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Strategic Global Intelligence Brief for March 2, 2018

Short Items of Interest—U.S. Economy

Tariff Shock Waves

Frankly, most analysts and observers never thought it would come to this. There were so many reasons that imposing tariffs on imported steel was a bad idea. It instantly makes everything made of steel more expensive in the U.S., such as cars, buildings, equipment, etc. It instantly pits the U.S. against its major allies, as we get the vast majority of our steel from countries like Canada, Japan, South Korea and Mexico. It also guarantees a trade war as these nations are prepared to retaliate immediately. It was assumed the U.S. would look for other ways to bolster the domestic steel sector and/or find a way to target specific nations. The U.S. objection to steel imports was focused on China in the beginning. This may yet be the case as the details have not been released. It even seemed that President Donald Trump's statement took his own staff by surprise. More on this subject in Monday's newsletter.

Fed Vice Chair Likely to Be Pragmatist

The suggestion is that Columbia University Economist Richard Clarida is going to be Trump's nominee to be vice chairman of the Federal Reserve. He is considered a pragmatist and not an ideologue by any stretch. What has been interesting about the Trump position on the Fed is that it has been imminently mainstream and noncontroversial. Many of the appointments made to other agencies have been intensely criticized and have been from extreme positions. There are certainly many who would like to see major changes at the Fed, but Trump doesn't appear to be one of them given the people that he has nominated. This is shaping up to be a very traditional and very practical Fed, with few preconceptions about policy.

Spending Has Not Caught Up to Tax Windfall

The good news is that the tax cuts provided a nice boost to household income as they were supposed to do. The combination of reduced taxation plus the payment of bonuses and increased numbers of wage hikes has resulted in real gains for the consumer. The bad news is that these consumers have not yet started to spend that windfall. The retail numbers are far lower than they were expected to be at this point. This either means that people are concerned about debt and are paying it down or they may be preparing to spend big later in the year—all eyes are now on the vacation travel season.

Short Items of Interest—Global Economy

U.S. Allies React to Tariff Plan

It would not be an overstatement to assert that U.S. allies are extremely angry at the Trump plan to impose tariffs on steel and aluminum and many have wasted little time in terms of reaction. The U.S. will likely be hit immediately with tariffs and restrictions from Europe, Japan, Canada and dozens of other nations. The initial estimate is for these new barriers to cost the U.S. as much as 5% of its export volume—a serious blow considering that exports are 15% of the U.S. gross domestic product (GDP). There remain possibilities of exemptions and lower tariffs for some nations and this may all be positioning.

Trump and Trade Wars

The statement that has many economists scratching their head is, "Trade wars are good and easy to win." This was Trump's response to the threat of retaliation over the steel tariffs and nothing in the trade data supports that glib assessment. The U.S. exports sophisticated machinery and food. The latter is easy to replace as far as other nations are concerned. That would damage the U.S. agricultural economy, and the rest of what we sell overseas goes to developed nations like ourselves. The idea of "winning" a trade war is absurd on its face and, in the case of the U.S., the loser will be the consumer who will see their costs soar for everything they currently buy.

Bank of Japan Suggests Time for Stimulus May Be Ending

As the rate of unemployment falls to a 25-year low, the head of the Bank of Japan has suggested that it is time for the loose monetary policy to come to an end. The yen has reacted immediately, as the assumption is that rates will start to come back up sooner than later.

Is That a Trend I See in the CMI?

Each month, we are asked to comment on the data collected by the National Association of Credit Management in their Credit Managers' Survey (CMI). The CMI is modeled on the Purchasing Managers' Survey and has the same virtues. The people laboring in the trenches of the credit industry just tell it like it is and don't try to sway their responses—just as the purchasing managers just report on what they are buying. Like the Purchasing Managers' Index (PMI), the CMI has an easy system that holds that numbers over 50 indicate expansion and numbers under 50 suggest contraction. For a deeper look, including graphs and charts, go to the association's website at www.nacm.org. What follows is the executive summary.

Analysis: Can it be true? Are we really seeing a positive trend emerge as far as NACM's Credit Managers' Index (CMI) is concerned? To be honest, two good months in a row hardly constitutes a trend, but it has been many months in a row for all this up and down gyration. It is gratifying to see two consecutive months of solid performance. The numbers for this month's combined score are up—56.5 as compared to the 55.1 that was noted last month. This latest reading is almost as high as it was last November when it reached 56.6. The index of favorable factors also improved, and by quite a lot—moving from 61.4 to 64.9. This is again close to the numbers that were seen last November when the reading was 65.7. There was similar progress in the index for unfavorable factors—50.9 for February from 50.8 in January. The movement in the unfavorable categories has been slight for some time, which has been an ongoing concern. The good news for the moment is that these readings have been relatively stable and even getting a little better.

The details have been interesting—as is usually the case. The majority of the movement has been in the favorable categories, but there was some significant movement in the unfavorables as well. The sales category made a big jump from 63 to 66.8, marking the highest point since September of last year when it hit 67.3. One of the themes you may have noticed already is that this month's numbers are back to what they were in the latter part of last year when the economy as a whole was growing at around 3%. The new credit applications category jumped back into the 60s by moving from 59.8 in January to the current reading of 63.3. There was a similar pattern as far as dollar collections were concerned, as last month the reading was 58.7 and this month the reading is 62.9. To complete the favorable sweep, there was the reading for amount of credit extended (64.3 to 66.4). These are really very healthy numbers and all rival the highs seen last fall.

The numbers were also better in the non-favorable categories, but the overall readings have not generally been as impressive. The bottom line here is that there are still lots of companies that are struggling and have not yet participated in the recovery that has been driving the economy as a whole. As a matter of fact, there is some additional risk these days as competitors feeling that growth start to push everyone to keep pace—some will simply not be able to keep up.

The rejections of credit applications slipped a little (51.8 to 51.5) reflecting some of the above mentioned desperation. Ready or not, there are companies seeking credit to expand and stay with the competition, but are not qualified to get what they seek. There was also a substantial dip in accounts placed for collection as the numbers fell from 51.7 back to contraction territory (anything under 50) with a 49.8 reading. Companies are still in trouble and are likely to react more negatively as expansion pressure grows. The disputes category stayed the same—better than falling, but still in contraction at 49.6. The dollar amount beyond terms category has been a problem all year as companies fall into the slow-pay category one month and manage to escape it the next. This month there was an improvement from 47 to 49.9, but that is still in the contraction zone. There was a slight reduction in the numbers for amount of customer deductions from 49.7 to 49.1. The only reading that really seemed to improve was filings for bankruptcies (55.2 to 55.4). The most important observation from the unfavorable list is that four of the six readings are in contraction territory—albeit less dramatically than was the case the previous month.

Manufacturing Sector

There was more good news when one breaks down the manufacturing data. The combined score was 54.1 last month and is 56.2 this month—equal to the highest point reached since April of 2017. The combined score for the favorable factors was also an improvement—going from 60.7 to 64.9, almost to the high point reached in November of last year. The combined score for the unfavorable factors also improved from 49.7 to 50.3. This is still close to the contraction zone, but it is nevertheless out of that danger for the moment. This reading above 50 has been hugging that boundary between expansion and contraction all year.

The sales category jumped dramatically—going from 62.7 to 65.8, taking the reading to levels not seen since (you guessed it) November of last year. The new credit application reading took a big leap as well—from 57.8 to 65.2, as high as it has been in over two years. There is a great deal of movement in the factory and manufacturing sector as there is a lot of catching up to do. Now, there is money with which to do that catching up. There is some sense of frantic activity here though and that is reflected in the less spectacular growth in the unfavorable categories. The dollar collections reading also improved (58.7 to 62.8). There was also growth in the amount of credit extended category as it moved from 63.4 to 65.9. Just as with the overall score for the CMI, the manufacturing sector is looking solid and focused on the future.

The improvements in the non-favorable categories were subtle, but some of these are nonetheless important indicators. The rejections of credit applications slipped a bit from 51.8 to 51.5. This suggests that some of those seeking new credit are unlikely to have much success locating it. The crush of competition has more than a few of the manufacturers scrambling to stay competitive, whether they can really afford the expansion or not. If they don't try to get up to speed, they know they will fall further behind. There was also a drop when it came to accounts placed for collection (51.2 to 50.1)—still in expansion territory, but just barely. The readings for disputes slumped further into contraction territory with a slide from 48.4 to 47.6. However, there was a little bit of better news as far as dollar amount beyond terms. The slow-pay reading is still in contraction territory, but not as deep as it was before as it went from 45 to 48.5. The dollar amount of customer deductions also improved, but remained mired in contraction slipping from 46.6 to 47.7. The filings for bankruptcies category showed a bit more promise as it moved from 55.3 to 56.3, but the real story is that three of the six categories are in contraction territory—the same as it was last month.

The manufacturing community is diverse—that goes without saying. At any given time, there are sectors that are doing well and others that are struggling. Right now, the energy-related manufacturers are doing better than at any time since the boom in the last decade, but the auto sector has been slowing down. Health care manufacturing is up as usual, and so is aerospace, but the farm sector is down. The ups and downs tend to even out over the longer term.

Service Sector

The service sector also saw some improvement, but more limited than has been seen in manufacturing. The fact is that retail is somewhat slower this time of year and the winter months are not generally good ones for the service-heavy construction sector. The combined CMI for services went from 56.0 to 56.8—not a big gain, but one that took these numbers closer to what they were in November of last year. The favorable factors jumped quite a bit—from 62.2 to 64.8, but these are still not as robust as the numbers were in November. The unfavorable index actually fell a little (51.9 to 51.5). This is not a dramatic drop as the important note is that this category remains in expansion territory.

The sales reading was quite robust and back to numbers seen last year. It increased from 63.3 to 67.8. The new credit applications reading slipped a little. This was a marked contrast with the growth that was seen in manufacturing. There are many in retail and construction that want to get through the slow season before loading up on debt. Last month, it was at 61.8 and this month, it is 61.5. The dollar collections reading jumped quite a lot—that always makes the credit manager happy. It went from 58.6 to 63. The amount of credit extended also shifted up (65.1 to 66.9). The really good news as far as the favorable factors are concerned is that all of them are in the 60s.

The rejections of credit applications slipped a little. That was expected given the decline in applications for new credit. It is still in the expansion zone, though, with a reading of 51.5 as compared to the 51.8 from the previous month. The accounts placed for collection reading slipped quite a lot. This is a bigger worry. It has gone from 52.1 in January into contraction territory in February with a reading of 49.6. The disputes category improved a little with a reading of 51.6 after one of 50.9 last month. The dollar amount beyond terms reading climbed out of the contraction zone with a reading of 51.3 after a 49 level the month before. The slow-pay issue has started to fade just a little—not uncommon after the holiday season ends. The dollar amount of customer deductions fell off a bit from 52.7 to 50.5 and is now barely hanging on to the expansion zone. The filings for bankruptcies reading also fell a little from 55 to 54.4 as retailers evaluate their standing at this time of year. This has been a year where the online option has really taken its toll on the brick-and-mortar operations.

This was a good month and it came on top of a good month. Is that enough to qualify as a trend? Probably not yet, but one has to start somewhere. If there are decent readings in the next month or two, we will have an actual recovery to talk about.

Steel/Aluminum Tariff Shock

The threat has been dangling for the better part of the year and now Trump has pulled the trigger—sort of. During the campaign, there was a promise to protect the steel industry in the U.S. from foreign competition and China was the primary culprit—accused of dumping steel in the U.S. and undercutting the U.S. industry. It turned out to be far more complex than this and the tariffs were delayed. Even now, it is not certain what countries will be slapped with what.

Analysis: We will have more to say on this after a weekend of reflection on what has actually transpired. Many questions still remain.

Demanding What You Never Knew Existed

Yesterday, I had an opportunity to speak to a group of business people in the electronics business—everything from security systems to sound systems to stadium scoreboards and anything else you can think of related to this kind of high tech. It is the annual meeting of the National Systems Contractors Association. In preparing for this keynote speech, I was struck by something. The majority of what these companies provide are essentially unknown to the consumer until they reveal it. People have no idea what is possible these days and throughout the meetings it was just one revelation after another. As I considered this, it dawned on me that this is more common than I thought. The old assertion is that demand begets supply—that consumers want something and somebody comes along to provide it in response to that demand.

I don't think that is the way it works these days. The products and services offered are not something we originally knew we wanted since we didn't even know they existed. I grew up with a party line phone and the only thing I thought to demand would be a private line at some point, not a phone that functions as a camera, GPS system, music delivery tool and can likely communicate with distant planets (I just know I have seen an icon for that). Now that I know it can do all of that, I demand that it does all of that. It seems that supply does indeed drive demand to a significant degree—consumers are still making the ultimate decision on what to buy. However, they are more often than not being led to want and demand something by the innovation of the producer and the marketing that takes place.

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Monday, 25 May 2020