Brief Notes on the US Economy
• More Drama – It has often been remarked there are two things one never wants to see being made – law and sausage. The truth of this remark has been on full display as far as the law of the land is concerned. The histrionics in Congress have once again brought the country to the brink of real economic damage. Business doesn’t know if contracts will be honored, investors wonder if they will get the returns expected, workers wonder about being furloughed and so on. Congress has not been able to agree on funding operations or whether to borrow the money it decided to authorize months ago. The decision to extend the government for another few months was made at the last minute but the debt ceiling talks go on. The infrastructure plans also remain in limbo. The economy has been perking up of late but only because businesses and individuals do not behave the same way that politicians choose to.
• Fed Admits Lack of Control – The statements from Jerome Powell and other members of the Fed are more direct than they have been but they are not all that new. The assertion is still that the inflation pressure experienced in the economy right now is transitory but the timing is the issue. The rise in prices can be traced quite directly to the shortages and bottlenecks created by the supply chain breakdown but the reaction of consumers has been playing a major role as well. Given the lack of faith in that supply chain there has been a great deal of hoarding and that places even more pressure on supply. The Fed has estimated that inflation will ebb as producers catch up with demand but it has been nearly impossible to predict when that would take place.
• Delta Impact Expected to be Short Lived – Thus far predicting the impact of the pandemic has been a very good way to make a fool of oneself. Very few of the assumptions made have proved to be accurate but that has hardly stopped people from trying. The latest assertion is that the slowdown in the third quarter that was provoked by the emergence of the Delta variant will reverse to a significant degree in Q4. The sense is that consumers are rebounding more quickly than expected but there are all sorts of caveats. The virus has been expected to become a bigger issue as the weather cools and as people spend more time indoors and in close quarters. The schools are getting a lot of scrutiny. If there is a surge, as there was last year at this time, the recent rebound in consumer activity could fade once more.
Brief Notes on the Global Economy
• The Inflation Spiral – What turns garden variety inflation into hyperinflation? In simplest terms it is when prices and wages start to chase one another. It starts with higher prices for the range of items that people seek to buy – food, fuel, clothing and so on. As they come to realize their lifestyles are suffering, they begin to demand pay hikes that allow them to keep pace. The current labor shortage means that these workers have more leverage than ever and can make these demands. German unions are currently ramping up their demands for higher wages as the rate of inflation has climbed to 3.4%. If the wages rise, the likelihood is that prices rise as well and wages have to go up even more. This is the cycle of inflation that leads to hyperinflation and stagflation.
• Vietnam Abandons Lockdown – As the virus swept through Vietnam the government elected to pursue a draconian policy of zero-tolerance. Businesses were locked down, people were forced to strictly quarantine, exports and imports were suspended. The aim was to crush the spread of the virus. That did not happen. The infection rate did indeed fall but there continue to be hotspots. What has happened is the near total collapse of the economy. Vietnam is now in deep recession with millions of people out of work and no government aid. The fact is that shutting an economy down has failed in every nation that has tried it. The unfortunate fact is that this deliberate destruction of the economy has not been able to address the problem it was intended to deal with.
Latest CMI Data Tilts Back in a Positive Direction
Each month we have the opportunity to comment on the latest Credit Management Index. This is data collected from the nation’s credit managers by the National Association for Credit Management. The system used is very similar to that of the Purchasing Managers Index and that gives it its power and accuracy. It is current as it is collected each month and it is accurate as the credit manager simply reports what they are seeing with no embellishment or manipulation. The fact that credit decisions are at the beginning of most business relationships gives the index its predictive power.
Thus far this year there has been a pattern of missed forecasts and predictions on the part of economists and analysts. It is not like 2020 when the pandemic turned the economy upside down, this year it has been more a matter of estimating high one month and low the next. Reminds one of the joke involving three economists out target shooting. One misses by 10 feet to the right and the next misses by 10 feet to the left and the third exclaims that on average they hit their target. The rapid growth at the start of the year was unexpected and so was the decline that occurred at the end of the summer. Now there seems to be a recovery of sorts and that was not altogether expected either. This recent rebound is getting picked up in the latest CMI numbers.
The combined score returned to levels seen in July with a reading of 58.1 compared to last month’s 57.7 (in July it stood at 58.4). The index of favorable factors stayed right where it was with a reading of 66.0 but there was some variance in the sub-sectors. The index of unfavorable factors improved slightly from 52.1 to 52.8. These shifts are not dramatic but the trend is positive again and in some important areas.
The sales numbers returned to the 70s with a reading of 70.4 and that means that there has been a reading above 70 for eight of the last 13 months. The new credit applications reading also improved from the 64.4 notched in August to 65.0. The dollar collections data slipped a bit however – from 62.8 to 61.1 and there was also a slide in the amount of credit extended as it went from 68.4 to 67.5. The big story as far as credit is concerned is that companies seem to be ordering more than is normal and requiring additional credit. There is some motivation from demand but the driver is a tendency to stockpile or hoard as there are concerns about the stability of the supply chain.
When it comes to the unfavorable factors there was some movement as well – not dramatic in most cases but significant. The rejections of credit applications reading barely budged – from 52.2 to 52.1. The accounts placed for collection data showed no change at all – staying right where it was with a reading of 51.7. There was an improvement in the disputed category as it left the contraction zone with a reading of 51.3 compared to the 49.5 notched last month. The dollar amount beyond terms reading moved up slightly from 51.6 to 51.9 and there was a similar move in the amount of customer deductions as it went from 50.1 to 52.3. The filings for bankruptcies moved very slightly down from 57.4 to 57.3 and that reading remains in a very good position. There have been some issues as far as creditors are concerned but thus far there has yet to be a surge of bankruptcy activity.
Manufacturing Sector – The manufacturing sector has been more volatile than would have been expected but recent releases have shown just how resilient the sector has been through the last year. The pandemic recession has been concentrated in the service sector due to the lockdowns that were imposed. The fact that consumers were cut off from service sector spending actually boosted purchases of manufactured goods but that increased demand combined with the collapse of the supply chain to create shortages and inflation. The latest numbers show that manufacturers have managed to weather these storms better than expected. Durable goods orders were stronger than expected and the Purchasing Managers’ Index has maintained a strong position although somewhat weaker than it was earlier in the summer.
The overall index for manufacturing remained where it was last month with a reading of 57.8 but there was some variability in the sub-sectors to note. The index of favorable factors slipped just slightly from 66.5 to 66.2 while the index of unfavorable factors improved from a reading of 51.9 to 52.3. Overall, the manufacturing sector of the economy continues to perform well.
The sales data jumped back into the 70s with a reading of 71.6 compared to 69.0 last month. Over the last twelve months this reading has been in the 70s nine times and that is exceedingly healthy. The new credit applications moved up from 63.4 to 64.7 but dollar collections saw a fairly sharp decline from 65.0 to 60.4. This is the lowest reading for this indicator in well over a year and is of some concern. The suggestion is that some companies may be stretching their ability to keep up on their obligations or are at least trying to guard their cash flow. The amount of credit extended slipped just a bit from 68.7 to 67.9. There still seems to be a great deal of stockpiling taking place as manufacturers remain unsure regarding the reliability of their supply chains.
The rejections of credit applications slipped a little but remains comfortably in the expansion zone with a reading of 52.4 compared to 53.1. The accounts placed for collection saw a gain however with a reading of 54.5 compared to 53.1 in August. The disputes category remained in contraction territory but with slightly better numbers as it has moved from 48.3 to 49.9 and shouting distance of the expansion zone. The more worrisome development is the slip in the dollar amount beyond terms as it has entered the contraction zone with a 49.9 reading. Granted, this is as close to being in the expansion zone as one can get but last month the reading was a more comfortable 50.8. The dollar amount of customer deductions essentially remained unchanged as it shifted from 50.0 to 50.6. The filings for bankruptcies stayed right where it was last month with a reading of 56.5 and that remains good news. The travails of the past year have yet to trigger a spate of business failures – at least in the manufacturing community.
More Data from the Credit Managers’ Index
Service Sector – The service sector has been defying expectations to a degree. The recession obviously hit the sector hard – especially in 2020. Since then, there has been a lot of volatility as the consumer has come in and out of the economy in a rush. Growth at the start of the year was extremely rapid and instantly strained the supply chain and prompted inflation. By the summer there was robust activity but that started to fade as the viral variant made a comeback and consumers became less confident again. All eyes are on the sector as the holidays arrive.
The overall index improved from a reading of 57.6 to one of 58.3. The index of favorable factors moved up slightly from 65.5 to 65.8 and the index of unfavorable factors also improved from a reading of 52.3 to 53.2. These are all quite comfortably in the expansion zone. The movement in the sub-sectors are even more encouraging. The sales reading moved from 68.1 to 69.3 although it is still somewhat short of the 70s which had been notched earlier this year. The new credit applications remained about where they had been before with a reading of 65.2 compared to the 65.3 registered in August. The dollar collections numbers improved from the 60.5 noted last month to 61.8 in September. The amount of credit extended slipped a bit from 68.1 to 67.1 but these remain very high numbers suggesting that quite a bit of credit is still being requested by those in the service sector (and many of those assessed by this index are in retail).
The rejections of credit applications remained very similar to last month with a reading of 51.8 compared to 51.4 the month prior. There is a bit of bad news as far as accounts placed for collection as the reading slid into the contraction zone with a reading of 48.9. Last month the reading was teetering on the edge of contraction at 50.3. The disputes category improved however with a 52.8 as opposed to the 50.7 noted in August. The dollar amount beyond terms category improved from 52.5 to 53.8 and that is always good news. The dollar amount of customer deductions made a very impressive comeback with a reading of 54.0 compared to the 50.3 noted in August. The filings for bankruptcies data remained very comfortably in expansion territory at 58.1, very slightly less than the 58.4 noted last month.
Consumers Still Driving Pace
For the millionth time it is worth noting that the consumer drives the US economy. That has never been clearer than it has been in the last couple of years. The government shutdown orders in the spring of 2020 crushed the ability of the consumer to spend on the services that accounted for as much as 65% of their disposable income and the economy went into collapse. The shortages and bottlenecks that appeared at the start of this year were attributed to the consumer coming out of the lockdown with a vengeance. Then the consumer went into retreat again this summer as the virus concerns ramped up again. Now we are on the edge of the holiday season and it looks like the consumer is prepared to shake off some of that pandemic concern.
Analysis: The latest data from the Commerce Department shows consumer spending rose by 0.7% in August after a rise of just 0.3% in July. The sense is that growth will be even more robust in September. Personal income has risen by 0.2% as many people have either returned to work or have received increased wages. The lament in the business community has been that skilled workers have been very hard to find but for the workers this has meant they have more leverage than ever. The number one means by which companies are recruiting new employees is poaching them from other companies and that generally means that they are offering these workers more pay and benefits to jump from the old job to the new one.
The first of the critical retail periods is now upon us. Halloween has emerged as the second most important selling holiday on the calendar. Adult costumes now outsell children’s costumes as the holiday becomes a party holiday and a decorating opportunity. If the spending is solid for Halloween, it bodes well for the rest of the retail year. Next up is “Blackvember”. It was once just Black Friday, the moment when the retailer saw their books go from red to black but now the discounts and sales start in October and accelerate through the entire month of November. This is when the early shoppers get their work done and this year that early activity will be more important than ever given the supply chain issues. Tens of thousands of containers will be stranded outside ports and they will be stuffed with material retailers had hoped to sell for Christmas. In the end the American male will save the holidays as they always have. They will suddenly notice that the holidays are just days away and they have not purchased anything for anyone and will frantically buy whatever they can lay their hands on. These lame gifts will subsequently be returned by the annoyed gift recipient and they will routinely spend two to three times the cost of the original gift. The retailer is not the only one hoping for a resumption of holiday normal – the restaurants and events will be hoping people are ready to come back.
Armada Strategic Intelligence System Starts to Show Some Weaker Numbers
The most recent data from the Strategic Intelligence System is showing some signs of weakness as the pandemic threat reignites around the world. This is consistent with many of the global economic assessments released lately. The projections are still showing progress but it is not as robust. Check this out for yourself, the latest issue has been released. Your two-month trial is absolutely free – no obligations at all. Simply go to www.asisintelligence.com and engage with us. We continue to tweak the report with every issue – adding the content that readers have requested.
The chart above shows the volatility of the Credit Managers’ Index over the last year and that seems to reflect the volatility of the economy itself. Periods of exuberance as things seem to start drifting towards normal interspersed with periods of concern regarding the pace of the virus and economic rebound.
What We Are Watching – From the Black Owl Report
October 18th Deadline on Default – Treasury Secretary Janet Yellen said that new estimates show that the US will default on its first debt payment on October 18th if the debt ceiling is not increased prior to that date. Very few expect the US to default on a payment, but it could walk right up to the brink of the deadline because of political wrangling. In short, although the money has already been spent (raising the debt limit simply pays for approved spending that was approved in the past), Republicans are worried that they will have no leverage to limit $3.5 trillion in new spending bills if they don’t force Democrats to use their political capital to increase the debt limit and pass bills that would collectively add up to nearly $5 trillion (includes the infrastructure bill)
The “Joys” of Child Rearing
I have to admit that for me the process of bringing up a child has been nothing but a spectator sport. My lovely wife was possessed of two adult sons when we met and my role was never father. Given that I was only six years older than the oldest stepson I was destined to get engaged as a grandpa at some stage. I do listen to the adventures of parents and remain deeply grateful for the opportunity to have missed some of these.
Last night the conversation turned to the activities of boys in the range from three to six. There was the three-year-old that elected to drink from a puddle before mom could scoop him up. The same lad decided to emulate his cartoon hero and try running through a wall. Then there was the youngster that dutifully donned his protective mask on his first day back in the classroom but insisted on licking the door. I have heard many such stories from friends and colleagues – good and attentive parents all. I have memories of being the kind of child that would convince a parent to run away and join a circus.
Perhaps my crowning achievement was attempting to impress the little girl down the street by joining in with her homemaker fantasy. She decided to make a pie ….out of mud. We built a fire and “baked” it and then she sweetly offered me a piece and I ate it. No price is too high when love is at stake. Unfortunately, this would not be the last romantic gesture to go awry in my life. Just ask my wife about the offer of wine and cheese at the wildlife refuge. Forgetting a corkscrew or wine glass forces adaptations that detract a bit from the moment.