Strategic Global Intelligence Brief for July 5, 2018

​Short Items of Interest—U.S. Economy

When Rapid Growth is Not All that Positive
It is always better to have growth than not but motivation also matters. The latest data from the Purchasing Managers' Index is quite positive—a month that saw the PMI hit 60.2. That is the highest level seen since the end of the recession and is further proof of a healthy manufacturing community. It may also be proof of something a little less positive. There is abundant evidence that a considerable level of production is defensive—preparations for incoming tariffs and trade restrictions. Companies are deliberately producing well past current demand in the event these restrictions come to pass and there has been a corresponding increase in inventories as business accumulates in anticipation of future price hikes and shortages.

Iran Sanctions May be Limited
This has most definitely become a pattern with the Trump administration. Assertions are made that sound rock solid and unyielding and then there are the adjustments and climb downs. This now appears to be the case as far as Iran sanctions are concerned. The stated policy was a complete ban on trading with Iran. Countries that bought oil from Iran would be subject to severe sanctions from the U.S. but now it appears that there will be lots of wiggle room and each deal will be decided on a "case-by-case" basis. Both India and Turkey buy oil from Iran and have been concerned as to where they can acquire the oil they need. They now appear to have gotten an exemption from the sanctions and can keep on buying Iranian oil.

Turning to New Labor Sources
The chronic shortage of workers in sectors such as manufacturing, construction and transportation has been an issue for more than a decade and has become more urgent as the unemployment rate has fallen. This has employers seeking workers in places they ignored in the past. One such area is convicted felons. There has been some hiring and recruiting of those who have been convicted of misdemeanors for many years, but felons found it very hard to get jobs. Now that has started to alter. The majority of the hires have been those convicted of nonviolent crimes but those with some skills and aptitude are finding opportunities despite being convicted of assault, rape and the like.

Short Items of Interest—Global Economy

Trump Demands More OPEC Production
At first, the assertion was that Saudi Arabia had agreed to a production boost as a favor to President Trump although most analysts asserted that this was a predictable decision given what the Saudi position has traditionally been on oil output. Now the president is threatening the Saudis if they don't hike daily production by 2 million barrels. This would stretch them to their limits and would leave nothing in reserve if a boost was needed later. The reality is that prices are now getting to the point that U.S. production could profitably gear up and the last thing U.S. producers want to see is 2 million bpd from Saudi Arabia hitting the market.

Business Impact from Immigration Crackdown
Many old patterns have been shifted or abolished under this administration's approach to immigration. It was once assumed the focus of immigration enforcement was on those who constituted a threat to the U.S.—terrorists and criminals. The raids conducted also picked up those whose only crime was illegal entry but the focus was still on those with a criminal record. Now, the attention has shifted to anyone who is in the U.S. illegally, and that has hit many companies that rely on that labor hard. This has mostly been in the farming sector as well as food processing. Seasonal visa opportunities have also been reduced, further complicating the issue for business.

Corruption in South Africa
When Cyril Ramaphosa took control of the country from Jacob Zuma he pledged to root out corruption. He is finding this very hard to do as the systems were in place before Zuma and they will be there long after Zuma and Ramaphosa are gone. This is a very slow and halting process.

What Passes for Stability in the CMI
Each month, the Credit Managers' Index (CMI) analysis is provided to the National Association of Credit Management. The information is compiled from a survey of credit managers who rate whether factors in their business credit cycle are better, worse or the same as the previous month. The full survey report can be found on the NACM website.

Analysis: There had been some faint hope there would be two months in a row with some positive trending, but there was also the fear the old patterns would reappear and provide another down month. There was a third option as it turns out—a month that looked a lot like the previous month. There was some variability, but not really enough to push the needle one way or the other. This is pretty consistent with many of the other measures that have been employed to gauge the state of the economy at the moment. There has been stability in the Purchasing Managers' Index as well. The level of capacity utilization nationwide has almost reached the bottom of what would be considered normal with a reading of just over 78% (the ideal is between 80% and 85%).

There was quite a significant difference between the performance of the manufacturing sector and the service sector. The combined score for the CMI this month was 56.3 and last month it was 56.6—about as close to no movement as one can get. The highest point reached by the combined index in the last year (56.6) occurred in November 2017 and in May 2018, so this month's reading is more than respectable. The index of favorable factors slipped a little from last month, but a reading of 64.9 is certainly a very good one—as high as it has been since February. The index of unfavorable factors was exactly the same as it was last month. There was even positive movement in one of the subcategories.

The details in the subcategories tell some interesting stories even as the overall index seemed to remain stable. In the favorable readings, the sales category was the same as last month with a very high number (69.6). This is the highest it has registered since the end of the recession, and it did it two months in a row. There was, however, a little dip in the new credit application category as it went from 63.8 to 60.5, which remains a very robust number and on a par with the data collected for the past year. The ever-mercurial dollar collection reading improved a little from 62.5 to 63.2. That completes a major turnaround from where the number was in April. The amount of credit extended category stayed almost level with a reading of 66.2 compared to 66.8.

The variability in the nonfavorable categories exceeded that of the favorable readings, but in general, there was stability here as well. The rejections of credit applications number was almost the same at 51.2, only slightly lower than May's 51.3. This is especially good news given that new applications for credit slumped a little. Companies seeking credit may be fewer in number, but those that are looking are creditworthy. The accounts placed for collection actually managed to escape the contraction zone (under 50) by moving from a reading of 49 to one of 51.3. This is indeed a positive trend. The disputes category stayed very near what it had been at 48.3, but still was slightly better than May's 48.1. The dollar amount beyond terms also had the reputation for being erratic over the last year with big movements up and down—usually coinciding with the data from the dollar collection reading. This month there was almost no movement at all (49.4 to 49.2). The trend is not the ideal direction hoped for. The category didn't get into the expansion zone, but it didn't bury itself further into the contraction category either. The reading for amount of customer deductions slipped a bit deeper into contraction with a 48.1 as compared to last month's 49.7. The data from filings for bankruptcies also slipped a bit from 56.4 to 55.7, but these numbers are still quite firmly in expansion territory. By and large, the nonfavorables are at least pretty stable, and in some cases, they have improved.

Manufacturing Sector
The manufacturing sector was far more volatile this month than was the service sector, although there was some stability in some of the categories. The combined score this month was lower than last month by a significant amount—55.9 as compared to 57. This took it to levels close to where they were in March, but still better than April. The favorable factors index dropped slightly from 65.5 to 64.6, but these remain very strong numbers and clearly in expansion-oriented territory. The index for the nonfavorable factors slipped from 51.4 to 50.1—barely hanging on to the expansion zone and back to the levels of the last few months. The data collected around the subcategories tell interesting stories as well.

There was not much of a slip as far as the sales category was concerned; it remains at a very high level with a reading of 69.1 compared to last month's 69.6. These are numbers that have not been seen since the end of the recession. The new credit applications category dropped from 62.4 to 60.2. Although that is a fairly significant decline, the important note is the category remains in the 60s. The dollar collection category stayed almost exactly where it had been at 63.3 (compared to 63.5), but most importantly, this factor was calm and contrasts with the wild variability that was on display most of the last year. The amount of credit extended also fell slightly but remained in good shape with a reading of 65.7 compared to 66.4 last month.

The activity in the nonfavorable categories was perhaps a little more interesting and significant. There was a slight dip as far as the rejections of credit applications. That is slightly worrisome as there was also a dip in the number of total applications. The number last month was 53.4; it had fallen to 50.6—barely staying out of the contraction zone. The accounts placed for collection category also fell, but not quite as far (51.3 to 50.6)—another narrow escape from contraction territory. The disputes category improved, but not enough to enter the expansion zone as it moved from 46.9 to 47.9. The dollar amount beyond terms category has been driving a lot of the angst regarding this index of late. Some of that worry has started to return as the data went from 50.2 back into contraction territory with a reading of 48.7. The dollar amount of customer deductions slipped even deeper into contraction with a reading of 46.6 after hitting 48.4 the month before. This category has not been this low since January of this year. The filings for bankruptcies fell slightly (58 to 56.2) but remains solidly in the expansion zone.

The volatility surrounding steel tariffs and threats of a trade war have caused a great deal of uncertainty among steel and aluminum users. To make matters worse there has been a hike in logistics costs due the higher price of oil and fuel.

Service Sector
There was not as much volatility in the service sector this month. Some of that is attributed to the relative lack of drama that has surrounded the sector. The various threats on trade deals have less to do with services as the bulk of the activity is related to manufactured exports and imports. The combined score of 56.8 for the service sector improved over what it was last month and hit a high not seen since February. The index of favorable factors stayed about where it had been with a reading of 65.2 following last month's 65.8. The index of unfavorable factors also improved and escaped from the contraction zone with a reading of 51.1.

The sales category has hit a record number—at least a record since the recession started. The index had been close for months. This month it pushed over the barriers to hit 70.1 after being at 69.6. The impetus for this seems to be the start of the summer driving and vacation season and the reappearance of the consumer who seemed to be in hiding the previous few months. Consumers are not spending as much on goods and are focused on services. The new credit applications fell by quite a bit from 65.1 to 60.9. Here, there is a sense that some of the retailers are still being very cautious about what kind of inventory they plan to invest in. The data for dollar collections improved (61.5 to 63); a welcome sign as that category has been the source of a lot of worry over the last several months. The amount of credit extended fell slightly from 67.2 to 66.8, but these are still very respectable numbers and signal very robust growth across the services board.

There was some significant movement in the nonfavorable category as well. The rejections of credit applications category escaped the doldrums of the contraction zone by moving from 49.2 to 51.8. That pairs well with the reduced number of applications. Those asking for credit are generally the kind of business that qualifies for that credit. There was a major improvement in the reading for accounts placed for collection as it went from 46.7 to 52. This is a major turnaround as far as collection action is concerned and that is very good news indeed as far as future growth. The disputes category fell a little from last month's reading of 49.3 to 48.6. The other category that has been sending the CMI into hills and valleys all year has been the dollar amount beyond terms. This volatility was not in evidence this month, but the data improved—that is the important part. It was at 48.5 and is now at 49.7, within shouting distance of the expansion zone. The amount of customer deductions also slipped a bit from 50.9 to 49.6. The filings for bankruptcies still sports a number solidly in the expansion zone as it improved from 54.8 to 55.1, a pretty consistent story most of this year.

There is nothing quite as dramatic as the material chronicled in the last several months. That is probably a good thing as there was a real desire for some stability. The numbers this month looked a lot like last month—not too bad these days.

A Tale of Two Scenarios for Manufacturing?
At the start of the year I was asked the same question that is asked of every economist and analyst at that time of year—what the coming year will bring. Not that there is any real difference between the start of a given year or any other period of time but it just seems the thing to do. At the time, I suggested this would be a year of two very different halve—especially for the manufacturing sector. The year would start like gangbusters due to the tax cuts and the sudden windfall of cash to spend on machines and expansion and hiring. The second half would not be so promising as I thought there would be a series of reactions to that tax cut that would boost inflation. It seems that I may have been half right about that second half slide. Inflation has yet to rear its ugly head although it is certainly starting to manifest.

Analysis: The manufacturing sector in particular is getting slammed by the Trump policies on tariffs and trade. The price hikes on steel and aluminum have been working their way through the economy and have started to have an impact on other metals and substitutes for these core metals. The average price hike has been between 45% and 76%. Meanwhile the trade war is threatening to wipe out export markets as other nations retaliate against the U.S. at the same time that imported parts and goods are getting more expensive and hard to get. There are a few manufacturers that may benefit from the lack of competition from overseas goods but there are far fewer of these than companies that depend on a global sourcing strategy.

Thus far, companies are waiting to see what happens and continue to hope that cooler heads prevail, but they are planning for when they don't. This will mean a significant number of cost reduction strategies and most of these involved layoffs. The fear is that all these trade battles usher in another recessionary period.

Another Goofy Independence Day
Not that we are really any different than other countries when it comes to celebrating the formation of the nation. All governments like to engage in celebrations of some kind, and for the most part, the population just wants to have a good time. They may be dimly aware that they are acknowledging their nation in some way or another as they haul out the BBQ and detonate the cache of small explosives they have acquired but it would be best to avoid asking many questions about the founding fathers, their principles and so on. This is the time of year that all those polls and surveys emerge that prove beyond a shadow of a doubt that most of your fellow citizens are dumb as posts when it comes to their own history. People had so much fun with the last little puzzle we ran in the newsletter—here is another one. Match these founding fathers with the fun fact about them.

• Thomas Jefferson
• Alexander Hamilton
• John Hancock
• George Washington
• John Adams
• James Madison


• smallest U.S. President at 5 feet and 4 inches and less than 100 pounds
• made a fortune smuggling goods into the colonies to avoid British taxes
• was notorious for a violent temper and explosions of profanity that reduced men to tears
• considered the job of Vice President to of less worth than dog spit
• authored a clause for the constitution that abolished slavery but it was left out at the last minute
• created what was to become the Coast Guard as well as the first national bank