Business Intelligence Brief: July 11, 2017

Short Items of Interest – US Economy

 

  • Quarles Set to Join Fed – In 2010 Congress made a change to the way that the Fed would operate by creating a post within the Board of Governors that would be primarily concerned with regulatory issues. That position was never exactly filled but existing Board member Daniel Tarullo assumed these duties. His background was in regulation and he was an attorney. He has since retired and that post has been unfilled. Randall Quarles will now hold that post should he be approved by the Senate. He is an investment banker and a former official in the Treasury Department. Most assume that he will be more industry oriented than Tarullo but the big change may come from his stance on a couple of key issues. He has been against the low interest rate policies of the last few years and has supported the notion of using mathematical formulas to determine interest rate policy.

 

  • Improvement for Black and Hispanic Workers – The latest jobless data shows that there has been considerable progress for these two groups and it has been a long time in coming. The unemployment rate for Hispanics is now quite close to the overall national rate at 4.8%. The rate for the black community has also improved to levels not seen since the 1970s but it remains quite a bit higher than the national norm at 7.1%. The rate of unemployment for whites is still far lower at 3.8%. Women of all races have lower rates of joblessness than men but this is especially acute with blacks and Hispanics.

 

  • US Prepares Unilateral Moves Against North Korea – For all the talk of military response it seems the US is going to focus on tighter sanctions as a response. The reality is that Pyongyang can’t be much more isolated than it already is but the Chinese connection has been relatively untouched. The new sanctions would be aimed at Chinese banks and companies that do business with the North Koreans – essentially presenting them with a choice of working with the US or the Koreans. China is not happy about this but they seem prepared to let this play out if it avoids an all-out war.

 

Short Items of Interest – Global Economy

 

  • What Does Mosul Defeat Mean? – The third largest city in Iraq has vanished – all that is left is mile after mile of debris and a population that has been shattered. The number of people left is a fraction of the original population and they are starving. The ISIS takeover took place three years ago and now they are gone. What was accomplished? The Iraqi army successfully completed the siege and few thought they would stick it out. The battle was tragic beyond belief but ISIS has been denied even a semblance of authority and the dreams of a Caliphate are gone. Unfortunately, this means that ISIS will simply return to its insurgent tactics and will remain a threat. If there is any kind of silver lining it is that ISIS will have a tougher time recruiting when there is no chance of a new state led by it – recruits will simply face the fact they will eventually be killed.

 

  • Australian Prime Minister Challenges his Right – Malcolm Turnbull has declared that his government will rule from the “sensible center” and he has moved to isolate the right wing that has pushed policies that are often at odds with what the public supports. He has taken a moderate stance on everything from immigration to economic development and societal support for the less well off in the country.

 

  • What Does Russia Want? – The issue of whether the Trump campaign was engaged with Russia in any meaningful way will rage as long as the politicians want it to. One of the key questions is why Russia would want to intervene in the first place and this all comes down to sanctions. These were imposed when Russia invaded Ukraine and threatened intervention in the Baltics and they have damaged the Russian economy. The Putin regime has tried to pretend they didn’t but the Russian economy has been in recession since they were imposed and he wants them gone.

 

 

 

Report from the Manufacturing Front

As we note every month, we do analysis for two industrial organizations – the Chemical Coaters Association International and the Industrial Heating Equipment Association. Both are heavily involved in auto manufacturing as well as any sector that engages in either heat treating metal or chemically coating it and that means almost any business that works with metal. They are at the heart of the manufacturing sector in the US. These are parts of the executive summary distributed to the members. These are all areas that matter to the manufacturer and to the overall business community and they make a fairly handy month to month scorecard as far economic performance is concerned.

This may turn out to be the transition month. It is certainly the month when much of the economic data started to turn and settle into what could be a pattern for the remainder of the year. Through the course of the first six months there was a sense that growth was being propelled by expectation and anticipation. The rhetoric at the start of the year was all about change and nearly every business heard what they wanted to hear. There would be big changes in areas like tax reform, infrastructure investment, regulations, trade and health care. It was the policy set that many in manufacturing and business had been pushing for years. Now it has been six months and the changes have been anything but quick with most of the big policy shift stuck in neutral. The business community is now adjusting to this new reality. This month there were seven indicators trending down and only four trending up. This sounds bad but it also has to be noted that many of those that are down this month have generally been positive until now.

One of the more important adjustments has been in the automotive sector. This has been pushing the economy along for months and now that pace has slowed dramatically. There are just too many barriers and the consumer has been sluggish. The same problem has appeared as far as housing is concerned. The price of homes has been rising and there is still not a lot of interest in buying a home among the millennial population. These are both drivers of the economy and have been performing very well until now.

Steel consumption was a bright spot as far as trends are concerned but there is an important caveat – much of the consumption seems related to the expectation of higher steel prices once the tariff on imports is imposed. There will likely be a big drop in consumption once that occurs. Metal prices are generally rebounding this month but that comes after they had all experienced a pretty significant slide. The recovery is nice but has to be taken in context.

The news isn’t necessarily bad or good but the data as far as industrial capacity and capital spending is off this month. There had been a nice little climb under way as far as capacity usage was concerned and it was hoped that this month would see numbers above the 80% level. It fell short again and has slumped a little. Capital investment has been all over the place of late and this was a down month. The data is not awful but it is not what had been hoped for by this time. This is a sign of the overall trepidation that has been manifesting in the industrial economy. There is still some reluctance to commit to big spending programs as business owners are not convinced that the second half of the year will be an improvement over the first.

The three measures of activity in the industrial sector are pointing in various directions. There has been a retreat as far as new orders as measured by the Purchasing Managers’ Index but the overall PMI has been performing well. Even the new orders data is not bad – just not growing as had been hoped. The durable goods numbers are always affected by the activity in the aerospace sector and that is volatile. The performance once airplane manufacturing has been stripped out is mediocre at best. The factory orders numbers have been weaker as well – consumers are no yet in break out mode and they might not gather much momentum in what remains of the summer.

The Credit Managers’ Index has been very odd of late – up one month and down the next. All of this volatility seems to be connected to two factors – dollar collections and slow pays. They are related as dollar collections data reflects whether or not the creditors are paying their bills. The slow pay is not yet a crisis but is heading that way. For the last four months, the index has been positive one month and negative the next – this is one of those positive swings. Transportation has been slumping and much of that is due to reduced activity in freight rail and the continued erosion of the air cargo business. The transportation sector tends to be predictive and if it is sliding the whole economy will follow suit.

New Automobile and Light Truck Sales – There are some serious concerns developing as far as the automotive sector is concerned. For the better part of the last decade the auto sector has been pulling the entire manufacturing community along with it. It was only a few years ago that sales of the bigger cars, SUVS and light trucks drove the market and provided much of the expansion for manufacturing overall. Since 2015 there has been a significant reduction in this activity and especially in terms of jobs. Of the 100 largest urban areas 48 of them have lost auto manufacturing jobs as companies have reduced output and replaced people with technology and robotics. The impact on manufacturing overall has been significant and few expect much of a renaissance any time soon.

The appetite for a new car has been reduced as most of those who wanted one have already made that purchase. The millennial generation is significantly less interested in acquiring their own car and the prime car buyers (Boomers) are fading away and buying their last car. The banks are not as eager to loan for cars as they once were and the model changes are not driving demand either. Cars last far longer than they once did and that means that people keep them for ten years and more. The bottom line is that car sales will not driving the manufacturing community this year or next and not for a long time.

 

CCAI/IHEA Continued

New Homes Starts – The housing sector is another one that has started to reverse course and that is not good news for the economy as a whole. Just as with the auto manufacturing sector the housing starts data was providing encouragement given the number of sectors this activity can touch. There is the building itself but then one adds in all the appliances that come with a new home and the landscaping and the electronics and so on. The challenges of home ownership have been mounting and they have started to take a real toll. The headwinds have been developing since last year and have only become more intense.

The first issue is that home prices have been rising at the same time that banks have been forced to be more cautious. The old system that allowed people to get into whatever home they wanted with a low down payment is long gone and now the prospective buyers have to pony up a lot of cash. At the same time, there is a shortage of homes in many of the hotter markets and that drives the prices up as well. Mortgage rates have risen a little but have generally stayed about where they have been. Existing homes have also been affected but not quite as dramatically as new homes. The issue that hangs over the whole sector is the willingness of the millennial to buy and that still remains at a slower pace than would have been expected.

Steel Consumption – There is a great deal of tumult in the steel sector at the moment and it has been affecting consumption numbers. The threats of a large steel tariff imposed on steel coming from outside the country has captured the attention of both producers and users. At this point the details of the tariff have not been released and it seems that the different exporting states will be playing by different rules. The largest exporter to the US is Canada and the majority of the top ten exporters are countries that have been long time allies. Given that this tariff is supposed to be for the protection of national security it makes little sense to equate steel imports from China with those from Canada and there may yet be exemptions to the 40% tariff.

Beyond this uneasiness as to what is planned there is the desire on the part of the steel users to protect themselves from impending higher prices and that has meant more stockpiling. The actual consumption of steel has not grown all that much but the accumulating is showing up in these higher consumption figures.

Industrial Capacity Utilization – It was looking so promising! For the last several months the rate of capacity utilization had been heading up towards the level that would signal respectable growth. As we have pointed out endlessly the ideal range for capacity utilization is between 80% and 85% as that signals that the economy is not experiencing slack but it is not overheating either. The trend had been steadily up and now this month it has dipped again and fallen short of that minimum level. Not that around 76.5 is necessarily bad but this still signals a dip and leaves the index showing slack. When the levels are this low the manufacturing community is not interested in buying more machinery or in doing any additional hiring. It had been hoped that this indicator would have continued its march toward normal but that seems more distant than was the case earlier in the year.

PMI New Orders – The Purchasing Managers’ Index has been improving over the last few months but there has been more variability with the new orders index. These are the more forecast oriented readings as these are the orders that point to future activity. The growth of a few months ago have ebbed and there is more caution appearing in the manufacturing sector as well as with some of the services. The blush of wild enthusiasm has faded and there are concerns that many of the good news developments are not going to come to pass this year. It looks unlikely that the health care issue will be settled until next year and neither will the tax cuts. This is problematic as this would have been the ideal year for these to change. The new administration should have had a honeymoon period but it was squandered on meaningless fights and scandals. Now the big changes will be offered during an election year and the reluctance to take a stand will be even greater with those who are trying to protect their seats. All in all, these numbers are not bad – they are just not as robust as they were expected to be at the start of the year. The momentum has slowed and it will be harder to get it back.

Capital Expenditure – The level of capital expenditure often follows the same pattern as capacity utilization as there is less demand for new machinery when the level of utilization is low. The slowdown in capacity usage seems to be playing a role with capital expenditures this month as they are down from what they had been. It has not hit the low set in February but for the past year these are low numbers indeed. The decline in February is partly explained by the fact there is a lot of build up at the start of the year and then purchasing tends to fall off a little. There has been quite a bit of movement from month to month and that has complicated the task of trying to identify trends, as soon as a pattern starts to emerge there is a reversal. It seem that enthusiasm for the future keeps clashing with reality and the continued sluggishness of the economy.

 

 

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 ksanchez@armadaci.com  and we will start a one-month free trial – there are no obligations – just an opportunity to see additional publications.

 

On Being a Fuddy Duddy

I try not to romanticize the past but I am sure that I am guilty of selective memory – most of us are. As children, we were all exemplary – hard working and respectful, dedicated to pleasing our parents and committed to education and our future goals. As Onslow from “Keeping Up Appearances” would say – “Right!”. I am certain that adults looked at me in my tender youth and questioned whether I would survive – much less make anything of myself. I try to remember this when I gaze at the younger generation now as most days I am either vexed or filled with a feeling of doom.

Do kids today really have so much less work ethic than those in my day did? I couldn’t wait to start working and pursued jobs well before I was legally supposed to. I liked working and I liked making an impression on my bosses. Not all of them were great and I didn’t like all the jobs I held but most were interesting and I tried to do my best. I don’t seem to come across that attitude much anymore. Usually I am left with the impression the person I am dealing with hates their job and by extension hates me. The most common approach is surly indifference and I have to be honest – this infuriates me. I have taken to writing letters to establishments commenting on these experiences and usually get no response at all or maybe a generic “thank you for your comment”. I also try to point out the good service when I see it.

I don’t know how we change this. I have tried pointing out these behaviors and all that does is escalate the tension and confrontation. I have been yelled at and been flipped off by some kid whose job is ostensibly to provide service. They learned nothing and that place of business lost me forever. I spoke to managers in each case and received nothing but a blank stare. I am pretty sure I would not have gotten away with this when I was working – I was once fired because I was caught talking on the phone when a customer came in the store. Those were the good old days!!!

 

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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The Truth About the Yellowstone Super Volcano.  There is a lot of news about the number of earthquakes happening near the Yellowstone Super Volcano. News agencies around the world are jumping on the “awakening of the sleeping giant” story – suggesting that this could be the end to the United States if it does indeed erupt. Here’s a bit of truth seeking on our part (we don’t have all of the answers).

 

There have been a swarm of more than 1,000 earthquakes near Yellowstone – including a 5.8 earthquake that took place in Montana just yesterday. First, this was the largest swarm of earthquakes in a single week…in the past five years. It isn’t unprecedented – in fact, it isn’t really all that uncommon over the past number of decades. The USGS has their volcano alert system still set to Green, they aren’t concerned.  But, if you are an odds kind of person, here’s where they put the odds of a super volcano eruption over the next 12 months:

 

730,000 to 1

 

The USGS is telling the public that they look at multiple factors to help predict a volcanic eruption. The earthquake swarms are just one of those factors. Today, only one factor is being triggered, the others are quiet. So, there isn’t a super volcanic eruption in our near future…yet.  An article in a science magazine last week suggested that Yellowstone isn’t the one to worry about anyway.  Because of the type of volcano – it isn’t explosive. Most of the activity that would come out of an eruption would be lava flows – not huge eruptions that blanket the earth in ash for years.

 

It might ruin a few family vacations – but it probably isn’t the global killer everyone makes it out to be. – KP

 

 

 

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karen

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