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Strategic Global Intelligence Brief for March 1, 2019

Short Items of Interest—U.S. Economy

Fourth Quarter GDP at 2.6%

This was almost exactly what the majority of analysts expected. It is a return to the pace that has dominated the economy for the last 20 years; it's certainly a respectable number. The over 3% growth that was notched in the early part of 2018 was somewhat artificial as it owed much of its momentum to the tax cuts that arrived early and served as something of an economic sugar rush. Now the tax changes are serving to weigh the economy down as millions of people are getting less in the way of tax refunds than they are accustomed to getting. The 2.6% growth is close to what would be considered normal. It is considerably healthier than the slow growth (under 1%) that has been experienced in Europe and even the 6% growth in China. Recession in China is taking place when the growth falls to 6% in part due to its population and status as a developing economy.

Hot Job Markets

To be honest, it is really pretty hard to make many definitive statements about the entire U.S. economy. This is the largest economy in the world, accounting for almost a quarter of the total world of economic activity. At any given time, there will be parts of the U.S. that are booming and parts that are suffering economic decline. Right now, the 10 hottest job markets are in cities that would not have been in that category a decade or so ago. According to a study by The Wall Street Journal, these hot job markets are Austin, San Jose, Salt Lake City, Boston, Orlando, Raleigh, Nashville, Seattle, Denver and Dallas. In most all of these cities, there has been growth driven by a combination of high tech, health care and education.

Coldest Job Markets

Just as there are changes that have driven cities to the top of the employment heap, there are cities where fortune has not been smiling. These are the cities that once supported major growth numbers, but shifts in the economy have laid them low to one degree or another. These are the cities losing jobs at a rapid rate. They include Rochester, Buffalo, Detroit, Cleveland, New York, Pittsburgh, Philadelphia, New Orleans, Chicago and Hartford. Most of these cities have seen jobs decamp to the suburbs, but these are also towns where older industries have been fading and have not been replaced by new ones.

Short Items of Interest—Global Economy

U.K. Feels More Pressure From U.S.

As the British prepared to break away from Europe, there was an assumption they could turn to their long-time ally and become more engaged. The U.S. was not expected to replace all of what the U.K. stood to lose, but it was assumed the Trump White House would be sympathetic given the mutual animosity towards Europe. That has turned out to be an inaccurate assumption. The U.S. is taking a very hard line as far as any new trade deal and is demanding a great deal more access for U.S. goods—especially from the farm sector. This is complicating matters for the British as the Tory party depends on the rural British vote. They are not thrilled by an onslaught of U.S. agricultural import.

More ISIS Claims Questioned

As Trump returned from the Hanoi summit with little to show for the effort, he has been making some additional claims. He stated that all ISIS-held territory in Syria has been recaptured, but that account has been disputed by those that have been doing the capturing. The Syrian government has asserted there are still dozens of ISIS strongholds. This has been repeated by the Russian forces backing them. ISIS has also asserted it still holds territory. Also, various aid agencies have indicated they still can't enter many regions as they remain in ISIS hands.

Estonian Populists

The populists in Estonia will not win enough votes to rule, but they will become the third-largest party and will start to have influence with their ardent nationalism and adherence to an anti-western platform.

Credit Managers' Index Trends in a More Positive Direction

The Credit Managers' Index (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. To see results of the index, visit the National Association of Management's website.

After a somewhat rocky beginning, the economic data for the CMI for February has been a welcome correction. Now the question is which of these trends will really take hold through the remainder of 2019? There is some evidence to support both optimism and pessimism. As a matter of fact, these contradictory indications have become quite the topic among economists. The Purchasing Managers' Index tumbled dramatically at the end of the year but then bounced back in February. There were similar performances seen in everything from capacity utilization to capital expenditures, durable goods orders and other markers of the economy. The worrisome part shows up with higher commodity prices and the impact of a global economic slowdown. This month's CMI follows some of that same pattern.

Analysis: The overall reading for February's CMI regained some ground with a score of 54.9—up from the 53.4 notched the month before. This takes the number back to the levels seen in November 2018 when it hit 55.8. The even-better performance was noted in the index of favorable factors as it hit 60.7 after falling to 59.5 in January. The only months where this score has been under 60 were December 2018 and January—all the rest of the last 12 months have been in the 60s. The index of unfavorable factors also reached a nice milestone as the index escaped the contraction zone (a score under 50) with a reading of 51. In the last 12 months, this index has been in contraction only three times; the February score is the highest seen in the past year.

As is generally the case, the details provide some better insights. As mentioned, the index of favorable factors returned to the 60s with a reading of 60.7. Two of the sub-index categories remain in the high 50s and two are solidly in the 60s again. The sales category had fallen to 59.7 and is now at 62.6. This is higher than it has been for the last couple of months, but not back to the 64.5 level reached during November 2018. The new credit applications sub-index remained in the 50s, but it improved from 58.2 to 58.9, while the dollar collections reading stayed almost the same as last month with a reading of 59.1 compared to the 59 in January. The amount of credit extended number went from 61.2 to 62.3, higher than it was in December 2018 or January.

There was some significant movement in the sub-index readings for the unfavorable factors as well. The rejections of credit applications shifted up again and now stands at 52.1, the highest score notched since August of last year when it hit 52.2. The accounts placed for collection moved up from 48.2 to 49, although this remains in contraction territory. The disputes category likewise improved slightly (48.5 from 47.1), but it remains in the contraction zone. The reading for dollar amount beyond terms escaped the contraction zone by hitting 51.3 after languishing at 47.4 in January. This is a substantial jump and in a critical area as slow pays are often the start of bigger issues down the road. The dollar amount of customer deductions also jumped back into the expansion zone by the narrowest of margins as it hit an even 50 after tracking at 48 the prior month. The filings for bankruptcies numbers improved as well, and the reading remained strongly in the mid-50s with a 54.9 from 53.8.

The combination of improved performance in the favorable factors and a real recovery in the unfavorable index casts a different light on the start of 2019. It is not that the concerns voiced at the start of the year are not valid—there is plenty to worry about as far as inflation is concerned and the issues of a trade and tariff war will be biting sooner than later. What this does seem to show is continued resilience in many businesses and that would suggest they could survive a bit of downturn this year.

Manufacturing Sector

Manufacturing has been growing rapidly in the U.S. over the last few years for a variety of reasons. At the top of the list has been the advantage brought by the heavier use of technology and robotics. There have also been some advantages created by cheaper commodities costs and improved options as far as transportation. Global demand has played a major role as well. These are all factors that are in some jeopardy now. The dollar has gained value and that hurts exports, tariffs have added to commodity costs, trade wars inhibit market opportunity and there are chronic issues like labor shortage and productivity decline as fewer trained people are available for hire. These factors seemed to be weighing on the sector the last few months, but the latest readings from the CMI indicate there is still strength.

The overall index rose from 53.1 to 54.8. That takes the readings back to levels last seen in November 2018. The index of favorable factors moved back into the 60s after having dipped into the 50s in December 2018 and January. The index of unfavorable factors moved out of the contraction zone with a nice jump to 51.4—marking the highest reading since May of last year. This data is consistent with the various manufacturing readings that have come from the Purchasing Managers' Index as well as data on industrial production, durable goods orders and factory orders. As is often the case, there are some unusual factors at work that may not extend that far into 2019. Some could even reverse by year's end.

The sales numbers improved and are back in the 60s again with a reading of 61.7—still a far cry from the 68.2 that was notched in September of last year. The new credit applications reading also improved, but it fell a little short of the 60s at 58.6 as compared to the 53.3 from the month before. The dollar collections data jumped back into the 60s with a reading of 60.5 after hitting 58.4 in January. There was a little dip in the amount of credit extended category as it went from 60.3 to 59.2. There seems to be a little more frugality showing up in terms of what kind of credit is asked for and for what kind of purchasing.

The rejections of credit applications stayed almost the same as it was the month before—moving from 53.3 to 53.5. That is good news when combined with the numbers of new credit applications. The accounts placed for collection category slipped back into expansion territory by the narrowest of margins—hitting 50.5 after last month's 49.7. The category of disputes improved a bit, but they stayed in the contraction zone at 48.7. Still, this was an improvement over the 46.8 that was noted the month prior. The dollar amount beyond terms also jumped into the expansion zone with a reading of 52.8 following the 49.1 in January. The dollar amount of customer deductions stayed in contraction territory, but it improved over the month before (46.7 to 49.3). The reading last month had been the lowest number seen since June of last year, and now it is back to semi-respectability. The filings for bankruptcies numbers slipped slightly, but they remained in expansion with a reading of 53.3 compared to 54 last month.

There was an improvement these last few months, but there are some factors that may have led to this expansion. The threatened tariffs and the impending trade war have pushed a lot of advance buying and stockpiling on the assumption that everything from commodities to intermediate parts and finished goods will be unavailable. Inventory levels are as high as they have been in some time. If the trade deal works out in some fashion, it may be very hard to reduce the size of that inventory overhang.

Service Sector
As with manufacturing, there was an improvement in the service sector as well. This set of gains has been a little harder to pin down as there seem to be several factors at work. There are also major differences between service sectors with more concern expressed over the pace of retail and less concern expressed toward health care and construction.

The overall reading for the service sector was 55—up from 53.8. This marks the highest level reached since November of last year. The combined index of favorable factors stayed roughly the same as it had been with a reading of 61.5 compared to 61.3. The combined index for the unfavorable factors was 50.6, marking the return to expansion after falling to 48.8 the prior month. The data was solid enough and the sub-readings reinforced this notion.

The sales numbers hit 63.5, back to numbers seen last November. The new credit applications data slipped, however, and fell out of the 60s with a reading of 59.2. This is still healthy, but just last month it was at 63. The dollar collections numbers also fell a bit (59.6 to 57.7). This remains solidly in the expansion zone, but the trend is not quite what would be desired. The category of amount of credit extended improved, however, and jumped further into the expansion zone with a reading of 65.5 as compared to the 62.1 from last month. Much of the down data has been coming from retail and much of the positive data is coming from construction and health care.

The rejections of credit applications improved a little as it went from 50.3 to 50.8. This is good news given the fact that applications have been in decline to some degree. The accounts placed for collection improved from 46.7 to 47.5, but this is still contraction territory. The category of disputes also improved, but it stayed in the contraction zone with a reading of 48.3 after 47.3 in January. The dollar amount beyond terms staged yet another improvement that fell just short of entering expansion territory. It was at 45.7, the lowest level in well over a year, and has now rebounded to 49.8. The dollar amount of customer deductions did expand enough (49.2 to 50.6) to leave the contraction zone. The filings for bankruptcies category improved further on the 53.6 reading last month and now stands at 56.5. This very good news as this the time of year that often features retail sector bankruptcies.

The rest of the year promises to be a challenge for the retail sector as the levels of consumer confidence are dropping steadily. There will likely be additional inflation pressure as the trade wars and tariff battles continue to heat up.

February 2019 versus February 2018
Last month was more than a little worrying. The data showed some deep slumps and there was concern that a trend was deepening, but along comes February and the trend seems to have reversed to a significant degree.

Pretty Much Everybody Saw This Coming

To the shock of absolutely nobody, the summit between Trump and Kim was a bust. If there was any surprise at all, it was that Trump acted quickly and left Kim with no doubt that this was entirely a collapse of his making. The North Koreans have done nothing but make demands. Trump made it clear they had to disarm before any more sanctions would be lifted.

Analysis: The real question was why this summit took place at all given that Kim has made no progress on any of his promises..

Being Aware

To be honest there is a great deal to be aware of these days. A person can be forgiven for missing a lot of what goes on around them. I am quite sure I miss many opportunities to do some small thing for somebody when they needed it, but I try to keep my eyes open. Lately, I have noticed a group of people that could really use help and rarely seem to be given any. These are the people who are taking care of elderly or infirm relatives and friends. We tend to be willing to assist parents with their small children, but perhaps look right past the adults.

Today in the airport, there was a woman with her mother—apparently dealing with Alzheimer's to some degree. Her mother would abruptly jump up and head to the exit from the airport and her daughter had to leap up to stop her. I struck up a conversation with the mom—just to keep her distracted and still. It was a rambling interaction. I am sure she thought I was an old neighbor, but her daughter got to finish her lunch. Earlier in the week, a man of some years was trying to navigate the crowded airport with his wife in a wheel chair and towing two mammoth suitcases. I offered to push her to the appropriate gate.

Very, very small things, but when people are dealing with this every single day, they get weary and start to feel very alone and invisible. They would never ask anyone to help, but they are genuinely grateful for such a simple gesture.

February CMI

The chart is the year-over-year comparison for the Credit Managers' Index. As you can see, it has been volatile with down months followed by good ones. It has been hard to get a trend going as these shifts have taken place roughly every other month. The last of these readings has been positive and the fervent hope is that this lasts for a few months.

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