Daily Archives: July 5, 2017

Business Intelligence Brief: June 30, 2017

Short Items of Interest – US Economy


  • CBO Suggests a Deadline – According to the latest assessment from the Congressional Budget Office the government will run out of money by the middle of October unless the debt ceiling is lifted. The pattern has been the same every time this limit is reached. Those who want major changes in the way that government functions use this as leverage and threaten to allow the government to go broke unless their demands are met. This usually means cuts in certain spending programs but that gets harder and harder to do with every passing year given that almost 60% of the federal budget now goes to Medicare, Medicaid and Social Security.


  • Bond Market Challenges Fed Orthodoxy – By all indications the Federal Reserve remains committed to hiking rates through the rest of this year and into next but the bond markets are not all that supportive of that plan. The yield curve has flattened as longer-term rates are getting much closer to shorter term rates. The spread between the two-year bond and the thirty year bond has long been seen as an inverse indicator of an economic downturn and right now the markets appear to be signaling that they see a recession as a more imminent threat than was the case a few months ago. This would suggest that hiking rates would be ill-advised as the economy is weaker than it might appear. This assessment is not universally shared and the bond markets have not always been so accurate but it is worth pondering.


  • Business Implications of Travel Ban – The Supreme Court ruling asserted that the travel ban from six Muslim majority states would be allowed until the Court has the opportunity to rule on this in October so the new rules may be temporary. It is also assumed that lawsuits will be brought immediately and these may lead to suspension as well. The aspect of the ban that most concerns business is that people from these six states will need formal and documented invitations to enter the US and all of these applications will be tightly scrutinized. The sector that will be most affected will be energy as three of the six nations are oil states (Libya, Iran and Sudan).


Short Items of Interest – Global Economy


  • Reactions to Steel Tariffs – The specifics of the steel tariff have yet to be released and it remains unclear what the actual target will be. If the tariff is focused on China and a few other low cost producers it will have a different impact than if the tariff is aimed at big exporters such as Canada (over 18% of the total). One reaction is certain when it comes to steel users – they will have to reduce costs elsewhere to accommodate the higher steel prices and most estimates hold that they will do so by reducing wages and jobs. The majority will accelerate their conversion to robotics and technology as they seek to reduce labor costs.


  • Not Much Common Ground with South Korea – It seems that most of the meetings between Trump and world leaders are tense these days. The upcoming meeting with the new President of South Korea will certainly be no exception. Moon Jae-in is from the left and has very different ideas as to how to deal with North Korea. He is an advocate of the “Sunshine Policy” of some years ago that sought to open up relations with the North. He opposes the use of the THAAD missile defense system and generally opposes the trade sanctions the US has warned are imminent. The meeting is already expected to be frosty and some expect an outright break.


  • Speaking of Sanctions – Whatever remained of the rapprochement with China has vanished and the two states are rapidly heading towards outright hostility. There are the US sanctions on Chinese banks that do business with North Korea, disputes over weapons sales to Taiwan, fights over the South China Sea and general opposition to Chinese economic and foreign policy.



Another Rebound for the Credit Managers’ Index

Once a month we bring you a summary of the Credit Managers’ Index. This is the narrative that accompanies the report and if you have an interest in seeing the whole thing with all the keen charts and graphs you can go the National Association of Credit Management website – We have been interpreting and discussing the CMI for several years now and it has proven to be a very predictive tool as far as the economy is concerned.

Is it appropriate to say “wheee” when talking about economic data? It seems that this may be the only response that makes any sense over the last few months as the CMI looks like a roller coaster. It is up one month and plunges down the next – only to rise again the following month. The variability would be more problematic were it not for the fact that this behavior has been mirrored in all kinds of other data streams. The fact is that there are contradictory waves coursing through the economy as the wild enthusiasm that greeted the start of the year has come face to face with reality. As with the data over the last few months, the majority of the shift this month was due to the same two categories – dollar collections and accounts beyond terms. More on this in a moment.

The combined score returned to solid growth territory with a reading of 56.1 after slumping to 53.6 the month prior. This month’s reading is as good as it has been in well over a year. The highest level that had been reached this year was 55.8 in April and that month was followed by a decline to 53.6 in May. The overall score for the favorable factors also surged with a reading of 63.9 following a 60.0 mark the month before. In April and February, the indicator was almost the equal of what it is today – 63.6 – but June’s number is still the highest seen this year and for several years prior to that. The indicator for the unfavorable factors also looked healthier with a reading of 50.9 but healthy is a relative term here. The data remains perilously close to contraction but at least this is an improvement over last month when it was 49.3. The unfavorable numbers have been hugging the border between expansion and contraction for the last few years.

In the favorable categories, there was some big gains and some minor ones. The category of “sales” went from 60.6 to 66.5 and that is the best reading for the last several years – better than the previous high of 63.8 set in April. There was minor movement in the “new credit applications” data as it went from 59.3 to 59.8. As mentioned earlier the mover this month was “dollar collections” once again. It went from 56.7 to 62.5 and continues the pattern of the last several months (56.4, 61.2, 56.7, 62.5). There was also an improvement in the category of “amount of credit extended” as it went from 63.6 to 66.8 and that is again the best performance in the last few years.

The activity in the unfavorable factors was more subtle but important nonetheless. The category of “rejections of credit applications” improved from 52.4 to 52.6 – not a major move but getting more solid and comfortable in 50s. This matches well with the “new credit application” numbers. There was a slight improvement in the “accounts placed for collection” but it remains in the contraction zone with a number of 49.2 as opposed to last month’s 48.5. The category of “disputes” climbed out of the contraction zone with a reading of 50.4 compared to last month’s 47.9. The big mover this month was as it has been in the previous months – “dollar amount beyond terms”. Las month it was 45.9 and this month it is back in the expansion zone with a reading of 50.4. This twins with the dollar collection data to suggest that companies are struggling a little to keep current with their creditors but that they have not entered into a crisis situation just yet. The category of “dollar amount of customer deductions” also moved a little from 48.7 to 49.1 and that leaves the category in contraction territory. The “filings for bankruptcies” reading changed a bit as it moved from 52.7 to 53.4. This was not a major shift as both numbers are comfortably in the 50s. This month there are only two categories remaining in contraction territory and just last month there were four.


Manufacturing Sector – The same amusement park experience exists in the manufacturing sector. This has been a volatile area of the economy thus far this year – by almost any measure. There has been extensive variability in everything from factory orders to durable goods orders, capacity utilization and within the various categories of the Purchasing Managers’ Index. The CMI data has been just as volatile.

The combined score for manufacturing trended back up from last month and is now at 55.9 after last month’s dip to 53.9. The data this month is not quite as high as it was in April when it hit 56.2 but it is close. The combined score for the favorable factors is back in the 60s with a reading of 63.8 (compared to the 59.7 registered in May). The combined score for the unfavorable factors was 50.7, a slight improvement over the 50.0 reading in May. As with the combined CMI the unfavorable readings are hugging the zone between contraction and expansion and it has been for the last few years.

The details are similar to the larger index. The category of “sales” jumped dramatically from 59.5 to 66.9 and that is by far the highest reading seen in the last several years, eclipsing the previous high of 64.7 set in April. The “new credit applications” number shifted up but only slightly from 58.6 to 59.8. Once again there was a big recovery as far as the “dollar collection” data was concerned. It went from 57.3 to 61.0 and that repeats the bouncing ball behavior that has manifested in the last few months. The “amount of credit extended” reading changed a little and improved from 63.4 to 67.4. This is only slightly off the pace that was set in April when the reading was at 67.8.

The “rejections of credit applications” moved up a little and that matches the performance of the “new credit applications” reading. It was 52.6 last month and is now sitting at 53.3. The category of “accounts placed for collection” improved a little but stayed in contraction territory – moving from 49.5 to 49.8.


CMI Data Continued

There is still a lot of financial damage to work through and many companies have been forcing collection activity. The “disputes” category also improved a bit but remained in contraction territory with a reading of 49.6 after a reading of 48.0 last month. There was an improvement in “dollar amount beyond terms” but not quite as dramatic a shift as was noted in the overall scores. The reading went from 48.1 to 49.3 and that is a decent gain but not one that takes the data out of the contraction zone. The category of “dollar amount of customer deductions” also showed just the slightest improvement from 48.6 to 48.7 and that also still leaves the category in the contraction zone. There was also minor improvement in the “filings for bankruptcies” as it went from 53.1 to 53.6.


Service Sector – As with the manufacturing sector there was volatility in the service sector. This is an odd time of year for services in general as this is the height of both the construction season as well as the travel season but retail is generally down as there are no big spending holidays to spark a rush to the stores. This year the construction sector has been very active and vacation season has been better than it was last year.

The combined score for the service side was an improvement over last month with a reading of 56.2 compared to 53.4 in May. That is the highest mark reached in the last 24 months and even exceeds the level reached in April. The combined score for the favorable factors also set records as it moved from 60.3 to 64.0. The previous high was set in April when it hit 63.3. The combined score for the unfavorable factors was still close to the margin between contraction and expansion but was an improvement over last month as it is now sitting at 51.1 as opposed to the 48.7 mark in May.

The “sales” category jumped from 61.7 to 66.0 and that is well past the old high set in February when it hit 64.5. The “new credit applications” number stayed just where it was and just short of entering the 60s. It is at 59.9 again and that is respectable enough. The “dollar collections” numbers also saw a nice bump as they went from 56.0 to 63.9 – the highest reading in well over three years. The “amount of credit extended” moved from 63.8 to 66.3 and that was again one of the highest scores in the last several years.

There was a reversal in the non-favorables and that is creating a little concern. The dip in “rejections of credit applications comes at the same time that applications for credit look a little stagnant. There appear to be more applications from those that are not creditworthy and that suggests there is some panic in some of these sectors. Most of that appears to be concentrating in the construction arena. The category of “accounts placed for collection” improved a little but this category remains in contraction territory as the reading moved from 47.5 to 48.9. The category of “disputes” improved enough to leave the contraction zone as it moved from 47.7 to 51.3. The category of “dollar amount beyond terms” improved spectacularly as it moved from 43.6 to 51.6 – that is the biggest jump of any of the categories and the best performance seen in well over a year. This category has not been in expansion territory except for the month of April when it hit 50.5. This couples with the big improvement in dollar collections to suggest that creditors are trying to get caught up. The category of “dollar amount of customer deductions” also changed a little – going from 48.9 to 49.5 but that still leaves the readings in the contraction zone. The “filings for bankruptcies” category is also moving slightly but in the right direction. It has moved from 52.3 to 53.2.

As with manufacturing the yo-yo of the data has been centered on dollar collections and slow pays. These are the first indications of problems to come but thus far the other shoe has not dropped. Each time it appears that more bad news is to come the next month improves.


Labor Shortage in Japan

The US might well look at what is happening in Japan to see what the employment situation will be in the US in the not distant future. The labor shortage problem has been acute there for years and has consistently worsened. It is as bad now as it has been in almost 50 years. The ratio of open jobs to applicants hit 1.49 and that is the highest level reached since 1974. The shortage is acute in sectors such as manufacturing but all sectors of the economy have been affected.


Analysis: The reaction on the part of the business community has been to adopt technology and robotics at an ever increasing rate. The shift from people to machines is well underway in Japan and that essentially means that these jobs will never come back. Even with the shortage there are millions in Japan who are essentially unemployable.


The Black Owl Report – An Executive Intelligence Brief

There are a number of publications that come from Armada. You are familiar with the daily Business Intelligence Brief we distribute through various business organizations. This is written for the general business community and deals with the broad economy – national and global. The Black Owl Report is a nod to the “black swan” theories of Nassim Taleb and focuses on forecasting and the big issues that move the corporate community. They are designed to be companion publications. The BOR is subscription based ($84 per year). If you would like to take a look at the BOR please contact  and we will start a one-month free trial – there are no obligations – just an opportunity to see additional publications.


Getting Out of One’s Comfort Zone

With the arrival of summer comes the wave of TV shows that have celebrities and others doing things they are not very good at. It is endlessly amusing and fascinating to see people perform badly – especially when one knows they are pretty good at something else. On the one hand, we have always enjoyed pratfalls and physical comedy – intended or not but I suspect there may be more to it than this.

Most of us try not to do things we are not good at – especially in front of others. We want to maintain our dignity and that veneer of competence that allows us to function at work and at home. Deliberately trying something that will doubtless make us look foolish is not usually on our agenda. The interesting part is that we often find that doing something like this is cathartic and even fun. We learn a bit about ourselves in the process of doing that which we usually avoid. It all comes down to attitude.

We have two choices when it comes to this activity. We either become very upset that we have failed to meet our and other’s expectations or we accept the outcome with grace and enjoy the experience. We see both responses from those around us. I generally have more respect for the ones who try, fail and then accept the performance for what it is than I do for those that become angry or frustrated when they are not as adept as they think they should be. Given my spectacular lack of talent and athletic skill almost everything is out of my comfort zone and I just have to be ready to laugh at myself on most occasions.


These are parts of the commentary that appeared in a recent Black Owl Report.  We invite you to start a one month trial subscription so that you can see the variety we offer in this publication.


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Magic Line in the Calendar – We have multiple reasons to celebrate the 4th of July this year. Of course, it’s the period when we celebrate the nation’s independence, remember our military, and kick off a lot of summer family traditions. It’s also a time when we reflect on the first half of the year, and consider what is ahead. I’m feeling that many executives are drawing a thin red line on the calendar – coming just after the 4th of July.


That red line demarks the “wait and see” period of the first half of the Trump term and the “time to get moving” period of the second half.  I expect many executives to come back from the holiday week fired up and ready to get active on initiatives.


Just some observations:


  1. Congress is gridlocked – that might be good for some. For those that were highly optimistic after the election; many have gone through the disappointment and realization that the incoming administration wouldn’t be able to get a lot of sweeping change to happen quickly. Many executives are now settling into this gridlock by looking at it as: the “market that they know”. It’s stable, and that’s about it. But they can work with that.
  2. The economy had momentum going into the election, and that momentum continues. That locks-in a 2% economy, something that executives can deal with and it is trending slightly better than what we saw in 2016.
  3. Some of the scary policy actions that could have been taken have been quelled, muted, or tabled (border taxes, complete immigration ban, cutting off Mexican trade, etc.). Sure, there are still a few things that could have a negative impact on the business environment floating about and a few of them keep some of us up at night.  However, for the most part, the biggest of those fear factors are now lurking in the background and it looks like they will be challenged to get through Congress.


Many of you are going to have your bosses hit your offices with some renewed vigor after the holidays. You know it’s coming. We don’t see any changes in the velocity of money yet – it’s still at all-time lows. Some of it is due to actions by the Federal Reserve to pump liquidity into the market. But, we still don’t see a huge change in the movement of money. Perhaps that will change in the quarters to come. – KP


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