Short Items of Interest—U.S. Economy

Replacing China
One of the more immediate questions is whether the U.S. can replace what it buys from China. The deficit the U.S. runs with China is due almost entirely to the voracious demand for consumer goods manufactured in China. Other nations tend to sell the U.S. commodities and raw materials, but China fills the stores of the U.S. retail community. The answer to question is yes, but the major concern is timing. It will take a while before production in the U.S. will be able to pick up the slack and, in many cases, there will not even be an attempt. Consumers used to inexpensive goods will not accept higher prices on those same goods. That means the U.S. will have to obtain these products from other producer nations that compete with China. They are willing and able, but will need time to get production up to the levels required by the U.S. During this period, the U.S. consumer will see both higher prices and shortages of some products.

U.S. Appoints New Head of IMF
The new acting director of the International Monetary Fund (IMF) for the U.S. is Adam Lerrick. He will serve in that position until the Senate approves Mark Rosen, but that process has been slowed by all the other drama that has overtaken the Senate (elections, Supreme Court appointment, etc.). Lerrick has been an outspoken critic of the IMF and its large-scale bailouts over the years. This is a critical time for the IMF as it will be considering the request that Argentina has made for just such a bailout. That request may be falling on deaf ears.

Japan Faces Increased Trade Pressure
The U.S. trade team has been reluctant to make common cause with Japan over China. In fact, the U.S. has been threatening Japan with tariffs and trade barriers that are aimed specifically at their automotive sector. Japan still runs a large surplus, and thus far, the Japanese have been lukewarm towards increased pressure on China. The Japanese have employed most of the same techniques the Chinese have used to protect their export sector. There are just as many barriers to U.S. goods imported into Japan. The U.S. has had a very hard time penetrating the convoluted distribution and retail systems in Japan.

Short Items of Interest—Global Economy

Latin States Demand Investigation of Venezuela
The assertion is that Venezuela under Maduro has become a human rights nightmare. There are claims of over 8,000 extrajudicial killings and three times that many people imprisoned on political charges. There are many disappearances and tens of thousands have fled the country into exile. The pace of these attacks has intensified as Maduro presides over a nation that is quite literally falling apart.

Disillusioned Brazil
The latest polls in Brazil suggest that a record number of voters plan to cast blank ballots—the most in 16 years. This is not voter apathy but voter anger. The candidates who are running are deeply flawed in the estimation of many. There is palpable fear the front runner will take Brazil into a near civil war. The extreme right-wing views of Jair Bolsonaro remind many of the period when the generals ran the country, but his far-left opponent—Fernando Haddad strikes people as being a version of Fidel Castro. The center left and center right have vanished in a cloud of corruption and incompetence.

French Manufacturers Lose Confidence
In the weeks after Emmanuel Macron took office, there was enthusiasm from the manufacturing community as he seemed to promise relief from tight labor rules and a relaxation of regulations that compromised their ability to grow. Those promises have proven very hard to keep and the attitude of the manufacturers has started to fade again. The French are simply not as competitive as they would like to be in Europe or the world as a whole. The key issue is that rules and regulations in place slow the ability of these manufacturers to react to changes in global demand. They are not as nimble as the Germans—much less the Japanese, Americans or Chinese.

Another Good Month for the Credit Managers' Index—Is This a Trend?

Once again, it is time for the Credit Managers' Index (CMI) and the insights it reveals. For those unfamiliar with the origins of the CMI, just look at the attention the Purchasing Managers' Index (PMI) receives each month. The same logic applies with both surveys. The purchasing manager and credit manager are both at the center of those early business decisions that set up other strategies. One can't very well do much business without supplies and equipment and inventory. That leaves credit managers to determine what kind of terms one can get and what restrictions will apply. As a bonus, the people who respond to these surveys are not tempted to fudge the numbers—they just tell it like it is. We at Armada have been preparing the analysis of the CMI for many years and have enjoyed the fact this survey is a leading indicator for the economy. What follows is the executive summary. If you want to see the CMI in all its detail, just go to the website of the National Association of Credit Management.

September showed another uptick in the Credit Managers' Index (CMI). This one puts the combined score as high as it has been since May and thoroughly in expansion territory. Anything over 50 qualifies as expansion, but getting past the mid-point is always welcome news as it suggests most of the economy is firing on all cylinders. The fact is the CMI is in agreement with a number of other leading indicators, which is always reassuring. The latest data from the Purchasing Managers' Index (PMI) was welcome news last month as the readings jumped into the 60s. There has been growth in terms of industrial production and the overall GDP as well. This is all somewhat unexpected given the turmoil and controversy over tariffs and trade wars, but timing is everything. The truth of the matter is many of these tariffs and restrictions have not yet come to pass. By most accounts they will come sooner than later, but for the time being, there is a window of opportunity to sell and buy before the restrictions are in place. This was what goosed the second quarter GDP numbers up to 4.2%—lots of frantic activity designed to beat the deadlines. That motivation will fade through the remainder of the year.

Analysis: The combined score for the favorable factors hit a high point not seen since May of this year: 65.2 as compared to the previous month's 64.3 and May's 65.7. The combined score for the unfavorable factors was also an improvement, but a very small one as it went from 50.1 to 50.6. This has been the pattern for a year as the high point was reached in September of last year when it hit 51.8. It continues to be the prime concern for the CMI data. Why are there still so many struggling operations given the overall growth of the economy and the good news that has been registered in the favorable categories?

A breakdown of the favorable categories shows solid growth and numbers that are back to where they were at the start of the summer. The sales reading was 68.8, just shy of the reading in May and June. There is likely to be some of that precautionary buying registered here as companies sought to try to insulate themselves against the impact of tariffs and trade wars. The new credit applications reading fell just a bit from 62.5 to 61.9. This is still comfortably in the 60s, but indicates there has been some evidence that business is starting to become a little more cautious and fearful of the future. The dollar collections data stayed roughly the same as last month with a reading of 62.8 as compared to 62.6. There was slightly more activity noted when it came to amount of credit extended as it improved from 66.9 to 67.1. This reading has been very high for the bulk of the year and suggests that the biggest and most important creditors are asking for more credit as they are likely to be the companies that have been growing most aggressively.

As with prior months, the real issues and concerns are showing up in the non-favorable categories. There was a slight reduction in the category of rejections of credit applications (52.2 to 51.8), which is consistent with the reduction in applications for new credit. There have been more companies with questionable financial futures seeking credit; many are not deemed a good risk right now. There is already evidence that companies with a lot of foreign trade exposure are not having an easy time of it as far as credit is concerned. On the positive side, there was a significant improvement in the accounts placed for collection category as it moved from the contraction zone to expansion by the barest of margins. It moved from 49 to 50.2; narrow as this is, the point remains that it signals growth again. There was also improvement in the disputes category, but the rise from 46.4 to 47.6 did not quite get the reading out of the contraction zone. There was a similar pattern with dollar amount beyond terms, but this month's reading is close to escaping contraction. It was at 48.5 and now sits at 49.9—a hair away from being in growth mode again. The reading for dollar amount of customer deductions remained very close to what it was last month and just shy of getting into the expansion zone (48.7 to 48.6). The filings for bankruptcies category also stayed very close to what it had been the month prior. It had been at 55.9 and it slipped a tiny bit to 55.6. Throughout the year, the rate of bankruptcies has stayed in generally positive territory as companies have been able to work themselves out of the predicament they have been in. The hope is that the number of bankruptcies will remain low as the trade wars and tariff issues come home to roost. There is deep concern regarding the farm sector and all the industries that have been related to it.

Manufacturing Sector

From last month to this, there has been only a slight change as far as the manufacturing sector is concerned. This will be well worth watching for the next month or two. As mentioned earlier, the performance of the PMI was very strong this month and last month the CMI index for manufacturing perked up—a kind of early sign that PMI data would be strong. The data for manufacturing this month remains strong and has built on the gains of earlier months, but there are a couple of troubling signs that may have an impact sooner than later. The manufacturing combined score was 56.4 and last month it was at 55.9.

The combined score for the favorable factors index is the same as it was the month before—standing pat at 64.4. This is one of those potential warning signs as these are the factors that tend to drive new business development. Even though the total number was the same as last month, there was still quite a bit of variability in the sub-categories. The sales reading improved quite a bit (66.5 to 68.2). It can be attributed to the somewhat frantic reaction to the potential imposition of tariffs and other trade restrictions. Many companies were trying to sell as much as they could before the taxes were levied and few think this pace will be maintained much longer. The new credit applications category was similar to the reading last month—a reading of 61.8 as compared to 61.4. This is a bit worrisome as it may suggest expansion plans are being delayed. The dollar collections numbers fell from 62.4 to 59. This may also present a future problem. For the first time in five months this category has dipped below 60, but at least it is not as big a drop as was seen in April. The amount of credit extended improved a bit as it went from 67.1 to 68.5, which signals the bigger questions are still being asked.

The less-exciting news was found in the non-favorable factors, although there were some areas of improvement and the overall index rose from 50.2 to 51.1. This is not comfortable territory as it would not take much to send the numbers back into contraction, but compared to where it has been of late, this is a decent reading. The rejections of credit applications slipped a bit but stayed about where it was last month. It went from 53.7 to 53.1 and is consistent with the numbers for applications for credit. The reading for accounts placed for collection went up quite a bit and escaped the contraction zone. It went from an August reading of 49.6 to one of 51.2. There was also positive movement as far as disputes are concerned, but not enough to leave contraction territory. It went from 45.8 to 48.7, so it is moving in the right direction. The dollar amount beyond terms reading also managed to escape contraction (48.4 to 50.2). This corresponds with the data from the dollar collections category. The dollar amount of customer deductions fell somewhat as it went from last month's 48.1 to 47.4 this month. There was some good news from the filings for bankruptcies category as it stayed right where it was—solidly in the middle of the 50s with a reading of 56.

Service Sector

As expected this time of year, there was quite a lot of activity in the service sector. As has been pointed out many times, this is a very diverse sector for the CMI as it has large components that do not have all that much in common. The biggest group is retail. This is their time of year as the holiday spending season gets ramped up. The second-most important component of this index is construction. In contrast to retail, this sector starts to slow down this time of year.

The combined score for services returned to a more robust state with a reading of 56.4—close to the numbers seen in June when it hit 56.8. The index of favorable factors improved quite a bit and reached 65.9—slightly better than the numbers in May when it hit 65.8. The combined score for the non-favorable index was 50.1, a bit higher than it registered the month prior when it rested at 50. Much of the real news was in the details of the sub-categories.

The sales numbers went up considerably from 63.4 to 69.4—almost back to the 70.1 notched in June. The new credit applications reading dropped a little (63.5 to 62). There was some trepidation showing in retail as many companies are still planning to rely on an inventory light approach to the season. The dollar collection data looked very positive as it moved from 62.9 to 66.5. This is the time of year that retailers know they have to be current if they want to access any more credit. There was a slight decline as far as amount of credit extended as it slipped from 66.7 to 65.8, but these numbers are still very respectable and very solidly in the 60s.

The rejections of credit applications stayed very close to what it was last month with a reading of 50.5 as compared to 50.7. The change in the category of accounts placed for collection was significant, but not quite enough to escape contraction as it moved from 48.5 to 49.2. The disputes reading fell a little from 47 to 46.4, which signals there are still struggling companies out there trying to buy time. The dollar amount beyond terms category moved as well, but fell short of escaping contraction (48.6 to 49.6). This is certainly the direction one wants to see it move. The dollar amount of customer deductions also moved in a positive direction, but only incrementally, shifting from 49.3 to 49.7. The filings for bankruptcies reading stayed close to where it had been, moving from 55.9 to 55.3. It is expected there will be more volatility in this category after the holidays have ended and revenue is examined.

Overall, the movement is subtle to be sure, but at least it is heading in the right direction, and for two months in a row. Dare we hope for a longer trend?

CEOs Worried More Now as Trade War Intensifies
The trade war between the U.S. and just about every other nation in the world has been like a slow-moving hurricane. Most people know it is going to be bad, but it will all depend on where it makes landfall (i.e., what business sectors will be affected). We can all see it churning away out there, but the sun is still shining and it looks like we will have plenty of time to react. The CEOs are now starting to shift their assumptions and have concluded there really is going to be a knockdown fight that will alter the relationship between the U.S. and its trading partners permanently.

Analysis: Over the last 10 to 20 years, the corporate community has sunk billions of dollars of investment in China and in the other places the U.S. does business. Now all of this is at risk. Even if production shifts back to the U.S. or to other nations, the process will be expensive. All the investment that has gone before will have been wasted.

Jargon and Obfuscation
It has been a while since my last technology rant. It is not because the tech experiences have improved—just the opposite. I think I have been beaten into submission by the powers that be. I fully understand that I am not of the right generation for this stuff—I am probably more at home with parchment and quill pens as my messages travel by clipper ship. But I have observed many of my younger brethren struggling with the same issues, so I know my travails are not entirely due to my ancient brain.

At the top of my list of grievances is the inability to communicate. Each time there is a malfunction, there is some message that might as well be written in hieroglyphs—pithy little comments like "no index parameter set on input for alternative code." It's right up there with "demons have inhabited your hard drive." I come from a world that perfected the use of jargon to confuse the masses. As an economist, I can trot out phrases that obscure the meaning of just about anything, but I strive very hard to communicate in clear language and to avoid jargon—I really do want people to understand. This is not the mission of those who write error messages.

My second peeve is the constant "improvement" of my machine so that it can do things I do not want to do at the expense of things I do. The updates give me better gaming colors when all I have ever done is play the occasional game of solitaire. Meanwhile, that same update elects to cut off my access to email. I notice that my laptop gets slower and slower. Then I realize that all sorts of idiotic capabilities have been foisted on me that I now have to remove if I want a word document to load in under an hour! In brief, I still miss my No. 2 pencil and my yellow legal pad. It never crashed!