Strategic Global Intelligence Brief for November 1, 2019
By Chris Kuehl, Ph.D.—
Short Items of Interest—U.S. Economy—
Consumers Are Still Spending—
The latest data from the Personal Consumption Expenditures Index (PCE) shows that consumers are still busy and still propping up the U.S. economy. It has been repeated ad nauseum, but it remains as true as ever—consumption is the key to the success of the global economy. The PCE is a reliable tool for assessing that impact. Right now, it is still rising—by 0.2% in September, a rate similar to that in August. It is a little slower than was the case in the first and second quarter of the year, but still a very respectable pace and one that should undergird growth in the fourth quarter. This has caused a few of the analysts to change their assessment for growth this year, moving from 1.7% to 1.8%.
PCE Also Indicates Low Inflation
The Personal Consumption Expenditures Price Index is also the favored tool for the Fed when they are assessing the rate of inflation. The numbers are still indicating a very low rate despite all the ingredients for a rise in inflation pressure. The most interesting deviation from the normal pattern is the lack of wage inflation. The Phillips Curve suggests that rates of unemployment at the current level should trigger higher wages, but for a variety of reasons, this has not taken place and it doesn't appear the situation will change anytime soon. There are Boomers retiring at a rapid clip, taking their higher salaries with them. At the same time, there are more semi-qualified people getting hired at lower wages than would have been the case if they had the right qualifications.
USMCA May Live After All
The decision by Speaker of the House Nancy Pelosi to allow a vote on the USMCA clears the way for passage of the legislation. The deal involved some more aggressive labor standards for the Mexicans and some small concessions to those that compete with Canada, but the pact is pretty close to what was originally negotiated. It could be passed within weeks. This gives Trump a victory, but it is also a victory for the more business-oriented and moderate Democrats. The deal has already been ratified in Mexico and Canada. That would allow the USMCA to supplant NAFTA.
Short Items of Interest—Global Economy
Purchasing Managers' Indices Show Strain
The latest round of data from the collection of global Purchasing Managers' Indices (PMIs) shows that the distress in the manufacturing sector is starting to take a real toll. The index numbers are universally down as manufacturing has been in a slump for much of the last year. The problem is clear enough—there has been a dramatic reduction in trade as the tariff wars continue to accelerate. The majority of the world has seen exports slip, while manufacturers have become very cautious and uneasy. The slide has been long enough that jobs are being affected around the world. That trend is expected to accelerate.
Japan Sounds Warning Over China's Military
While the world has been focused on the confrontation between the U.S. and China, there have been other nations expressing concerns regarding Chinese activity. Japan has long been a critic of China's economic policies and has been deeply suspicious of China's military ambitions. These concerns are being expressed again over the development of new missile capacity in China. These weapons could be a direct threat to Japan. This worries Japan more than usual as they are not sure of U.S. backing in the event of a confrontation.
WTO Rules Against India
The U.S. has objected to the support the Indian government has traditionally given to its export sector and the World Trade Organization (WTO) has just ruled that this objection is warranted. The Indian government has poured some $7 billion into export subsidies; these are not allowed under WTO rules. The U.S. is seeing a good deal of business expansion into India as companies seek to replace their Chinese supply chains, but there has been concern that India will simply do what the Chinese have done in the past. The WTO ruling is expected to hasten some reforms in India.
CMI Shows a Little Improvement
Each month we bring you the narrative for the Credit Managers' Index (CMI). This is an index put together by the National Association of Credit Management and is modeled on the Purchasing Managers' Index (PMI). As with the PMI, the index gets its influence and accuracy from the fact that credit managers are just reporting the facts without embellishment or interpretation. The added importance of the CMI is due to the fact that credit managers tend to look toward the future as they are most concerned about what companies will be doing in the future—when they are scheduled to pay. For the complete CMI—with all the historical graphs and charts—go to the website for NACM and look for the CMI.
Analysis: The rebound for the October Credit Managers' Index was not a spectacular one, but these days we will take what we can get. The overall data for the economy as a whole has been like this—something for both the pessimist and the optimist. The manufacturers are slumping according to the Purchasing Managers' Index as well as the data on industrial production from the Fed and various reports on everything from durable goods to capacity utilization. At the same time, consumers continue to power the economy as they remain encouraged by the lack of inflation and the low levels of unemployment. We can now see the data from the Credit Managers' Index—an off month followed by an upswing. Not that this month's data is startling in terms of a reversal, but a positive trend is welcome even when it is somewhat less impressive than preferred.
The combined score moved from the 54.1 reading in September to 54.6 in October—improved but not at the point reached in August when it hit 55.2. The combined index of favorable factors jumped back into the 60s with a reading of 60.1 compared to the 59.1 registered the prior month. Again, August was better yet with a reading of 61.8. There was the same pattern with the combined score of the unfavorable factors. This month was an improvement on the September reading as it went from 50.7 to 50.9 (the same as August). The relative stability in the unfavorable factors has some significance as shown in the data below.
The really indicative data shows up in the specific sectors. There was generally good news as far as the favorable factors were concerned, but sales fell a little from 58.7 to 57.9, again a far cry from the 64.4 reading in August. The new credit applications data also dropped back slightly (from 59.7 to 59). In contrast, there were good numbers coming from the dollar collections data—62.1 up from 58.5. If there is a category that delights the credit manager more than dollar collections, it would be hard pressed to identify. There was also good news as far the amount of credit extended as it went from 59.7 to 61.6. The sense is that larger clients are more active and there is more emphasis on staying current with the credit offered.
There was a bit more volatility in the unfavorable categories. The rejections of credit applications improved a bit from 51.4 to 52.1, precisely where that reading was in August. The accounts placed for collection category also improved, but not enough to escape the contraction zone (a score under 50). It went from 48.4 to 49.1 and is certainly in striking distance of expansion. This is the best reading notched in this category since June of this year. The disputes category on the other hand, fell from the levels reached last month, going from 50 to 48.1. The dollar amount beyond terms data improved quite a bit and may be somewhat connected to that better dollar collection reading. The reading in September was 50.2 and this month it is at 52. Companies are trying to get current and to remain there as there is more concern about the potential for a slowdown next year. The dollar amount of customer deductions slipped a little, but not far enough to drop back into contraction. The reading last month was 52.1 and this month it is 50.9. The filings for bankruptcies data improved a bit with a reading of 53.4 compared to September's 52.1. The good news is this category has been showing improvement for several months now.
For the combined readings, like much of the recent economic data, there are signs of concern showing up but nothing to suggest a serious slowdown or reversal. It appears the economy could head in either a slow growth or slow decline direction. Much will depend on the progress or lack of it on the global stage.
As for manufacturing, by most accounts, the sector is in some trouble. The data coming from the Purchasing Managers' Index has been down for two months in a row and there has been some negativity from reports as varied as the industrial production index, durable goods orders, factory orders, capacity utilization and even capital investment. The primary issue has been the slowdown in the global economy as the export sector in the U.S. accounts for roughly 15% of the total GDP. This is not nearly as critical a sector for the U.S. as is the case for Germany, which is over 55% dependent on exports, but it is certainly important.
The combined score for manufacturing slipped from 54.3 to 53.9. This takes the readings back to levels seen in July. The combined score for the favorable factors improved a bit from 58.8 to 59.1, but the combined score for the unfavorable index fell from 51.2 to 50.5. It is important that all of these measures remain in the expansion zone, but the trends for the unfavorable data is not what would be preferred.
The specific data in the favorable category tells an interesting story. The sales numbers went down quite a bit from 57.9 to 56.7, much less than the 65.3 notched in August. The new credit applications stayed very close to what had been noted previously with a reading of 59.2 compared to 59.5 in September. The dollar collections data stayed precisely where it was last month at 58.7, but that is a bit down from the reading in August when it was 59.6. The big shift was in the amount of credit extended as it went from 59.2 to 61.6. The sense is that bigger companies are accessing credit as they try to anticipate the impact of further tariff restrictions.
The rejections of credit applications improved with a reading of 52.1 from the 51.9 notched last month. This is good news considering that applications for credit seem to have stagnated a little. The accounts placed for collections slipped a bit from 49.7 to 49.3. The difference was not all that severe, but the problem is that it remains in contraction territory. The disputes category fell dramatically with a reading of 46.7 compared to the 50.6 marked in September and 50.3 in August. The dollar amount beyond terms stayed roughly where it had been previously with a reading of 52 down from 52.1 in September. The dollar amount of customer deductions was unchanged from last month with a reading of 51.1. That is an improvement over what it had been in August (49.3). There was a slight dip in the filings for bankruptcies as the category went from 52 in September to 51.7 in October.
The stumble that manufacturing seems to have taken is thus far not a catastrophic one. It seems more than a little artificial given the overall confidence level of the consumer and the fact that inflation has not triggered the Fed to try to slow down the economy. This slowdown is almost purely a matter of trade wars and tariffs that have altered global patterns and thrown several nations into economic decline. A truce in that trade war would likely do wonders for the global economy.
The fact that this is the retail season shows up in the data as the CMI tends to be somewhat heavy in the retail-oriented sectors. The numbers have been a lot better for services than for manufacturing; a trend that is likely to continue into the coming months. The combined score for services jumped from 53.9 to 55.3. That seems to be on the strength of the favorable factors. The combined score for the favorables moved back into the 60s with a reading of 61.2 compared to last month's 59.4. These readings are back to what they were in August. The unfavorable combined reading was also up, but less dramatically as it went from 50.1 to 51.4.
The sales data stayed about where it had been with a reading of 59.1 as compared to 59.6. The part that worries a bit is the fact that numbers for the bulk of the year have been in the 60s. There have only been four months in the last 12 that have been under 60—two of those were this month and last. The new credit applications data slipped a bit from 59.8 to 58.7, but this remains pretty solidly in the expansion zone. The dollar collections data really made the difference for the services category and the entire CMI. This is not an unusual development this time of year as many companies do a lot of purchasing for the holidays and seek to keep their creditors reasonably healthy. The amount of credit extended also saw a nice upswing from 60.2 to 61.6.
The rejections of credit applications tracked in a positive direction with a reading of 52 compared to the 50.9 reported in September. This is consistent with the favorable data on new applications and a good signal. The accounts placed for collection saw a fairly significant improvement, but the overall score is still in the contraction zone—moving from 47.1 to 48.8. At least the trend is in a good direction. The disputes category stayed right where it had been the month before with a reading of 49.4—not great as it remains in contraction, but at least not getting any worse at this point. The improvement in the dollar amount beyond terms was significant and connected to the improvement in dollar collections. The reading this month was 52.1 and last month it was at 48.3. The dollar amount of customer deductions slipped a little, but didn't tumble out of the expansion zone. It was at 53.1 and is now at 50.7. The filings for bankruptcies category saw a nice gain as it moved from 52.1 to 55.1.
This is the period that has long been referred to as the Black Quarter as this is when the retail community will make the bulk of its income. This year will be reasonable but no record setter as the retailers entered the season with an inventory-light strategy. Other service sectors such as construction take a bit of a breather this time of year.October 2019 versus October 2018
This up and down activity has started to become routine. This time, the data seems to have been affected by just a few factors—trade wars, tariffs and the upcoming holiday season.
Beware the Job Numbers
The report from the Labor Department is likely to be more than a little scary (sorry, I still have Halloween on my mind). Just as the ghouls and goblins we saw yesterday were not real—the data today will not be altogether believable. These numbers are expected to be low—perhaps lower than they have been in several months, but the majority of that decline will be attributed to the impact of the GM strike and the tens of thousands of workers that were temporarily listed as unemployed. There will be a return to more normal levels next month.
Analysis: This reminds everyone that each month will feature variables that affect the numbers and need to be figured in.
Antidote to Social Media Isolation
Much has been written about the divisiveness and isolation brought on by social media. It seems most of the population has retreated into their own little worlds and interact with an increasingly small number of fellow human beings. Our prejudices are reinforced and our bias rewarded as we shun others and seek only to please our "tribe." Worse yet, there are those who have no human interaction in their lives at all. There are alternatives to this lifestyle, however.
I was a participant in a program sponsored by the Independence, Missouri, EDC at a new brew pub in that city. It struck me that this institution is the antidote to that isolation. People from all walks of life can gather at such a place and rub elbows with one another. They will share common experiences—everything from watching the big game to trivia nights or dart tournaments or just listening to music. There is a kind of temporary camaraderie in a pub. It gives people an opportunity to socialize and interact with those they might never have occasion to talk to otherwise. There are few places that rival a good neighborhood pub—maybe the local coffee shop or café as they also attract the community as well.
Take time to hang out today and this weekend. Support your local purveyor of coffee, tea, beer, wine or whatever you prefer. The point is just to get out and meet with the rest of the world.
Most Popular Halloween Costumes for U.S. Children in 2018
As with all good economic data, we will have to wait to see what the trends were for this year. However, we do have data on the past and we can conduct our own assessment. In my very specific poll of approximately 150 trick or treaters, the patterns of the past have held as we saw lots of princesses and superheroes. There were very few Star Wars costumes, however, and far more sports-related outfits including a lot of kids in soccer outfits despite the freezing temperatures. Given our Kansas locale, we also saw a great many cowboys and farm-related costumes (at least five cows). My favorite was the kid dressed as Dr. Who. He was more than a little impressed that I recognized him as such (the sonic screwdriver gave it away).