Global Growth as Key to U.S. Manufacturing
The U.S. is not as dependent as many other developed nations when it comes to trade. Exports are still important however—15% of a nearly $20 trillion GDP is not insignificant. If there is to be a true recovery in the U.S. manufacturing sector, it will have to be due in part to a recovery in the nations that traditionally purchase the machinery the U.S. sells. That really means Europe, Japan and a few other developed nations. Right now, they are looking at a pretty challenging year. The U.S. will have to depend on its own consumers for another year. That will keep the industrial sector a little less robust than would be preferred.

Gold as Signal of Concern
Investors are certainly not always the best source of economic guidance as they tend to be very enigmatic and jumpy. It is hard to tell what worries them or excites them from one minute to the next. Lately, the markets have been surging again. That would certainly be taken as a good sign of investor confidence, but at the same time, there has been a surge in the price of gold. Over the course of 2019, the prices have risen by 16%, the largest one-year gain since 2010, when the global economy was coming off the recession. This is due to gold's importance as a hedging strategy in times of unrest. Cautious investors are not as upbeat about 2020 and are working to protect themselves with gold accumulation.

Short Items of Interest—Global Economy

Splits in Iraq Deepen
With all the attention that has been focused on Syria of late, it has been easy to overlook the issues in Iraq. The President, Barham Salih, has threatened to resign if he is forced to appoint a prime minister who has close ties to Iran. In the last election, the Iran-backed party made significant gains and now wants to insert one of their own as PM. That would not be a popular position as far as the U.S. is concerned. It also worries the Sunni population in Iraq.

War Games
For the first time, there will be a series of war games held in the Indian Ocean and around the Middle East that involve Russia, China and Iran. These three will be making a show of their capability. It will certainly be inferior to what the U.S. has in the region, but it will also make clear these three can and will support one another. The exercises will be around Iranian coastal waters and in key waterways for Iranian oil tankers.

Likud Primary Won by Netanyahu
The challenge to Prime Minister Benjamin Netanyahu from within his own coalition was not expected to be successful, but it was a shock to the system that he was challenged at all. The Israeli voters are as divided as they have ever been. That has resulted in two elections that have failed to produce a government. The sense is that half the country will vote against Netanyahu no matter who he runs against. The fear is that a third election in less than two years will only yield another stalemate in the Knesset.

Some Sense of Stability in Credit Managers' Index
It is the last report from the Credit Managers' Index (CMI) this year, this decade. That really doesn't mean much given that credit managers have been thinking about the coming year for several months already. The latest data is an improvement on the months prior, but there are still some warning signs. What follows is the summary of the report and the summary sections for both manufacturing and services. To see the entire report, go to the NACM website and look for the Credit Managers' Index.

The latest score from the CMI is not likely to cause any dancing in the street, but it isn't exactly all doom and gloom either. The reading this month was a little down from the month before, but compared to the big declines the Purchasing Managers' Index has been experiencing, the data remains very solid. December's composite score of 54.6 is exactly the same as it was in October. The November reading was a bit better with a 55.5 reading. The really good news for an end-of-the-year report is the numbers have stayed quite consistent and in reasonably positive territory. The lowest point all year was 53.4, reached in January and again in July. The highest readings were in May (55.7) and November (55.5).

There was a similar story in terms of the favorable and unfavorable categories. Generally speaking, the favorable numbers have been very solid with numbers in the high 50s and low 60s. The current favorable numbers dipped a little to 59.3 from a reading of 61.6 in November, but overall, the scores have been consistent all year. The low point was July when the reading hit 58.6 and the high point was May's 63.8. The majority of the concern expressed by the CMI shows up in the unfavorable numbers. The current reading is exactly the same as it was last month at 51.5, on par with the data presented all year. The high point has been the last two months with that 51.5 reading, while the low point was 49.4 in January. The numbers have been in expansion territory for 10 of the 12 months with only January and March in contraction (a score below 50).

The details tell a fairly compelling story as far as next year is concerned. The sales numbers have been high all year. The latest reading of 58.8 was a little down from November (61.6), but higher than in either September or October. The new credit application category also fell out of the 60s with a reading of 59.4 compared to 61.2 in November. The dollar collections reading slipped quite a bit though from 59.2 to 57.9. This is the lowest it has been since July. There had been some good numbers here for a while as it seemed many companies were working to get their credit obligations under better control. The amount of credit extended also slowed a little—down from 64.3 to 61.1, but still very solidly in the 60s.

The data in the unfavorable categories were a little more vexing. The rejections of credit applications improved somewhat from 51.3 to 52, good news given that applications have been down a little. The accounts placed for collection escaped the contraction zone with a reading of 50.3. This marks the first time these numbers have been in the 50s since June. This is one of those indications that companies are trying to get their credit affairs in order for the coming year. The disputes numbers stayed about where they were the prior month, but this is good news as both months have been in the 50s. Last month it was at 50.3 and this month at 50.8. The dollar amount beyond terms data slipped a little (52.6 to 51), but still stayed out of the contraction zone. The dollar amount of customer deductions was almost the same as it had been last month with a reading of 51.3 compared to November's 51.4. The filings for bankruptcies also maintained an even reading of 53.4 compared to 53.5 last month. The most encouraging aspect of the unfavorable data this month is all the readings are in expansion territory for the first time in several years. The turnaround is not spectacular and it will not take much to see these numbers deteriorate again, but for now, the data shows companies are in generally better shape as far as their trade credit is concerned. We will see what the data looks like after the first of the year when the retailers determine what those sales did to their profit expectations.

Manufacturing Sector

The manufacturing sector has been experiencing its share of ups and downs this year; it has been harder than usual to get an accurate read. For example, the data from the Purchasing Managers' Index (PMI) has been in contraction territory for four straight months. In contrast, the latest industrial production numbers show a recovery in the manufacturing sector despite the inhibitions in place due to the trade wars. There has been some question about how important manufacturing really is for the overall U.S. economy, but it is important to remember that the manufacturing share of the U.S. GDP is over $2.7 trillion, larger than the entire GDP of India.

The overall numbers for the manufacturing sector remained very close to what they had been the month before—54.8 as compared to 54.5. The favorable factors slipped just slightly from 59.7 to 58.9, while the unfavorable factors improved from 51.1 to 52. The trend is certainly better than has been with the PMI of late. The details are, as always, interesting.

Sales slipped out of the 60s, but remained comfortable at 57.9—higher than in October and on a par with the data in September. The readings for new credit applications improved from 59.8 to 61.2, as high as it has been since June. The dollar collections numbers also improved from 56.8 to 57.5. This seems to be related to companies getting their credit positions set for the new year. The amount of credit extended slipped some from 61.6 to 59.1.

The rejections of credit applications data improved quite a bit from the reading in November as it moved from 51.6 to 53, the highest level reached since August. The category of accounts placed for collection jumped out of the contraction zone with a reading of 51.1 compared to 49.4 the month prior. This is the highest level reached since June. The disputes reading also left contraction territory with a reading of 51, the highest point since July. The dollar amount beyond terms stayed very close to what it was in November (52.4 compared to 52.1). The dollar amount of customer deductions improved quite a lot with a solid 52.6 reading compared to 50.8 in November. The filings for bankruptcies shifted down a little but stayed in expansion territory with a reading of 51.8 after 53 last month. The most important aspect of the unfavorable readings this month is that all of them have left the contraction zone behind for the first time in nearly three years.

Service Sector
With all the good news that has been coming from the manufacturing sector, it was a bit of a wonder that overall numbers for the CMI have not been better. The culprit has been the service sector. That creates a certain amount of concern regarding the coming year. The problem has been an uneven retail season and some issues affecting construction.

The composite numbers are not awful, but they declined from 56.5 to 54.4, even lower than in October. The composite for the favorable factors dropped quite a bit from the 63.4 notched in November, but these are still in the high 50s at 59.7. The unfavorable score stayed fairly close to the prior month with a reading of 50.9 compared to November's 51.8.

The sales numbers slipped from 62.5 to 59.7, but that is pretty consistent with the numbers registered all year. The real concern here is that sales are up due to all the discounting and specials, but profits are not keeping pace with those revenues. There was also a steep decline for the category of new credit applications as it slowed from 62.6 to 57.6. The dollar collections data went south as well—moving from 61.7 to 58.3. The amount of credit extended slid a bit from the 66.9 reading in November to 63 in December, but that remains a very solid number.

The rejections of credit applications slipped slightly, but stayed out of contraction with a reading of 50.9 compared to 51 in November. The accounts placed for collection fell out of expansion territory with a reading of 49.5 from 50.1, ending the brief foray out of contraction. The disputes reading was nearly the same as it had been with a reading of 50.6 after 50.9 last month. The dollar amount beyond terms also worsened a little and fell back into contraction with a reading of 49.7—just last month the data was firmly into the expansion category with a reading of 53.1. The dollar amount of customer deductions stayed in the expansion zone but only barely with a reading of 50 from 52. The filings for bankruptcies changed very little—54.9 up from November's 54.

The worry at this point is many retailers already look a little weaker than expected. That does not bode well for after the holidays. Construction seems to be picking up a little as far as residential activity is concerned, but labor shortage remains a huge issue.

December 2019 versus December 2018
A bit of a mixed set of messages this month with a nice recovery in manufacturing, but some concerns regarding the fate of the retailer and how this will affect the service readings in the new year.

Ten Years of Progress?
There is no official anniversary as far as "social media" is concerned as there is no real consensus as to what actually constitutes social media or even what really makes it different than other kinds of communication electronically, but there is a sense that Twitter, Facebook, Instagram and all the other iterations became thoroughly integrated into the mainstream over the last 10 years. That is long enough for people to try to start determining if the explosion was a good thing or bad. As with all such evaluations, there is a great deal of opinion and there has been no real agreement.

Analysis: Of late, the perils of social media have received a lot of the attention. There have been malicious uses in politics, fears regarding the impact on the young, social isolation, bullying online, the heavy abuse by scammers and so on. There are also those who point out the wealth of information that can be obtained and how these platforms have united people with friends and family. The one aspect of social media that is of the greatest concern for the likes of this writer is the paucity of real thought and analysis that is manifested in the medium. There are far too many people who seem violently allergic to complexity and have become dependent on the tweet and the sound bite for their world view. The fact is that nothing is as simple as these communications would imply. The world we inhabit can't be reduced to 24 characters or a meme. If all of this online activity provoked people to go forth and learn more, it would be a good thing, but for the most part, the public accepts these snippets as enough, and they aren't. There is far too much on social media that is 100% false, but what is even more distressing is the wealth of half-truths and partial explanations that leave too much out.

Post-Holiday Thoughts
To be honest, the majority of my thoughts in the aftermath of this Christmas have been focused on napping. This was an unusual holiday in that we hosted my three great-grandkids for the first time. They came up from Florida and stayed the night on Christmas Eve. As the day neared, we started to worry about what would happen with three kids (6, 4 and 1) combined with five cats unfamiliar with the actions of kids. This is not a childproof home by any stretch. That kept mom and dad very busy. The kids managed to navigate all the Christmas stuff with the help of tons of distractions provided by an army of adults.

The big challenge was going to be the feline five. As suspected, two of them hid for the duration despite the efforts of the kids to find them. These two had been feral at one time and reverted to the habits needed to survive predators. Spike tried from time to time, but it was all too much for him and he retreated as well. That left Sven and Scoot. The kids wanted to play with them both. That was tricky. Sven is nearly 20 and is pretty frail so I needed to do a lot of rescuing. Scoot figures she owns the place and backs down for nobody. Despite several warnings about getting too rough, it took a little gesture from Scoot to get the message across. A quick scratch coupled with a prolonged hiss made the point and they gave her more "space." Mom reminded her progeny that cats are not dogs and suggested that next time they ought to listen to what mom and dad tell them. Scoot from that point stuck to me like glue. The kids seemed in awe that I was able to get that "mean cat" to be so friendly and cuddly. It was several hours after they left before we saw Seamus and we are still not sure where he found refuge!

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Sunday, 26 January 2020