Strategic Global Intelligence Brief for February 1, 2019
Short Items of Interest—U.S. Economy
Shutdown and Jobs Data
This month's report on the jobs data will be affected to some degree by the government shutdown as some 800,000 employees of the federal government were not being paid and most were eligible for unemployment assistance for all or part of that period. This is a temporary issue (provided there is not another shutdown), but the part that is not temporary is that which involves the hiring and firing in the private sector. There were about 22,000 businesses that work with the federal government affected. Many of them may have been forced to reduce their workforce as well. Then, there are the businesses that lost customers as federal employees stopped spending. This impact will likely be greatest where the government employee is the dominant consumer.
Hiring the Unqualified
One aspect of the report that will be examined closely will be the type and quality of the new hires. Last month, the total hiring was a bit of a shock as few had expected to see 300,000 new jobs. In that data, there was the observation that many companies have started to lower their standards when it comes to hiring. They are no longer hiring aptitude as they can't find people with the required skills. Now they are hiring attitude and hoping they will be able to train these employees well enough to contribute sooner than later. The expectation is that it will take from 18 to 36 months to get maximum productivity from these new hires.
Herman Cain for Fed Job?
With the expiration of the last Congress, there are still two vacancies on the seven-person Board of Governors for the Federal Reserve. Two of the nominees put forward by the White House saw their invitations expire. Marvin Goodfriend from Carnegie Mellon looks to be nominated again, but Nellie Liang may not be. Herman Cain—former CEO of Godfather's Pizza and a one-time presidential candidate has been suggested as well. One of his notable suggestions has been to return to the gold standard—a move that most economists pan as absurd and completely devastating to the global economy.
Short Items of Interest—Global Economy
Kicking the Brexit Can
As the deadline for an exit from the European Union looms, the U.K. and the EU are facing unpleasant options. In truth, there is no desire on the part of either the British or Europeans to see the U.K. stumble out of the EU with no agreement at all. This would devastate the British economy, but it would hurt the Europeans as well. The rumblings seem to suggest there will be some kind of short-term deal to extend the deadline long enough for some new ideas to develop or perhaps give the U.K. time to consider another referendum on leaving the EU.
Progress With China?
There have been some vague statements from the White House that suggest concessions have been made by China sufficient to delay the imposition of more tariffs on Mar. 1. There have been no specifics as yet, so it may well be that no deal is reached. The talk is now about a summit between Trump and Xi Jinping that would result in some kind of mutually face-saving deal that could allow both to claim some modicum of victory. It appears the U.S. is backing away from demanding structural reforms in favor of China buying more from the U.S.
Massive Deal Between Europe and Japan
While the U.S. is locked in a war of wills with China and most of its other trading partners, the EU and Japan have signed the largest bilateral agreement ever. The pact eliminates almost all tariffs between the two entities and is expected to dramatically increase the levels of trade between the two signatories. Consumers in both regions are expected to see lower prices and better variety almost immediately. Both Japan and the EU indicated that their deteriorating relationship with the U.S. was a major factor as far as this trade deal was concerned.
The January Credit Managers' Index Looks a Bit Weaker
CMI data has been collected and tabulated monthly since February 2002. The index, published since February 2003, is based on a survey of approximately 1,000 trade credit managers in the second half of each month, with about equal representation between the manufacturing and service sectors. The survey asks respondents to comment whether they are seeing improvement, deterioration or no change for various favorable and unfavorable factors. There is representation from all states, except some of the less populated, such as Vermont and Wyoming. The computation of seasonality is based on the formula used by the U.S. Census Bureau and most of the federal government's statistical gathering apparatus, making it possible to compare the CMI diffusion index with comparable indices, such as the Purchasing Managers' Index (PMI) and other manufacturing and service sector indices.
Analysis: January's Credit Managers' Index (CMI) was characterized by a slight downturn from December 2018. As 2019 started, there was a great deal of conversation regarding how the year would progress in comparison to 2018. The sense was that 2018 was a "pull out all the stops" year and 2019 would not likely feature that kind of encouragement. There will be no big tax cut in 2019 and there will be no low interest rate environment as had been provided by the Federal Reserve. There was not even the momentum in terms of growth that carried over from the end of 2017. The first sets of data coming in have shown there was good reason to be worried. The Purchasing Managers' Index trended lower and so did the December CMI. Now that January is in, there was still more decline although nothing precipitous. The optimists are asserting this is just a "breather." They expect recovery in the second half of the year. The more pessimistic assert this will be just the start and conditions will steadily worsen through the year.
This month's data is not a lot different than it was the month prior, but the trend has been down. That has created some concern regarding the rest of the year, and it will take some good news to force the index to start trending in the opposite direction. The combined index fell a bit from 54.2 to 53.4. The index remains in expansion territory (a reading above 50) where it has been for the majority of the year. The bad news is this is the lowest reading seen in the last 12 months, hardly the direction preferred. The change was extremely slight as far as the favorable factors are concerned and, in fact, they went up (59.4 to 59.5). The bad news is these last two months have been the only two below 60 in the last year. Even more concerning is the index of unfavorable factors as this reading slumped into contraction territory with a reading of 49.4 compared to the 50.8 notched in December. The last time these numbers were that low was in April of 2018. Up to this point, the decline in the CMI data was felt primarily in the favorable categories, while the unfavorable stayed relatively stable. Now there are some new signs of real distress among creditors.
It was only a month or two ago that the four categories included in the favorable sector were all reading in the 60s. Now only one remains in that classification. The others are all still in the high 50s, which certainly continues to signal growth, but the pace has slowed a little. The sales category improved slightly from 59 to 59.7, getting close to the 60 line again. The new credit applications also moved back up a little, but the category stayed under the 60 line as it went from 57.5 to 58.2. The all-important dollar collections number dropped a bit, from 59.3 to 59. The amount of credit extended also dropped, but stayed in the 60s with a reading of 61.2 as compared to 61.9 in December.
There was a slight improvement in the rejections of credit applications number—51.4 to 51.8, which is good news given the applications for credit category has been a little weak. The decline in accounts placed for collection is a bit more worrisome. It was at 49.7 and is now at 48.2. The disputes category sank as well (49.6 to 47.1). There was a similar drop in dollar amount beyond terms as it shifted from 49.3 to 47.4. The downward trend continues with the dollar amount of customer deductions which fell from 49.7 to 48. The filings for bankruptcy sagged, but stayed in the expansion category by going from 55 to 53.8. The message is loud and clear: Companies are having issues, and this has started to affect their ability to keep pace with their obligations. There has been enough of a slowdown in some sectors to impact the data. The numbers are still in the high 40s and not all that far from expansion, but the trend is not in the preferred direction and is likely to get worse as the year progresses.
Manufacturing Sector
The good news story from much of 2018 was the resurgence of the manufacturing sector in the U.S. Many factors played a role in this growth and the question for 2019 is whether they will still be providing that positive impetus. Last year, there was a tax break that allowed companies to buy machinery that had been planned for years, the consumer came back to life pushing demand for a variety of factory goods and the growth of the global economy stimulated the export sector. There will be no tax cut this year, the consumer has been slowing down and the global economy is not expected to grow at the pace it did last year—the International Monetary Fund (IMF) just downgraded growth again on the eve of the Davos, Switzerland meeting of the World Economic Forum.
The favorable and unfavorable numbers both weakened, enough to start creating some worry. The overall favorable factors dropped from 58.9 to 57.7, while the overall unfavorable readings went from 50.7 into the contraction zone with a 49.9 mark. The total for the whole of the manufacturing sector fell from 54 to 53.1. These are lower numbers than would be preferred, but not really cause for panic just yet. The overall score remains in growth territory as do the favorable numbers. Even the unfavorables are just barely in the contraction zone.
The sales category improved slightly (59 to 59.1), but it still fell short of the 60s where it has been for the past year. The new credit applications declined considerably from 56.8 to 53.3—not a good sign. This category has been in the 60s since July of 2018 and keeps sliding. The dollar collections data also fell a bit, from 59 to 58.4. This is the category that is most carefully watched as it signals whether creditors are staying current with their obligations. The amount of credit extended remained in the 60s, but by the narrowest of margins (60.9 to 60.3).
The rejections of credit applications actually improved a little, moving from 51.6 to 53.3. This is especially good news given there has been a decline in the applications for new credit—those that are applying are generally creditworthy. The accounts placed for collection slipped into contraction territory with a reading of 49.7 compared to 50.3. The disputes category also shifted deeper into contraction territory (46.8 48.6). The dollar amount beyond terms moved into contraction territory as well, dipping from 50 to 49.1. There was also a significant decline in the category of dollar amount of customer deductions as the reading fell to 46.7 after 49.1 last month. The filings for bankruptcies stayed stable enough, moving from 54.4 to 54.
These numbers are worrying at this stage, but they are not yet catastrophic. The slip into the contraction zone has been fairly recent and the data is not showing a deep collapse; however, the data shows many companies are now struggling, and there is nothing to suggest there will be a major economic surge that will help pull any of these companies out of this slump. As usual there are significant differences between the various sectors—energy-related manufacturing is doing far better than agriculture, for example. Health care manufacturing remains strong and automotive is holding its own.
The service sector has fared a little better than manufacturing this month as more of the readings are still in the 60s and generally in expansion territory. The sector is very diverse, and that makes the data both intriguing and sometimes confusing. It tends to be weighted toward retail and construction, but health care plays a significant role as well. It is not clear that any of the government shutdown activity has affected the data at this point, but if there is to be a reaction, it would be in the service category given the potential impact on spending by consumers.
The overall CMI score for services went from 54.5 to 53.8, the lowest reading since April of last year. This is not a point of panic at this stage as the data is still in the expansion zone, but the data is clearly weaker than it once was. The favorable factors data actually improved this month and got back into the 60s with a reading of 61.3 as compared to the 59.9 that was notched in December. The unfavorable index fell from 50.9 to 48.8, more of a concern as that signals there is serious weakness in the creditor population showing up.
The sales reading regained a little lost ground and moved from 59 to 60.3, while new credit applications also made a nice positive move, jumping from 58.2 to 63, and that was unexpected. It seems that many retailers gained additional confidence from the solid holiday season and expect the consumer to keep spending into the new year. That may turn out to be an inaccurate assessment given the recent slump in consumer confidence. The dollar collection numbers stayed right where they were the month prior at 59.6 and the amount of credit extended shifted down a little from 63 to 62.1.
The rejections of credit applications fell a little but stayed out of the contraction zone by the narrowest of margins (51.2 to 50.3). The fact that this number is still in the 50s is good news given the number of new applications. The accounts placed for collection sank deeper into contraction with a 46.7 reading compared to the 49.1 reported last month. This is getting worrisome as there are many more companies struggling to meet their obligations. The disputes category dropped out of the expansion category by shifting from 50.5 to 47.4. The dollar amount beyond terms also fell (48.5 to 45.7). This is especially bad news given the data on collections as it suggests that even more trying times are ahead. These slow pays usually get worse unless there is some kind of economic rebound, which is not expected this year. The company that is falling behind now will be challenged to recover. The dollar amount of customer deductions also fell into contraction, but not quite as dramatically—50.3 to 49.2. The filings for bankruptcies slipped, but stayed in the expansion zone as it went from 55.6 to 53.6.
The focus is now on retail and the consumer. The U.S. economy is unusually reliant on consumer activity as it accounts for some 80% of the GDP (in most European states it is closer to 65%). The consumer confidence levels have been dropping, but these are always volatile and change very quickly, and for a variety of reasons.
January 2019 versus January 2018
The trend of late has not been what anyone would like to see. The unfavorable numbers are sinking deeper into the contraction zone, and there has not been enough activity in the favorable categories to offset the decline. The sense is that further slowdown is likely.
NACM, headquartered in Columbia, MD, supports more than 11,000 business credit and financial professionals worldwide with premier industry services, tools and information. NACM and its network of affiliated associations are the leading resource for credit and financial management information, education, products and services designed to improve the management of business credit and accounts receivable. NACM's collective voice has influenced our nation's policy makers on federal legislation concerning commercial business and trade credit for more than 100 years and continues to play an active role in legislative issues that pertain to business credit and corporate bankruptcy. Its annual Credit Congress & Expo is the largest gathering of credit professionals in the world.
It is time for a familiar rant. It is one I engage in more often than I would care to, but the trigger for my outrage is just too common. I am not talking about airlines or bad customer service—not this time anyway. I speak of what can only be described as the "dumbing" of society. It absolutely astonishes me that at a time when more information is available at our fingertips than at any time in history, we seem to have slipped into a stupor of stupidity. Two things of recent note have my hackles up this time.
The first observation is the inane commentary on the cold weather this week "so much for that global warming, huh". The arrival of this Polar Vortex is a direct result of climate change and its impact on the North Pole. There will be more of these to come. Then, there has been the constant barrage of outright lies and half-truths on virtually any subject one chooses—from economics to health. It is not a good thing when so many people seem to wallow in their ignorance.
As in past rants, I have a suggested solution to this threat. If you have not already acquired a copy of Steve Allen's book you really should. It is entitled Dumbth: The Lost Art of Thinking. It contains 101 ways to reason better and improve your mind. Allen was a brilliant comedian, the creator of the Tonight Show as well as Meeting of the Minds. He was a tireless advocate for being informed and able to intelligently navigate the world. I re-read this book regularly in order to keep my brain sharp. I highly recommend every person on the planet read it and read it often.
