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Strategic Global Intelligence Brief for March 29, 2019

Short Items of Interest—U.S. Economy

Economic Slowdown Was Corporate Slowdown
The latest data coming from the investment community shows that much of the problem with economic growth at the end of 2018 can be attributed to a radical slowdown in the rate of corporate profits. This slowdown was masked to some degree by the surging stock market as it was assumed that investor optimism was being fueled by the performance of the companies in which they were investing. Turns out many were ignoring the fact that these companies were struggling. This is due in part to the large volumes of foreign investing in the U.S. markets as there have been such limited options in Europe and Asia. The corporate community is now showing that struggle graphically and the economy is stuttering.

Fed Warnings About Global Growth
Vice Chair Richard Clarida has highlighted a risk that the Fed always pays attention to but where it is now applying more scrutiny. There has been some confusion regarding the need for the Fed to pump up the U.S. economy given the fact that growth numbers are not really all that bad. Clarida points out that global growth has become anemic. This has especially been the case with nations where the U.S. does a lot of business. Exports are over 15% of the U.S. GDP. If there is a serious level of slack demand from overseas markets, the U.S. suffers. He warns that steps could be taken to push stimulus even if the U.S. economy is still growing at a respectable rate.

Q4 Data Revision
The latest Q4 numbers are being released today. They will look worse than originally thought—growth may be down to 2.2% or 2.3% rather than the 2.6% originally reported. On the more positive side, there has been a partial rethink of Q1 and these estimates have been slightly improved. Some had thought Q1 growth would be down as low as 0.5%, but now the view is that growth will be somewhere around 1.2%. Second quarter may see numbers that are getting closer to 2%. It is possible that by the end of the year the economy will be close to 2.5%—not exciting, but on pace to replicate what has been the norm for the last 20 years.

Short Items of Interest—Global Economy

North Korean Incident Nothing Less than Bizarre
A few weeks ago, the Spanish police were called to the North Korean embassy after reports that a badly beaten woman was staggering around the street nearby. She said she had been attacked at the embassy and had escaped by jumping from a balcony. When the police tried to gain entry, they were denied access by what seemed to be a North Korean official. It wasn't. The embassy had been seized by a group of anti-Kim activists who had beaten embassy officials and stole computers and documents before vanishing and escaping to Portugal and other locations. The anti-Kim groups have become more and more desperate as they assume that President Trump is now supporting him.

Chinese Crackdown on Labor Unions
A group of workers in Shenzhen have been trying to form an independent union. This has drawn the ire of Chinese officials. Organizers have been detained and many have simply vanished. The crackdown has been harsh and seems intended to signal to others that such a move will be thwarted, and violently if need be.

Ukrainian Comedian Leads Polls
The populism and anti-establishment argument is winning the day in Ukraine as well. The leading candidate to win the presidency is Volodymyr Zelensky. His campaign has had very little substance and no platforms—just wicked jabs at the others running for the office. Despite the massive issues facing the country (collapsing economy, Russian occupation and threats, etc.) his campaign has focused on jokes and new dance moves.

Migration Crisis in Europe
There has been such focus on the immigration mess in the U.S. that to some degree the press has forgotten about the issue as it has affected Europe. It has certainly not escaped the notice of the European governments and the populations most affected by the exodus from the Middle East and North Africa. The latest drama involved the seizure of a tanker by a group of migrants who had been rescued by the tanker as their small craft was falling apart. When the migrants learned the ship was heading to Libya, the country they had just left, they took control of the ship by overpowering the small crew.

Analysis: The ship ended up in Malta where authorities retook control, but the incident underscores the desperation of the migrants.

Credit Managers' Index Dips Again
Each month, we have the responsibility of summarizing and assessing the data that is collected from the National Association of Credit Management in their Credit Managers' Index (CMI). The CMI is modeled to some degree on the Purchasing Managers' Index (PMI) and tends to be even more forward looking than the PMI. To see the complete CMI with graphs and charts and historical reference go the NACM website.

Month after month, we seek the ever-elusive trend of the Credit Managers' Index (CMI) going further into positive territory. One month our hopes are up and the next month they are dashed. This was one of those months where the scores reversed again. It is not a crisis situation by any stretch as the numbers are still firmly in the expansion zone (a score above 50), but we all would like to see improvement. The challenge is that much of the other economic data is telling the same story. There is a low expectation for first quarter GDP and reductions in the readings that are coming from the Purchasing Managers' Index as well as data from industrial output to capacity utilization. Maybe credit managers should be glad this month wasn't worse.

The combined CMI score was 53.6 in March; it was at 54.9 the month prior. In January it was 53.4, so perhaps February was the little anomaly and now the numbers are back to where they should have been. The combined score for the favorable factors slipped back out of the 60s again, at 59, the lowest point reached in the last 12 months (even going back to 2017). The combined score for the unfavorable factors fell as well and is back in the contraction zone under 50. It was at 49.4 in January and is now at 49.9—very close to the 50 line, but still below the level of contraction.

The details are interesting as far as identifying trends. The sales numbers fell out of the 60s with a reading of 58.2, the lowest score in the past two years. These numbers have been in the 60s consistently until this year. There was also a decline in new credit applications, but they have been this low before (58.2 in January and 57.5 in December). The reading is now sitting at 57.8 after reaching 58.9 last month. The dollar collections reading slipped as well (59.1 to 56.6). That marks the lowest point since April 2018. The amount of credit extended stayed in the 60s and actually improved as it went from 62.3 to 63.5. This may be the most interesting piece of data of all. In spite of all the down performance there was more credit extended. That suggests good customers are asking for and likely getting more credit. It is also important to note that even with these reversals, the favorable factors remain comfortably in the 50s.

The changes were also noticeable in the nonfavorable categories. The rejections of credit applications trended down a bit but not as much as would be expected given the drop in new applications for credit. The reading last month was 52.1 and this month it was 51.2. Those applying for credit seem to be worthy enough to get much of what they are asking for. One of the major concerns is the sharp drop in the reading for accounts placed for collection. Last month it was at 49, close to the high point for the last 12 months. This category has not escaped the contraction zone since September of last year when it hit 50.2. There was actually a little improvement as far as the disputes category was concerned as it rose to 49.5 after a reading of 48.5 in February; still not in the expansion zone, but getting a little closer. The reading for dollar amount beyond terms fell, but managed to remain in the expansion zone (barely) with a reading of 50 compared to the 51.3 the month prior. The dollar amount of customer deductions fell out of the expansion zone with a reading of 48.8 from last month's 50. There was also a dip in filings for bankruptcies—meaning there were slightly more this month than last. The reading was at 53.7 after a 54.9 mark set in February. There is no wholesale collapse under way, but the data trended down generally, and in some sectors the decline was significant—the worst reading in the last 12 months. The hope is that next month trends back up, but with all the other generally down data coming out of late, that doesn't seem likely.

Manufacturing Sector

In many respects, the manufacturing sector has been pretty healthy the last few years—its share of GDP has grown and the sector now accounts for about $2.7 trillion dollars of the total U.S. GDP. If manufacturing was an independent country, its GDP would be larger than that of India—it would be the ninth-largest country in the world. There have been some weaker signals of late—everything from a reduced Purchasing Managers' Index to slips in capacity utilization and capital investment. The shift is seen in the CMI data as well.

The combined score for the manufacturing sector is 54.6, only slightly less than the reading the month before at 54.8. The combined score for the favorable factors was 60.3, very close to the reading in February when it hit 60. The combined score for the nonfavorable factors slipped slightly from 51.4 to 50.7, but it still managed to escape the contraction zone. As usual, the details tell a more complete story.

The sales reading slid out of the 60s with a bit of a thump. It had been at 61.7 and now sits at 58.4—the lowest point since the middle of 2017. The sluggish economy has been taking a toll on sales. The new credit applications data improved, however, from 58.6 to 61.2. The sense is that companies are feeling some of that reduction in sales and are trying to improve the situation with more offers of credit. The dollar collections reading slipped out of the 60s with a reading of 57.8 after being at 60.5 the month before. The amount of credit extended jumped dramatically from 59.2 to 63.9. All in all, the data for the favorable factors looked solid and even improved in some key categories.

The data for the nonfavorables was also somewhat mixed. There was almost no change as far as rejections of credit applications is concerned. It was at 53.5 last month, 53.2 this month and 53.3 in January. The big change this month was in accounts placed for collection as it has shifted from 50.5 to 46.8, as low as this reading has been in over a year. This is of some concern as this can be the last stage before companies start to slip into bankruptcy. In contrast, there was improvement in the disputes category as it moved from 48.7 to 50.2. The dollar amount beyond terms slipped a little, but has remained in expansion territory with a reading of 51 after one of 52.8 the previous month. The dollar amount of customer deductions also fell a little and is now a bit deeper in the contraction zone (49.3 to 48.4). The filings for bankruptcies improved a little from 53.3 to 54.6.

By and large, the manufacturing data was pretty solid. There was no real shift in either direction this time and the numbers are still solidly in the mid-50s.

Service Sector

The service sector did not fare as well as manufacturing. The numbers are still in the low-50s, but have slipped a bit from what they had been the month before. The service sector as a whole has suffered some reversals in the past several months as measured by the Purchasing Managers' Index as well as some of the other measures of spending and consumer confidence. The consumer is spending far less on things like entertainment and restaurant meals. There have been declines in many areas, but health care has been holding steady as usual.

The combined score for the service sector was 52.6, down from the 55 notched last month. This remains a respectable number, but it's slipping closer to the contraction zone. The combined score for the favorable factors slipped out of the 60s and is now sitting at 57.7, as compared to the 61.5 in February. This is the lowest point this index has reached in over a year. The combined score for the nonfavorable factors dropped into the contraction zone with a reading of 49.1 compared to 50.6 the month before.

The sales category saw a major dip—from 63.5 to 58, the lowest point reached in close to three years. The numbers are still in the high 50s, so there is no need to panic, but it isn't the trend that anyone would prefer. The new credit applications data also fell hard as it moved from 59.2 to 54.3. There is obviously a lot more trepidation regarding requests for credit. The dollar collections data also fell off, but not quite as dramatically (57.7 to 55.5) and the amount of credit extended skidded as well, but still managed to stay in the 60s with a reading of 63.2 compared to 65.5 in February.

The rejections of credit applications slid a bit from 50.8 to 49.1, but the shift was not all that dramatic. Given the reduced number of new applications, it would seem to indicate that those applying are quality applicants. Accounts placed for collection went from 47.5 to 46—not a major drop but heading in the wrong direction. The disputes reading stayed very close to what it was the month before (48.3 to 48.9). The dollar amount beyond terms category also changed very little. That is also good news. It was at 49.8 and is now at 49. This is still not in the expansion zone, but is certainly close to breaking out of contraction. Dollar amount of customer deductions shifted from 50.6 to 49.1—not a major dip, but another marker that has now fallen into the contraction zone. Filings for bankruptcies slipped from 56.5 to 52.7; not a welcome piece of news, but at least this category is staying in the 50s which is more than can be said for any of the others. This marks the first time in over a year there have been so many categories stuck in the contraction zone.

March 2019 versus March 2018

This month the index fell a little, but it seems to be mostly due to weak service sector activity as manufacturing more or less held its own.

Work Ethic
I do not want to sound like some kind of crotchety old geezer complaining about "kids today." I am sure it will sound that way though. I addressed a small group of manufacturers in Kansas City yesterday. Inevitably, the conversation worked its way to the issue of labor shortage as this continues to be one of the most pressing issues for the sector as a whole. One of the comments I hear frequently from people who are not directly engaged in these businesses is that companies need to do their own training and stop whining that schools are not doing their jobs for them. This is a stunningly ignorant comment.

Beyond that, there is the experience these guys have with almost every new hire they make anymore. One guy took out an ad and offered a job where the applicant would be trained fully and completely as a certified machine operator—complete with formal classes, one-on-one mentoring and support. All while being paid close to $20 an hour. He did not receive one single applicant. The others commented that new hires jump ship for a dollar or two more an hour and last no more than six months—even when it is pointed out that with experience come raises. They can't get people to show up for work on time, can't get them to quit wasting time at work on their cell phones and can't get people to take responsibility for much of anything. It was not just one or two complaining—every one of them had similar stories. There really does seem to be a "work ethic crisis" in the country at this point. That does not bode well for the future of the U.S. economy.

Mediterranean Migrant Arrivals in 2018

The numbers are already staggering and they keep increasing as the countries of the Middle East and North Africa continue to deteriorate. The EU is overwhelmed by the task of rescuing and accommodating the refugees. Now, the populations of Europe are rejecting any further engagement. The populism that has swept people to power in Italy, Hungary and elsewhere is often rooted in the ferocious opposition to the influx of people from throughout Africa, the Middle East and South Asia. The strategy has shifted from trying to rescue these people to halting the migration in the country of origin through blockades and through providing aid to these governments to beef up their own security.

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