Strategic Global Intelligence Brief for May 30, 2018

Short Items of Interest—U.S. Economy

Housing and Labor Shortages
The U.S. has an acute shortage of workers in a wide variety of fields. This has been made abundantly clear over the last few years. There are many factors that play into this issue—lack of training opportunities, lack of knowledge regarding these opportunities, personal issues that preclude people taking these jobs. However, there is another inhibitor that many are unaware of. There is not enough housing in the communities that often host manufacturing jobs or agricultural jobs. A company may want to hire and they may have recruits, but these potential employees soon discover there is no place to live in the community. That leaves them with long commutes. Many reject that burden and expense.

Consumer Confidence Rebounds a Bit
The latest survey of consumer confidence by the Conference Board suggests that the consumer remains pretty upbeat regarding the state of the economy right now, but they are less enthusiastic about what the future might hold. This has been a theme for much of the year as people have been reacting to developments such as the tax cut and the surge in economic growth that took place last year. While these developments have been welcome, there is growing concern as far as inflation is concerned. People are feeling that pressure and they are anticipating a point where the Fed starts to crack down and hike rates.

Kim Advisor to Visit U.S.
General Kim Yong-chol is said to be one of Kim Jong-un's closest advisors. He was once head of the country's intelligence system. This resulted in his being prohibited from traveling to the U.S., but that restriction has been waived. The assertion is that North Korea is willing to give up its nuclear weapons in exchange for massive levels of support for building a modern economy as well as ironclad reassurance that no effort will be made to remove Kim Jong-un from power. The visit by General Kim suggests that North Korea wants more than words.

Short Items of Interest—Global Economy

Italian Crisis Spreads
Italy's president has refused to approve the formation of a government run by the two insurgent parties that finished ahead in the polls. This effectively forces another election. Many think that it will only make these parties that much stronger as voters now feel they are being ignored. The impact on global markets has been severe—sending stocks lower than they have been in over two years. The fear is that Italy's crisis quickly becomes a European crisis and from there a global banking crisis. The loss of the U.K. was one thing, but Italy is a founding member of the EU. Its withdrawal could well sink the whole organization.

Europe Rebuffed by Ross
The effort on the part of the Europeans to get permanent exemptions from the steel and aluminum tariffs has been thwarted by Secretary of Commerce Wilbur Ross and others in the Trump White House. His assertion has been that nobody in the U.S. has been hurt by more expensive steel and aluminum. That will come as news to the manufacturing community that has been seeing dramatic price hikes. The manufacturing organizations are seeing daily reports of lost business, lost opportunities and loss of jobs. These impacts will only become more severe if these tariffs are imposed, as right now, many of the nations that export to the U.S. have been exempted temporarily.

Mexican Business Community Warns
The Mexican business leaders have never made a secret of their opposition to the campaign of Andrés Manuel López Obrador (AMLO), but they are trying to be as explicit as possible—asserting that Mexico faces catastrophe should he be elected and tries to implement his populist agenda. The investment community has already started to exercise caution. It is assumed that relations with the U.S. will rapidly deteriorate as there is no love lost between AMLO and President Trump.

Bounceback for Credit Managers' Index

Lately, there have been more than a few sighs of relief heard as people try to review the state of the current economy. Some of the indicators attracting the most attention have stuttered and pointed to big declines only to stage a rebound later. Inflation numbers jumped with the ferment in the Middle East and then calmed. There were also a series of reactions to the steel and aluminum tariffs and other indicators of a trade war. The CMI has had its share of scares as well. In April's report, the bottom fell out of the dollar collection category, but this month it has bounced back to a more expected position. The April reading now seems an anomaly, but one that could occur again. The drop was drastic in April, but there has been up-and-down movement in that category for over a year—just not usually to this extreme. To read the full report, go to the National Association of Credit Management website at www.nacm.org.

Analysis: The combined score for this month's CMI was back to what it had been through most of the year. It now stands at 56.6, nearly the same as it was in February when it stood at 56.5. The index of favorable factors rebounded strongly as well, hitting 65.7. It had not been this high since last November. The index of non-favorable factors recovered a little and left the contraction zone (anything below 50) by moving from 49.4 to 50.6—exactly the same reading as March.

As is generally the case, the interesting data is contained in the sub-index readings. This month looks like a return to positive news across the board as far as the favorable numbers. The sales category jumped as high as it has been since the recession with a reading of 69.6—just a hair shy of 70. This data tracks with much of the other data releases, such as durable goods orders and capacity utilization, as well as that from the Purchasing Managers' Index. The new credit applications data also improved a bit by moving from 62.2 to 63.8, showcasing an active demand for new credit. Next, the controversial dollar collections number launched its way out of the doldrums by moving from 46.7 to 62.5—the same level as was seen in February. The best theory on this dramatic drop has been that many companies suddenly began to protect their cash flow and stalled their creditors for a while. These were the weeks of maximum unease over the impact of the tariff and trade war threats. The last of the favorable readings is amount of credit extended. Here, the change was slight, moving from 66.1 to 66.8.

The unfavorable factors remain generally low, but there is not much indication that conditions are getting any worse. The rejections of credit applications improved just slightly from 51 to 51.3. The accounts placed for collection stayed in the contraction zone, only shifting from 48.7 to 49. The disputes category showed much the same behavior with a slight improvement over what it was the month before (48 to 48.1), continuing to languish in contraction territory. The other marker that is watched as carefully as the dollar collection data is dollar amount beyond terms. It shows that creditors are trying to stretch their terms. This reading is still in contraction territory but not nearly as deeply, moving from 46.4 to 49.4. The dollar amount of customer deductions also stayed in the 40s but improved from 48.4 to 49.7. The filings for bankruptcies remained thoroughly in expansion territory at 56.4 compared to 53.8 in April. Although these numbers all saw some improvement, the majority of the categories are still showing contraction. Only two of the six are in the 50s, which demonstrates some continued fragility. On the plus side, they are all trending in a generally positive direction and might break into expansion territory sooner than later.

There is generally good news on the manufacturing front, which is more than a little encouraging and somewhat unexpected. The manufacturing sector overall has been riding some impressive waves up and down. The tax cuts at the start of the year really had a stimulating impact on the small- and medium-sized manufacturers because they were able to do the purchasing they had been putting off. On the other hand, the sector was left dealing with the uncertainty of tariffs on key commodities, like steel and aluminum, as well as the looming threat of trade wars with China, NAFTA nations, Europe and almost every other nation they sell to. Much of the data from manufacturing looks like the overall CMI this month.

The sales category comes very close to the rarified air of the 70s with a reading of 69.6, compared to the 66.2 seen last month. The new credit applications category stayed strong moving from 60.8 to 62.4. The dollar collections data that had collapsed so dramatically the month prior rebounded and is now at 63.5, opposed to the 46.1 that was notched in April. This anomaly is still a little mysterious and seems related to trepidations regarding cash flow. The amount of credit extended stayed almost exactly where it had been the month before (66) with a reading of 66.4.

Just as with the overall CMI, there was not that much movement in the unfavorable categories. The rejections of credit applications improved a little from 52.4 to 53.4. This is good news given the number of new applications. When these readings diverge it means companies that are not all that creditworthy are requesting credit and are subsequently turned down. The category of accounts placed for collection surged out of contraction territory with a 51.3 reading compared to 49.8 in April. This is especially welcoming news since there has been concern that those low dollar collection numbers would next trigger more collection activity. Disputes stayed in contraction territory and slid quite a bit deeper (48 to 46.9). This is one of the cautions that were triggered by last month's dollar collection fiasco. In contrast, the dollar amount beyond terms ramped up and escaped the contraction zone with a reading of 50.2 compared to April's 46.8. Again, this was somewhat unexpected good news given the usual link between dollar collection and slow pays. The dollar amount of customer deductions remained right where it was at 48.4. The filings for bankruptcies showed a nice gain to 58. This is the best reading seen in this category in several years and suggests most of the manufacturers are thriving.

The sales category can be volatile this time of year and not because there is a lot of activity. The big spending holidays are over and there are all the inhibitors as far as the consumer—everything from the looming reality of filing tax returns to bad winter weather and the hangover from all that holiday-inspired spending. The data matches pretty well with what had been observed with manufacturing but with a few unique trends. The sales category was strong with services as well, despite the slow pace of retail activity. Fortunately, the other service sectors have more than made up for this.

The construction sector performed well as did finance and accounting, taking the latest reading to 69.6 after a 65.5 mark in April. The new credit applications category also performed well, moving from 63.6 to 65.1. As with manufacturing, the dollar collection data improved dramatically (47.3 to 61.5). This abrupt fall and rise will remain confusing for a while, at least until there is some kind of pattern manifesting. The amount of credit extended moved even further from the 66.2 reading in April and is now at 67.2.

The rejections of credit applications slipped a bit, which is slightly worrying. It was at 49.5 and is now at 49.2. This is hardly earthshaking, but when the applications and rejections are up, it signals that some of those who are seeking credit may be getting desperate. The accounts placed for collection also slipped a little from 47.7 to 46.7, yet another slightly troubling sign given the issue with dollar collections last month. The disputes reading improved somewhat but remains in contraction territory. It was at 47.9 and is now at 49.3. The dollar amount beyond terms reading also improved (46 to 48.5), but it was still stuck in contraction territory. This is good news as one would have expected this category to have trended worse if that dollar collection issue had worsened. The dollar amount of customer deductions broke into expansion territory by a hair, reaching 50.9 after being at 48.3 the month prior. The filings for bankruptcy reading also saw some improvement going from 52.4 to 54.8.

The big story this month was the return to normal readings in dollar collections. It seems that April was an anomaly when it came to how creditors were choosing to handle their obligations. There are generally good readings in the favorable categories, but most of the unfavorable readings continue to be in contraction territory.

OK—So the Trade War Is Back On Now?
It is tempting to draw some parallels between the Trump White House and Kansas weather. The old joke has been that if one doesn't like the weather in my home state all one has to do is wait 10 minutes and it will change. Apparently, this saying can be applied to Trump's trade policy. Less than two weeks ago, the delegation that traveled to China came back with the declaration that the trade war was no longer an issue. It seemed that Steve Mnuchin and company had made some progress and had averted a nasty little set of tariffs and trade restrictions. Yesterday, that all seemed to go out the window again. Trump announced billions in tariffs on a wide range of Chinese exports. What accounts for these wild swings?

Analysis: At the moment, there are two basic theories in play. The first is that President Trump waffles between two groups of advisors and changes his mind frequently according to which of these groups has his attention. There are the fiercely anti-China, anti-trade and nationalistic advisors who promote policies of isolation. This would include people like Peter Navarro, Robert Lighthizer and Wilbur Ross. Then there are those who favor a nuanced set of policies that include trade pacts and the need to work with other nations for common goals. These would include Steve Mnuchin, Robert Kudlow and many in the GOP leadership. President Trump seems to shift back and forth between these positions according to how he thinks this plays to his core base of support.

The other theory is that China is not necessarily living up to the promises it made at these meetings and the U.S. is holding its feet to the fire. It has been a common Chinese tactic in the past. Agree to all kinds of reforms and plans and then find excuses to drag the process out indefinitely. The U.S. may have expected China to be more forceful with North Korea and thus ensure that the summit between Trump and Kim would take place. It has become apparent that this meeting is far more important to Trump than to Kim. He has staked his reputation as a dealmaker on it. If Kim walks away Trump loses face. If China made promises it has not kept, there would be reason enough to remind them what is at stake.

Regardless of the rationale, this kind of on-again, off-again trade policy is devastating to U.S. business interests. Nobody can count on anything at all. Every arrangement made is subject to the whims of the political needs. That is simply not the way that business works. This is especially true when pursuing global business as there are many inherent risks already—everything from currency changes to transportation issues, management differences and so on. Stability in terms of trade issues is crucial. Under this administration that has not existed at all.

Another Health Glitch for Loyal Readers
A few weeks ago, I promised loyal readers that I was through with health updates in this newsletter. All had been going well and now I am just in that long recovery process. But something new has arrived to make this year one of my least favorite in a long time. I thought I had better provide a head's up as it may impact the regularity of the newsletter for a while. Over the weekend, I discovered I have a detached retina with two big holes. I go in for surgery today. With any luck, the damage will be somewhat mitigated although there has been permanent impact already. Among the fun things is the need to stare at my feet for the next five days. I am not allowed to look up for more than five minutes an hour. This may have an impact on my writing abilities, but maybe not past early next week. What happens from here is not clear—it all depends on the success of the surgery.

So, as I ruminate on this year, I can confidently assert two things. Number one is that 2018 will NOT go down in my personal history as a good year or even a mediocre year. It will be a year that should be halted and replaced right now. The second assertion is that life is most assuredly unpredictable. I once thought of myself as reasonably healthy, but based on the last five months, I can certainly no longer say that. Perhaps this will be the last drama for a while. But if not, I have learned one valuable lesson. Essentially, it is a simple one—take nothing for granted.

I once heard a motivational speaker hold forth on this topic. At the time I thought it was a little trite. You know the drill: "take each day as a gift," "stop and smell the roses," "don't put off the things that are really important." It all makes sense of course, but we are all so busy and have so many obligations—we will get to those roses tomorrow or the next day. Then we are pulled up short and suddenly realize those roses aren't always going to be there. This year has been full of minor bumps and may have more in store—who knows. All I know is what I have right now. There are things to appreciate and value each day.