Brief Notes on the US Economy
• Home Prices Rise to Another Record – The latest data from the Case Shiller index shows a price gain for homes that once again set a record. There was an 18.6% hike and that is the sharpest jump since the index began in 1987. The steady hike in the price of homes reflects a demand that continues to escalate at the same time that supply has been unable to keep pace. There are too few people working in the sector and the costs of commodities continues to climb. The analysts keep looking at these numbers with a sense of impending doom – surely this has to stop at some point. The fact is that these hikes will indeed reverse but will they fall slowly or crash. The factor that continues to underpin the entire sector is the mortgage rate environment and as long as these numbers are at historical lows the demand for homes will be there.
• Government Steps to Address Housing Shortages – There is an ongoing concern that housing shortages are getting worse and creating real hardships. There are several ideas under consideration – relatively small technical adjustments that can be executed quickly by government. There are currently restrictions on how much investment Fannie Mae and Freddie Mac can make in rental property and these may be relaxed. There would be expansion of the grant program carried out by Community Development Financial Institutions as this has been designed to bring more affordable housing to the market. There is a plan to expand financing options for manufactured homes and there are plans to help first time home buyers and charitable organizations to buy distressed property. Right now, the investment groups snap up this property first so they can develop higher end projects. This cuts the availability of affordable homes in urban areas.
• It’s Happening Again – What is it about toilet paper? Every time there is a hint of economic crisis there is a run on this product and there is evidence that this has started to happen again as people become increasingly worried about the virus. What the heck do people do with all this TP? Are we to believe that stress creates bowel issues of increasing severity? Is there some cult that asserts that using TP for wallpaper will protect against Covid 19? It is puzzling. Thus far the situation is not as dire as it was in 2020 as suppliers report that inventories are at about 85% of normal. Those of a certain age can now point out to the younger generation that the sheer size of the Sears catalog was a protection against this sort of crisis.
Brief Notes on the Global Economy
• Asian Supply Chain Collapse – There has been plenty of attention focused on the issue in China but the reality is that supply chain issues are far more severe in many of the other Asian states. The production facilities have been forced to close for periods of time and the ports have been snarled. The culprit has been the virus as these nations have not been able to get the vaccines needed. On average the Asian states are between 5% and 20% vaccinated and this has nothing to do with resistance. They simply don’t have the vaccine or they have been using the Chinese version. That vaccine is less than 50% effective in the first place and then there is the small number of people who have been able to get it. These nations are even more connected to the overall manufacturing community than China.
• Eurozone Supply Crisis – There has not been a gap between demand and supply like this in Europe in over 24 years. The demand for manufactured output is as high as it has been in years as the consumer has tried to resume their old habits but the ability of the manufacturers to meet that demand has been severely compromised by shortages in almost every category. There has been a mass shortfall in steel, aluminum, plastics, wood and anything else one chooses to name. There is limited output all over the world and limited ability to move the freight and this guarantees inflation. It is really the only way that demand can be controlled and the potential is for very high prices in many key areas.
Credit Managers’ Index Still Strong but Fading a Little
Each month we comment on the data that s collected from credit managers across the US by the National Association for Credit Management and it is time once again. The power of the CMI is similar to that of the Purchasing Managers’ Index. It is current as it is released every month and it is accurate – the data is what it is with no fudging or attempts to shape the outcome. It has proven to be a good advance indicator for the PMI itself as well as the economy as a whole. Go to www.nacm.org for access to the entire report – complete with all the nifty graphs and charts.
That euphoric sense that we had started to turn the corner on the economic decline has largely dissipated and it only took a few weeks. After several months of steadily improving data there has been a stall and even a decline in the last month. Most of the indicators are drifting back and showing strain. Thus far they have not fallen to alarming levels but the enthusiasm that was evident in mid-summer has evaporated. The latest CMI data reflects that trend as the overall numbers remain very healthy but they have all slipped from the positions they occupied a short time ago. The same pattern is showing up with the Purchasing Managers’ Index, a measure that the CMI very often anticipates.
The August reading for the combined score is back to 57.7 and that is about where the numbers stood in June (57.5). In July there had been some growth in evidence with a reading of 58.4. Thus far this year there has been quite a bit of variability with readings as high as 60.6 in April and a low set last September of 56.0. This latest reading is the fifth lowest in the last twelve months – making it a fairly average mark. The index of favorable factors slipped a little from the 67.0 notched in July with a reading of 66.0 but this number remains very comfortably in the 60s. The closest this sector has gotten to the 50s was in September of last year when it hit 60.8 and these favorable factors have not dipped close to the contraction zone since the recession in Q2 of 2020. The index of unfavorable factors remained stable with a reading of 52.1. This score has been in the 52 range for three straight months (52.7 in June and July and now at 52.1). This is a bit closer to contraction territory than would be preferred.
The shift in some of the subsectors was interesting. The sales data went from 73.3 to 68.6 and that marks the first time sales have been out of the 70s since February. The current month’s reading is the lowest since November of 2020. There was also a slip in the data for new credit applications with a 64.4 compared to 69.8 in July. The dollar collections reading did not change all that much and that is encouraging as it points to the desire to continue staying current on debt. It was at 63.8 in July and is now at 62.8. The amount of credit extended actually jumped significantly with a reading of 68.4 compared to last month’s 61.1. The explanation for some of this has been the surge in “hoarding” by many companies that have worried about the breakdown in the supply chain and the potential for higher inflation. They are buying far more than one would think they needed.
The rejections of credit applications stayed right where it was with a reading of 52.2 and that seems a comfortable position given the pace of new applications. The accounts out for collection dipped slightly but has remained just out of the contraction zone with a reading of 51.7 compared to last month’s 52.0. The disputes category remains in contraction territory but no deeper than it was the prior month. The current number is 49.5 and in July it was at 49.4. There was a small dip in the numbers for dollar amount beyond terms as it went from 52.4 in July to 51.6 this month. The dollar amount of customer deductions has fallen very close to contraction territory with a reading of 50.1 compared to the 52.2 noted in July. There was also a slight dip in the data for filings for bankruptcies as it went from 58.2 to 57.4. These are still very solid numbers for bankruptcies as this month’s reading is still better than any of those from April of this year back through 2020.
Manufacturing Sector – There has been a surprising level of volatility in the manufacturing data. Through the bulk of 2020 there was generally more stability in manufacturing than in the service sector as the pandemic impact was clearly felt more profoundly on services ranging from hospitality to entertainment and travel. In many cases the consumer spent more than they usually do on manufactured goods but in many cases, this spend was directed at imports. The manufacturers oriented to those service sectors saw declines and they have been further affected by supply chain breakdowns. The latest numbers are lower than might have been expected. The combined score slipped from 58.1 to 57.8 – not a major drop but it takes the data back to June levels. The index of favorable factors remained very stable with a reading of 66.5 compared to 66.6. The index has been in the 60s and 70s for the last twelve months. The index of unfavorable factors slipped as well – from 52.5 to 51.9 but this is a fairly modest adjustment and the data is still in expansion territory.
There was not much change in the sales category as the reading dropped out of the 70s. The current number is 69.0 and last month it was at 74.7 (but in June it was sitting at 68.2). The new credit applications number saw a more dramatic shift from 71.9 to 63.4. This takes readings back to where they have been through much of the year. The dollar collections data barely budged with a reading of 65.0 compared to the 65.5 noted last month. The most dramatic change was seen in the amount of credit extended category as there was nearly a 15 point move from 54.3 to 68.7. As mentioned above there is evidence of significant hoarding (or more politely – stockpiling) as manufacturers worry about supply chain failures and future inflation.
More From the CMI
There was very little movement in the data for rejections of credit applications as it was at 53.7 in July and this month it stands at 53.1. There was actually some improvement in the accounts placed for collection data as it went from 51.6 to 53.1 on the strength of some determination to stay current with credit. The disputes category remained in contraction territory but it is slightly less deeply entombed as the reading this month is 48.3 and last month the numbers were at 47.3. The dollar amount beyond terms data slipped almost into that contraction zone with a reading of 50.8 contrasted with the 54.3 noted in July. The dollar amount of customer deductions also veered very close to contraction with a reading of 50.0. It was slightly more comfortable in July at 50.6. The data on filings for bankruptcy shifted down a little from 57.5 in July to 56.5 this month but in general there has been good news as far as numbers of bankruptcies.
Service Sector – The service sector was on its way to a nifty little recovery just a few weeks ago as the consumer eagerly embraced the opportunity to get back to some semblance of their normal life. That recovery now seems threatened again as the virus has made a resurgence. The expectation held that people would embrace the opportunity to get a vaccine but fully half the population has shunned it and the old restrictions and protocols are back, affecting consumer activity. The combined score for the service sector started to trend down a little but not dramatically as it read 57.6 as compared to 58.7 in July and 57.9 in June. The index of favorable factors slipped slightly but at 65.5 are firmly in expansion territory. Last month the numbers hit 67.4 but in June they were at 65.1. The index of unfavorable factors slipped from 53.0 to 52.3 – still securely in expansion territory.
The sales data showed a fairly rapid decline as it went from 71.9 to 68.1 but that is still higher than it was in June when it hit 67.1. The new credit applications reading also fell a bit at 65.3 compared to the 67.6 noted in July and 66.1 in June. This is the time of year when retailers generally try to increase their inventories but that seems to be more subdued this year. The dollar collections data fell as well – from 62.2 to 60.5 while there was a small increase noted in the amount of credit extended. Last month the reading was at 68.0 and this month it is at 68.1. As with manufacturing there has been evidence suggesting companies are buying more inventory than they would normally as they are suspicious regarding the supply chain. They now have to hope that demand somehow keeps up with this extra inventory.
The rejections of credit applications actually improved – going from 50.7 to 51.4. There may have been a decline in the number of applications but fewer are being turned down. The accounts placed for collection numbers sagged and are getting closer to contraction territory with a reading of 50.3 compared to July’s 52.3. The readings for disputes also fell closer to contraction at 50.7 as compared to 51.5 in the previous month. There was an improvement in the dollar amount beyond terms category though and that is encouraging as this suggests that there is a desire to stay more current with credit terms. It did stand at 50.5 and is now sitting at 52.5. The data on dollar amount of customer deductions sank fairly dramatically however – going from 53.7 to 50.3. The filings for bankruptcies numbers remained very stable as the numbers this month were 58.4 and in July the reading was 58.9. Thus far there has not been a wave of bankruptcy activity despite the radical shifts in how consumption is being conducted during the last year and a half.
It Is Not Just Benefits
There have been many assumptions regarding the end of the extended unemployment benefits. The most common one has been that all those people who have not reentered the workforce have just been sitting around waiting for the money to quit coming. Now that the program is ending, they will all have to go get jobs or so it is assumed. The reality is that 25 states opted out of the program early and they have not seen a major rush back to work. It turns out that there are many other reasons that people have elected to remain out of work.
Analysis: The five factors at the top of the list include the need to remain home to care for sick or elderly relatives. There has been a shortage of facilities to care for people due to the pandemic and that has left many with little choice other than to quit work and do that caretaking themselves. The second major motivation has been childcare as schools and other facilities have been shut down or restricted and it appears that many schools will not reopen this fall as expected. A third and more chronic problem is that these people lack the skills required to get the jobs on offer. This has long been an issue and the pandemic only made it worse. The fourth problem is that many fear the disease and do not want to risk exposure. This has been an issue for those that have health issues already or are older. Finally, there are those that found other ways to make a living – the use of the “gig economy”. They have engaged in everything from ride share to simply arranging day work – much of it tax free.
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 latest Credit Managers’ Index looks a little more threatening that it really is. The decline noted this month is due to some drops in the favorable factors but these were pretty minor as the numbers are still in the 60s and strongly rooted in expansion territory. It is just that these readings were a bit higher the month prior.
Consumer Sentiment Dips – Consumer sentiment dipped to its lowest level since March. It remains above levels seen for the year prior to March, but the drop is worthy of note, nonetheless. The Conference Board said that Delta and inflation were the two biggest factors weighing on sentiment through Mid-August. The expectations index also fell to 91.4 from 103.8, that is also noteworthy. There is a bit of concern mounting regarding the next six months and what that could mean for consumers.
For more stories like this go to www.armada-intel.com/trial
I was just trying to get some work done in the hotel lobby …..ok I was eavesdropping. A group of people were discussing issues related to immigration – a hot topic in a state like Arizona. One guy from New Jersey was deep in his antagonism towards those who have been coming into the country illegally and was asserting that they were all criminals and very dangerous. A woman listened to the diatribe for a bit and then interjected her own opinion. It was very interesting and had the attention of the assemblage.
She looked to be in her 80s and lived outside Tucson – fairly close to the border. Her husband had passed away a couple of years ago and she now lived alone on her ranch. One evening she heard noises and upon investigation there were three men using her garden hose to wash. They started to run but one stopped to apologize in limited English. They were going to try to get jobs the next day and wanted to be a little cleaner. She decided at that point to intervene. She told them they could take a real shower in the house and that she had old clothes that belonged to her husband. They cleaned up, dressed and left. Two days later they were back. She was worried at that point but they told her they had found jobs with a cousin and now had a place to work and live. They just wanted to thank her and they noticed that the ranch needed work. For the next two months they came by her place several times a week to fix things, repair fences and the like – all of them had grown up on ranches in Mexico. They returned to Mexico but promised they would be back to work with that cousin and would finish the repairs at her place.
Illegal immigration is a massive issue and for every story like this one there are tragic stories of violence and exploitation. There are no simple answers but it might help if we all treated each other as human beings.