Category Archives for "Business Intelligence Brief"

Business Intellilgence Brief: April 21, 2017

Short Items of Interest – US Economy

 

  • Debate Still Rages Over Chinese Import Influence – We have been discussing the debate that has been raging among trade economists as they try to determine the impact of Chinese exports to the US. The aim is to really understand whether the influx of goods from China over the last few decades can be blamed for the decline in US manufacturing jobs as well as other economic reversals. It would seem intuitive that these imports would have a negative impact but guessing and assuming is not enough to inform policy. The imports certainly challenged domestic producers and caused everything from closure and layoffs to relocating overseas. On the other hand, the cheaper good gave consumers more buying power and that allowed other businesses to grow. The latest wrinkle in the debate is based on trying to determine the impact of the housing market.

 

  • Soft vs. Hard Data – The split is getting wider by the day. For the last few months there has been a steady improvement in “soft” economic data. The consumer sentiment surveys are up, confidence measures for the manufacturers are improving, investors are feeling encouraged and so on. The problem is that nobody really knows why. The “hard” data is weak. There has been a decline in most of the manufacturing indices and retail sales have been down for three months in a row. The latest Credit Managers’ Index showed some distress as far as dollar collection and slow pays are concerned and those are both early signs of concern. The question is whether attitude will be able to pull the economy forward or will the real news start to fade all that enthusiasm.

 

  • IMF Worries About Trump – It is essentially a matter of “damned if you do and damned if you don’t”. The IMF report asserts that there are risk to the current Trump impact regardless. If the upbeat attitudes suddenly start to fade and the markets get concerned there is a profound risk of a major market correction in the US that would affect the whole world. If the plans do pan out there is a risk that many of the most leveraged companies will borrow more and the hikes in interest rates will put these very companies in jeopardy. Either way there had better be some contingency plans in place.

 

Short Items of Interest – Global Economy

 

  • Eurozone PMI Looks Good – There is certainly reason for the European business community to be concerned about what has been happening politically but thus far it has not affected their outlook or their day to day activity. The latest flash PMI from Markit shows that Eurozone PMI numbers are up to a six year high of 56.7. This is better than last month and the various sub-indices on new orders and employment are likewise improving. The French PMI would likely have been the most affected but it has improved as well – going to 57.4 and better than the reading in Germany (56.3). The overall sense is that Europe is growing at a respectable rate despite all the turmoil.

 

  • Venezuelan Protests – The threat of a coup attempt has been increasing in Venezuela as reports are circulating that segments of the military and police are disobeying orders to break up some of the protests. There have been unconfirmed reports that soldiers have thrown down their weapons and have joined the marches and there is considerable speculation regarding the whereabouts of some key military leaders. The pattern in this country is for the military to step in when there is chaos and the betting is that there will be a junta in place in a short period of time.

 

  • World Bank Downgrades African Growth – The expectation had been that sub-Saharan Africa might grow at around 3.2% this year but the prediction has been reduced to no more than 2.7%. The sense is that famine and warfare will drag the whole continent down and even the more successful economies will be affected by the lack of job growth.

 

 

 

Protecting an Industry – Pros and Cons

There are few industries that evoke as much nationalistic fervor as steel and that has long been the case and for every nation. Steel is the foundation of an industrial society and becomes a marker for industrial strength and independence. Every nation has announced their arrival as a modern state by developing the ability to produce their own steel and the image of belching furnaces and molten rivers of steel has been imprinted on the minds of millions of people – never mind that this is no longer the norm in steel production. Steel is at the heart of the auto industry (although less than was once the case) and it is fundamental to the construction sector in the US and elsewhere. Steel has been protected in various ways over the years and the clashes between the unions and steel company owners have been among the most epic of struggles. There is now a proposal from the Trump administration to launch an investigation of the steel sector and the imports of steel into the US. This is a law that was used a great deal in the 1970s and 1980s as a means by which to promote domestic production and limit imports but it has not been used much since. The motivation is ostensibly to protect national security.

 

Analysis: In the past, the issue of national security was interpreted fairly narrowly. If the intent was to protect the US from being dependent on potentially hostile nations for its steel the solution was to ensure that most of the imported steel came from allies such as Canada, South Korea and Japan as opposed to states such as China and Russia. Over the last few years these two nations have developed their steel sectors aggressively and sell a lot of steel to the US and other nations. The US has already put in place restrictions on steel imports that have resulted in a reduction from 34.7% imported steel to 29.9% in 2016 alone. The study that has been authorized by Trump could have an even more profound impact.

The real battle is not between the domestic producers of steel and the foreign exporters. The tensions in the US are between the users of that steel and the producers. The three sectors that dominate steel usage in the US are construction (averaging 50% to 60% per year), machinery (accounting for around 20% to 25%) and automotive (6% to 7%). Within the construction category the dominant user is the public sector as steel is heavily used in road and bridge work as well as buildings. The commercial construction sector accounts for most of the rest as residential housing is a very light user. The added costs that would accompany steel import duties would hit some very vulnerable sectors.

The makers of machinery fear that their costs would rise by as much as 10% to 20% – it would all depend on the kind of steel they demand and how much. They assert that even a small hike in their costs would drive prices up to the point that sales would falter. The auto sector is acutely sensitive to price hikes but so are the makers of farm machinery or construction equipment. The desire to cut government expenses will run straight into the need to pay more for the steel needed to pursue all those infrastructure plans. It has been pointed out by the steel consuming industries that for every person employed in the steel industry there are 60 who are employed by industries that use steel and if they can’t get access to less expensive steel they may become incapable of remaining competitive. The US has indicated that it wants to emphasize exports and to reduce the overall trade deficit and it is feared that higher steel costs will blunt that effort. The US will never be in a position to successfully export steel – the exports will be the machines that are being made with the steel used in the US.

When it comes down to it the US is primarily concerned with the steel imports from China and Russia. The Chinese sell steel more cheaply than any other nation as they have supported this industry for years. All that state support has allowed overproduction and now that domestic demand in China has slowed dramatically the Chines steel makers are trying to get rid of it on the global market.

 

 

Automation – Threat as Well as Opportunity

Over the next decade the most dramatic changes in the global economy will be as a result of the advance of technology and robotics. It has already had a profound impact on the developed industrial states as many of the jobs once performed by people are being done by machines. The most vulnerable have been those with low skills and this is why there are mounting concerns regarding the impact of automation in the developing world. At the recent meeting of the World Bank it has been asserted that over 60% of the current population of these states will be rendered jobless by these advances. It has always been assumed that these states would be competing in the global market based on the low cost labor supply available but even in countries that have very low labor costs the use of technology has been expanding.

 

Analysis: The call at the World Bank was to expand efforts to address poverty and lack of education but it is not at all clear what that education should look like. Is it practical to try to train the global labor force to work with advanced technology? There are simply not enough jobs to accommodate that large a number of job seekers. The current thinking is that people will have to be equipped to develop their own small scale businesses – everything from service offerings to small scale retail and manufacturing. The projects pushed by the World Bank and others have long relied on big efforts designed to spur major development and now the emphasis may have to shift towards the micro business designed to provide a living for just one person or a family. This has been the approach off the various micro-loan efforts but more is needed beyond just the small loan.

 

 

Terror and the French Election

The polls have suggested that the race for the French Presidency is very close and the attacks in the last few days have made them even tighter. France has been under a state of emergency for over two years due to the terror threat and attacks and this latest incident has served to ratchet tensions further. The more that is known about the attacker the more politically volatile this has become. The assailant was killed in the exchange but not before killing a police officer and injuring others (reports from France have indicated that one of those injured has now died). The man was known to police and had been considered a threat, he had even been in prison for a time after shooting at police. The question on the minds of many voters now is why he was not still in prison or otherwise dealt with. The mood in Paris is angry and there is considerable fear – all feeding more support to those candidates that would advocate a much tougher position on terrorism and suspected assailants.

 

Analysis:  Going into the weekend poll the two front runners are still Marine Le Pen and Emmanuel Macron and the margin between them is razor thin. In the last weeks, Jean Luc Melanchon has surged but the terror attack may have affected his campaign the most as he has had the weakest response of the four candidates. Much support has been directed towards Melanchon from the poor suburbs that house the majority of the immigrant population. They fear reprisals from the greater population and they worry about increased security and Melanchon has been echoing these concerns. That has not done him any favors with the greater population. Meanwhile there appears to be some support growing for Francois Fillon as he has taken a hard-line position on terrorism and asserts that he is the only candidate that has actual experience in governing. There are signs that voters are less concerned about the financial scandals that have dogged Fillon since he won the center right Republican leadership battle.

Regardless of who emerges from the first round it is now clear that terror will be a major issue for the second round. France has struggled with the balance between security and freedom and it has been as complex for them as for any democracy. There are hundreds of people who are suspected of supporting the aims of ISIS and other terror groups. There are those who would demand they be in prison or forcibly expelled but France also values freedom of speech and thought and the majority of these people have committed no crime at all. Those who have engaged in illegal activity have been subject to punishment but there is resistance to meting out more than another criminal would receive.

The grim fact is that democracies are vulnerable to those who would abuse the freedoms provided and the population has little choice but to accept the threats to a degree. Even if an effort is made to attack these terrorists aggressively there is no assurance that it would be any more effective as even repressive regimes have been victimized by these terror attacks.

 

 

Iran’s Electoral Contenders Selected

Iran’s Guardian Council has control over who is allowed to run for office in Iran and they have routinely blocked reformers from standing for office. The six who have been approved to contend for the Presidency does include three that could be termed reformers and that includes the current President – Hassan Rouhani. Those who were advocating an even more reform oriented regime were rejected and so was the former President – Mahmoud Ahmadi-Nejad. The two dominant contenders will be Rouhani and Ayatollah Ebrahim Raisi who is said to be the favorite of the Grand Ayatollah Khameini. It is expected that the other two moderates will soon throw their support to Rouhani while the other two hardliners do the same for Raisi.

 

Analysis: The most potent risk to the process may be Ahmadi-Nejad as he has claimed that only he can really represent the conservative position and plans to try to subvert the election in some way. His movements are now being restricted and he could well end up in jail but that may make his position even stronger. The rural conservatives support him still and there is general frustration with the lack of economic progress under Rouhani. When he was elected, he claimed that he would be able to break the global stranglehold that Iran has been suffering but that has been far harder to accomplish than expected – especially as Trump has come to office.

The recent comments by the Trump administration may be a benefit to Rouhani as it appears the US is not yet ready to abandon the nuclear deal. This could give Rouhani an opportunity to point out that his reform approach is still capable of bearing fruit. On the other hand, the comments from Trump have been hostile and that may give hardliners an edge as they can claim the US remains an enemy.

 

 

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.

 

 

Have We Lost Our Minds?

I like to think that we as a population have made progress but sometimes that is a hard position to maintain. I have to remember that we live in media saturated culture now and that every incident that takes place anywhere is soon making the rounds of social media. I like to assume that things must have been worse in the past – we just didn’t know about them. I certainly hope so.

In just the last week it feels like my town has boiled over. A man stalked a pilot off an American Airline flight and assaulted him in our airport and a day or so later national cameras caught a fight between two fans at a baseball game. The man clearly belted a woman and claimed that she started it by spitting on him. Twice mushroom hunters found dead bodies in a field and there have been daily accounts of shootings. I don’t think I live in Beirut but these stories make one wonder. I am also aware that I have lived in this city for my entire life and have never even come close to this violence. The odds are clearly in favor of peace and quiet but the stories keep coming and they are unsettling.

The fact is that the vast majority of us will go about our business every day and will not encounter anything untoward. I know that we are privy to everything now and that did not used to be the case. We have to keep these incidents in perspective but at the same time we have to find ways to take the hate and anger and fear out of our lives.

 

 

 

This is a 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. Drop a note to ksanchez@armadaci.com

 

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Housing Starts Down, Permits Up. There was bad news for housing starts in March, followed closely by positive news in housing permits. Starts plunged by 6.8% with single family units down 6.2% and multi-family down by 7.9%.

 

Industrial Production Improves in March. Despite headlines to the contrary, Industrial Production improved overall by .5% sequentially in March and accelerated at a 1.5% annualized rate (versus .7% in the Q4 update).

 

A Different View of Retail Inventories. We are hearing the investment community talk about the overloading of retail inventory – on the heels of bad retail performance in February and March. We have a different Take.

 

 World Growth to Accelerate According to IMF. The IMF has released its latest World Outlook update, and it bumped up global growth from 3.4% to 3.5%. It left most of its 2018 outlook unchanged – primarily because of Brexit and a few unknowns that could affect global growth.

 

Our Take on China’s Surprising Q1 Growth Rate. China’s Q1 GDP grew at 6.9%, the fastest rate of growth in more than 6 quarters and much higher than analyst forecasts. Most obvious, Government investment in infrastructure helped to boost Q1 GDP, but we think there are other factors that need to be considered.

 

Chinese Steel Production Up Again. China’s steel output rose to 72 million tons in March which was 1.8% higher month-over-month and a new record for output. Beijing has been trying to force the steel industry to cut output amid growing global concerns that China’s dumping of steel on the global market was killing the sector in many countries .

 

Cyclone in Australia could Temporarily Tighten US Freight Capacity. We are at a business cycle stage in which supply/demand across many facets of the US economy can experience wild swings when global events occur, which will create a ripple effect across US markets.

 

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Business Intelligence Brief: April 20, 2017

Short Items of Interest – US Economy

 

 

  • Initial Job Claims Up – For the first time in four weeks there has been an increase in the number of new claims for unemployment but there is no real cause for alarm – at least not yet. The four-week moving average takes the week by week volatility out of these numbers and it is tracking lower than it has been. The speculation is that this dip may be seasonal and related to factors like weather and even the Easter holiday. The overall sense is that the labor market remains solid and the biggest problem is still that there are too few people qualified to take the jobs on offer.

 

 

  • Treasury Takes the Lead on Global Economic Issues – There has continued to be some criticism of the IMF, World Bank and WTO in the speeches by President Trump but most of the assertions have been essentially contradicted by Treasury Secretary Steve Mnuchin. It appears that the basic policy towards these institutions has not changed but this doesn’t mean that reforms and changes are not in the offing. The US has issues with all three of these and others and they are legitimate concerns regarding policy and emphasis. The good news is that there is just talk of reform and not of blowing the system up altogether.

 

 

  • Big Slump in Manufacturing Index – The latest reading from the Philadelphia Fed’s manufacturing index was expected to be lower than it was previously. The expectation was the index was going to slide from its previous high of 32.8 to around 25.5. That would have been a weaker reading than anybody had wanted to see but the actual reading was even worse. It came in at 22.0, a ten point fall. The factors involved seemed to include weather, the turmoil in Europe and the UK and just a general slump in enthusiasm as it has dawned on people that change is slow and halting in the US.

 

 

Short Items of Interest – Global Economy

 

 

  • IMF Worries About Debt Load – The talk of the central banks has shifted to when they will hike rates and not if. It seems all but inevitable that the other central banks will follow the lead of the US Fed and start the process of hiking rates. The IMF has been looking at the debt exposure for the majority of the US corporate community and has issued a warning of sorts. Most of these companies took advantage of the low rates and did a lot of borrowing. This didn’t affect them all that much while interest rates were low but if there is a sudden increase in global rates they are going to have trouble servicing that debt.

 

 

  • French Business Worries – In fact all of the European business community is concerned that France will find itself led by either a left wing or right wing populist. The predictions are dire regardless of whether it is Le Pen or Melanchon that win. The push is on to ensure the success of Macron but the very fact business supports him makes him unpopular with a broad swathe of voters. The fear is that France will be hostile to business in general and that will prompt companies to leave France altogether. At the very least they will not plan to expand much.

 

 

  • Why China Supports North Korea – The relationship between the Chinese and North Korea is complex in the extreme. The most basic interest the Chinese have is stability. The last thing that China wants is a collapse of the regime that sends millions of Koreans streaming across the border into China – starving and desperate. Beyond that there is the advantage of having an unstable neighbor. Look at what has changed about the US policy on China of late. The bombast regarding trade and currency manipulation has ended because the US needs China to control Kim Jong-un. This is a useful bargaining chip. If China is unhappy with the way it is being treated it can simply suggest that it has lost interest in trying to control the North Koreans. There are some who have suggested that the failed missile launch was due to the fact the Chinese supplied the components of the weapon and made them fail at the critical moment. The Chinese can also use their attitude towards the Koreans as an example of their loyalty to other allies in the rest of the world.

 

 

 

Beige Book Analysis Reinforces Concerns Regarding Jobs

In some respects, the Beige Book is an odd collection. This is not the usual collection of carefully vetted data that the Federal Reserve churns out on a regular basis. It is not designed to be. It is very current and it is primarily anecdotal and opinion based. The book is a collection of observations made by the staff and boards of the twelve Federal Reserve banks and all of these banks use slightly different systems to collect these observations. It is meant to be a snapshot of business conditions in the districts and it is meant to be driven by perception as much as by pure data. It becomes a way to understand what various business leaders think they are seeing in their local and regional economy.

 

Analysis: The latest Beige Book is marked by a very consistent and persistent complaint. It is getting very hard to find the people needed to do the jobs that are available. This has been an issue in many sectors for years – manufacturing companies can’t find the skilled workers they need and they are demanding more and more from their workforce as they turn towards automation and robotics. There is a shortage of truck drivers that has hampered the growth of the transportation sector and there are such severe shortages of construction workers in the hot building markets that people are waiting over a year to get their house built. There are too few people to fill the positions in medical care and the finance sector and so on. There is nothing new about this issue, it has been at the top of priority lists for years.

The new wrinkle is that there has been a challenge in filling low wage jobs as well. Retailers and fast food operations and manual labor jobs are also going unfilled. Part of the issue is that unemployment numbers are lower than they have been at any time since May of 2007. The U-3 rate is now 4.5% and even the more inclusive U-6 number is lower than it has been since the recession at 8.9%. The US is close to what the Fed considers full employment and this would naturally mean that there are fewer people available to take the jobs on offer. The issue is that there remains around 7 million people out of work and there are some 93 million people currently out of the workforce. These are entirely different situations although some tend to lump them together.

The 7 million people out of work are divided into many categories but one of the most significant is length of time unemployed. Frankly there is little concern regarding those who have been jobless for just a few months. They are very likely to get another job quickly and most are just taking their time as they look for that next opportunity. This may be as many as a million people from one month to the next. The long term unemployed are those who have been without a job for over a year and in this labor short environment this is a concern. They are to some degree unemployable for a variety of reasons. They may lack the skill, background or education to get a job. They may be in a part of the country with few jobs and are unable to move to where the jobs are. They may simply want to rely on the welfare system and many are active in the grey economy – working off the books in an illicit or licit job. If this group was actively engaged in the job search the pressure on wages would be somewhat reduced. The business community is now facing the need to pay higher wages in order to secure the people needed and that has been a major contribution to the current rate of inflation.

 

 

Shift on Trade Issues has Been Minor

Over the last few weeks there has been a lot of conversation regarding the changed positions of the Trump administration and some have concluded that he has “seen the light” and is ready to embrace the whole notion of globalization. This would be an inaccurate assumption – at least at this stage. The majority of the changes that have been embraced are in regards to foreign policy and most of the new Trump positions match up with the traditional Republican approach – a more aggressive and interventionist policy than is normally pursued by Democrats. There have not been all that many changes as far a trade and global economic issues.

 

Analysis: The decision to put less pressure on China is a tactical move designed to keep China engaged in thwarting the ambitions of the North Koreans. The Trump policy toward Nafta has not significantly altered and there is continued hostility towards institutions such as the World Trade Organization, the IMF and many other global economic policy centers. The fact is that there is deep support for these more protectionist impulses within the GOP and within the ranks of the Democrats as well. There is not all that much support in either party for the continuation of trade policy as it has been practiced.

The perception is that the US has given away far more than it has received when it comes to trade. The US has ostensibly pursued a free trade policy while other nations have been protectionist. In truth, the US has some protectionist policies in place as well but on balance the US has been more free trade oriented than most. The current aims seem to be designed to end some of these policies and to get a better deal for the US. The emphasis is on the exporter and on protecting domestic industry and possibly at the expense of the consumer as they will see less in the way of cheaper foreign made alternatives.

Another target that will remain intact is the immigration issue. Not only is there opposition to the illegal migration across the border from Mexico but attacks on legal migration from around the world. There will be fewer opportunities for foreign students and fewer opportunities for foreign workers regardless of their skills and the desire on the part of US companies to hire them. The aim is to push business to hire domestically but the challenge for many companies is that the US simply doesn’t produce enough of these skilled people to meet demand.

 

 

What Next in Venezuela?

It is being referred to as the “mother of all marches”. The estimate is that tens of thousands of people have taken to the streets in the major cities demanding early elections. The opposition to Nicholas Maduro and his utterly inept regime has gotten stronger every day and the various opposition groups that have tried to unseat him are coalescing enough to push hard for these elections. The country has been a financial disaster for years and by every measure life has deteriorated into a simple fight for survival. The inflation rate has risen so high that currency is next to useless, over 60% of the population is living under the poverty line, unemployment rates are over 40% and even those who ostensibly have jobs rarely get paid. Crime is utterly out of control with violent attacks taking place every day. The police make no attempt to address crime and devote themselves to attacking the protests and defending the regime. How much worse can things get before the country explodes and what would happen if Maduro was forced out?

 

Analysis:  The grim reality is that nobody has a good alternative for Venezuela. This is a country that is 95% dependent on oil exports for its budget and with per barrel prices in the 50s there is not enough money coming in. Several years ago, the country was being warned that its exploitation of it oil reserves was going to create a crisis sooner than later. Oil in Venezuela was always divided between the easily developed and that which required a lot more refining. The system employed in the past tried to balance that easy oil with the more difficult development but under Chavez (and Maduro) the easy oil was pulled out as fast as possible and those reserves are essentially gone now. All that is left is the harder to exploit oil and that means that Venezuela needs global prices to be above $60 if they are to make any money. This has not been the case for over three years.

The only hope for the country is to get access to international aid and investment – both from private sources and from the international institutions like the IMF. That is not going to happen until Maduro and his government are gone and even if there is an opposition leader in power there will be deep suspicion that this government would remain stable. The situation in the country has become too dire and Venezuela is essentially a failed state with little to offer the global economic community.

The protests have been met by violence from Maduro and his supporters. The most likely outcomes are either a coup that brings some kind of military junta to power, a severe crackdown by Maduro plunging the country into what amounts to a civil war or a takeover by the opposition that could lead to that same civil war if the Maduro supporters elect to fight.

 

 

Razor Thin Margins as French Election Nears

By this time it is usually very clear what the French will have to choose from in the second round of elections. The main parties always seemed to be the top vote getters and the choice was between the center right and the center left. This year there is no such easy answer to the question of who will make the second round. As of this week the polls show very close races with Emmanuel Macron at 23%, Marine Le Pen at 22%, Jean Luc Melanchon at 19% and Francois Fillon at 19%. If that stays the way pollsters predict the second round would be Macron vs. Le Pen and the question becomes whether either of them can capture the support of the other two.

 

Analysis: Supporters of the far left Melanchon would certainly not support Le Pen but they have no love for the centrist Macron and could decide to just sit out the second round. Fillon’s supporters have a similar dilemma. They do not like Le Pen but can they shift their support to a former Socialist – even one that asserts he is a pragmatist?

The key voter in France will be the disaffected voter and there are many of them in the suburbs of the largest cities and in the rural areas. They are angry and disillusioned and desperate for change. These are the regions of very high unemployment and no sense of a future. It is the poor suburbs of Paris and other cities that have given root to Islamic terrorism. Every year there have been thousands of recruits streaming from France to fight with ISIS in the Middle East and even more that stay at home with the intent to do harm locally. The rural areas are seething as well – feeling abandoned and threatened by the cities. The calm voices are shouted down by people who want radical change in their lives. The rest of Europe is watching this with great concern as only Macron would be committed to Europe in the way that past leaders have been.

 

 

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.

 

 

Not a Schedule I Would Recommend

This is something of a shout-out to Southwest Airlines. I don’t think I would have even attempted the schedule I undertook yesterday with any other airline. So many things could have gone astray but they didn’t and I pulled this off – against all odds. I was in Chicago on Tuesday night to present to the Metals Service Center Institute dinner. The next day I needed to be in Orlando to make a 10:45 presentation to a group from ABC-Amega. That meant catching a 6:00 AM flight that got me to Orlando at 9:30. The plane arrived early and I was at the venue by 10:00. After the talk and a quick lunch it was back to the airport for a 2:30 flight to Kansas City that got me home at 4:30. I was to address a meeting of the Construction Financial Management Association and they agreed to extend their reception until I got there. Again, the plane arrived a little early and I got there at about 5:10. I do not intend to do this to myself very often – six hours on a plane so that I can spend four hours in Orlando. I am just grateful that I can generally count on good old Southwest to help me pull this off.

 

 

 

These are quick summaries of articles that appear 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.

 

To get a FREE TRIAL go to www.armada-intel.com/trial

 

 

 

Housing Starts Down, Permits Up. There was bad news for housing starts in March, followed closely by positive news in housing permits. Starts plunged by 6.8% with single family units down 6.2% and multi-family down by 7.9%.

 

Industrial Production Improves in March. Despite headlines to the contrary, Industrial Production improved overall by .5% sequentially in March and accelerated at a 1.5% annualized rate (versus .7% in the Q4 update).

 

A Different View of Retail Inventories. We are hearing the investment community talk about the overloading of retail inventory – on the heels of bad retail performance in February and March. We have a different Take.

 

 World Growth to Accelerate According to IMF. The IMF has released its latest World Outlook update, and it bumped up global growth from 3.4% to 3.5%. It left most of its 2018 outlook unchanged – primarily because of Brexit and a few unknowns that could affect global growth.

 

Our Take on China’s Surprising Q1 Growth Rate. China’s Q1 GDP grew at 6.9%, the fastest rate of growth in more than 6 quarters and much higher than analyst forecasts. Most obvious, Government investment in infrastructure helped to boost Q1 GDP, but we think there are other factors that need to be considered.

 

Chinese Steel Production Up Again. China’s steel output rose to 72 million tons in March which was 1.8% higher month-over-month and a new record for output. Beijing has been trying to force the steel industry to cut output amid growing global concerns that China’s dumping of steel on the global market was killing the sector in many countries .

 

Cyclone in Australia could Temporarily Tighten US Freight Capacity. We are at a business cycle stage in which supply/demand across many facets of the US economy can experience wild swings when global events occur, which will create a ripple effect across US markets.

 

 

To get a FREE TRIAL go to www.armada-intel.com/trial

 

Business Intelligence Brief: April 18, 2017

Short Items of Interest – US Economy

 

  • Executive Order Calls for Review of Immigration Policies – There will soon be a pretty nasty exchange of views between the Trump White House and the high-tech community. The latest executive order has called for a significant review of the H1B visa program that has allowed many high-tech companies to get access to foreign talent. The industry has complained for years that it does not see enough in way of domestic talent and therefore needs to go outside the US but those working in the sector assert that the companies are using that foreign labor force to hold down compensation and that likely explains the shortage of qualified workers.

 

  • Potential Clash at the Fed – The man that has been pegged to be the new Vice Chairman in charge of bank supervision is Randall Quarles. He is currently an investment banker and has been part of Treasury under Bush. He is an advocate of using a formula to determine interest rates and that pits him against most of those currently on the Fed. The fear is that this more rigid approach compromises the ability of the Fed to act when there is a crisis. The formula that Quarles has advocated in the past would have prohibited the Fed from lowering interest rates at the time of the 2009 recession and might well have deepened the downturn.

 

  • Mnuchin Outlines Emerging Strategy – There is a transition underway at the Trump White House and it would be safe to say that Treasury Secretary Mnuchin is the primary driver. The radical rethink of the US role in the world has been eroding and has been replaced by more traditional Republican orthodoxy as far as trade is concerned. It is unlikely there will be the wholesale assaults on Nafta and China has already been taken off the hook as far as its currency policy is concerned. The notion now is to promote a fair trade approach but to avoid trade wars and other conflicts.

 

Short Items of Interest – Global Economy

 

  • South Korean Trade Pact Under Assault – This was once hailed as one of the more significant trade pacts the US had signed in recent years as it was supposed to open up the traditionally closed market in South Korea without giving up too much access to the US. The plan has not worked as hoped as there has been a growing deficit with South Korea. Even though the US exporters are not facing the formal barriers they once did they are subject to all kinds of regulatory and non-tariff inhibitions and the US has now declared that this is going to have to change.

 

  • Snap Election Called in UK – As it has become obvious that the Brexit process is going to be wrenching and controversial there have been political adjustments in the UK. Theresa May has called a snap election for just a month from now as she needs a stronger mandate if she is going to get through the coming Brexit mess. She was not directly chosen by the public in the last election and came to power through the resignation of David Cameron. She needs to get the vote of the public and is expected to win handily. The next step will be to steel the British for what comes next in the breakaway process.

 

  • Terror Attack Thwarted in France – Just a few days prior to the first round of Presidential voting the French authorities claim to have ended an imminent threat. This could have ramifications as far as the election is concerned. On the one hand it shows that France is getting better at stopping these attacks but it also reminds the public of the threat and that could reinforce those that are arguing for a very tough policy on immigrants and others that some consider a threat. The authorities thus far have been very cautious regarding details as they do not want to be thrust into the middle of the campaign. The candidates have had differing responses as well – some congratulating the police and military and others warning that these attacks are coming.

 

 

 

Report from the FFJSCR

Yes – it is time for the quarterly report from the Fabricators and Manufacturers Association with the worst acronym ever devised. It is the Forming and Fabricating Job Shop Consumption Report. What makes this survey interesting is that these are businesses that rarely get this kind of treatment. They are mostly small to medium sized job shops and reflect the activity of the manufacturers they are selling to. We do the analysis of this survey once a quarter and have found it to be a very interesting assessment as far as the small business community is concerned and something of a harbinger for what is going on in the bigger companies.

This may be the quarter that separates the reality of the economy from that which has been expected. There is always a certain amount of enthusiasm when a new President takes control as people tend to take the political campaign slogans as signals of future intent (evidence to the contrary). This time the enthusiasm level was even higher than usual as it appeared that Trump would change many of the provisions that seemed to be holding the economy back. Now that the administration has been in place for a while it is apparent that many of the same old problems are in place and change will not be as easy as first hoped. Some of that sober realization is starting to crop up in the data for the latest FFJSCR.

One of the more important measures of the economy’s health is the level of operating capacity. If there are numbers below 80% capacity utilization there is too much slack in the system. The likelihood of additional hiring or equipment acquisition is therefore low. When capacity utilization is above 85% there is likely to be a strain to keep up with demand and this when there will be bottlenecks and shortages – at least until there are more people hired and more equipment purchased. The FFJSCR data is showing that capacity utilization is on the low side – at just short of 70%. This would mean slack capacity among most of the respondents but when looking at the anticipated capacity there is a general sense that companies will be adding to it. That may mean more slack in the short term but should mean less in the way of shortage and bottleneck later.

There remains a good bit of enthusiasm regarding the future and that has been evident in a whole host of measures lately. The consumer confidence surveys have been solid and so have those that assess the mood of the business community. The worry is that some of this is superficial as the level of retail sales has not reflected the consumer survey levels of confidence. In the manufacturing community, the level of real confidence is reflected in data such as new orders. The survey this month shows that 44.7% of the respondents are reporting more in the way of new orders and another 41% are reporting that this activity has been stable. Only a little over 14% of the responses indicated a decline in new orders and that suggests that there is more expansion in the manufacturing sector overall and that it is expected to expand further into the year.

Hiring is another solid signal as far as expansion is concerned and here there is also progress and stability but there are some factors to take into consideration that affect these numbers and have for some time. The survey reports that over 27% are expecting to do additional hiring and just over 68% are staying right where they are as far as hiring s concerned. That means that only 4.5% of the respondents are planning to reduce their workforce. This is as low a level as has been seen in the last few years. The wrinkle in all this is that most of the manufacturers are struggling to find qualified people to hire. This has been an issue for years and despite all the hand wringing nothing has changed significantly. The pipeline as far as talent is empty and companies really have no alternative but to poach one another’s employees and that generally means that labor costs will rise steadily as companies try to lure the people they want and need.

Beyond hiring the next biggest expense is raw material costs and here the key factors are generally the price of steel and aluminum. The survey reports that the vast majority of respondents are seeing prices for both metals coming up. The percentage that reports that prices are going up is 59.4% and another 39.8% see the prices staying right where they have been. Only a tiny fraction (4.4%) have seen prices go down. In general, the commodities suppliers have been trying to adjust to reduced demand over the last few years and they have limited output as a means to hike prices. The tactic has worked pretty well and the hope is that more production can be spurred when and if there is a boost in overall demand.

The cost of transportation and logistics has also been a factor when it comes to overall expenses but there hasn’t been all that much movement. The percentage of respondents that report more logistics costs is 29.3% and the vast majority have indicated that these costs have been stable – over 70%. Not one respondent reported that these costs are going down. The variability within this category reflects the modes of transportation employed. Rail costs have been more stable than trucking costs and there has been some reduction in the costs of ocean cargo due to the overcapacity issue facing maritime shipping. There is also a great deal of regionalism in logistics in part due to the fluctuating costs of fuel and overall operating expenses. Just as with manufacturing there has been a shortage of manpower in transportation – it is estimated trucking companies are short some 80,000 drivers this year alone.

Generally speaking, the respondents are staying connected to their capital equipment strategies as 57.4% indicate that nothing has altered their plans and they intend to buy what they had intended to buy. Roughly 18% have delayed their original plans by a quarter or two and 24.6% have set their plans on the back burner indefinitely. This is not much of a shock given the data on capacity utilization referenced earlier. Until that slack capacity is used up there is less incentive to acquire anything new. There is tremendous variability between sectors however. Those feeding into the agricultural community are seeing very low demand while medical manufacturing thrives. Automotive and aerospace are not as vibrant as they have been and so on.

 

 

FFJSCR Continued

Ultimately the real test is measuring outlook. How positive are companies regarding the future? Here the readings are better than they have been in some time. There is a sense that some significant impediments to business progress may be removed and that some of the stimulating efforts will bear fruit. A whopping 61.9% see improving conditions for the coming quarter and another 34.3% expect things to be about as they are now. Only 3.7% expect things to get worse. This is the most confident the sector has been in a while.

As mentioned at the start of this analysis the confidence levels that have been rising among consumers and businesses have been contingent to some degree. Consumers are upbeat but retail sales are still down, they are cautious. The promised changes have not taken place yet and there is mounting evidence that many of the proposals presented in last year’s campaign will be hard to pull off given the mood of Congress and the power of inertia.

 

European Politics in Flux

Not that the last few years have been uneventful as far as Europe is concerned but this year may feature some of the most significant developments the region has faced in decades. In just a few week’s time there will be the formal start of Brexit, the beginnings of a dictatorship in Turkey and the possibility of a far right populist coming to power in France. Any one of these would be wrenching to Europe but all three at once could alter the course of Europe for years. Some would argue that it has already changed and not in a particularly healthy way.

 

Analysis: In the weeks that followed last year’s vote in the UK there were many that asserted that Brexit wouldn’t be as jarring as many had expected. It shocked many that Britain voted this way at all and there was a good bit of “buyer’s remorse” afterwards. It was assumed that cooler heads would prevail and that some kind of amicable deal would be worked out that allowed the UK to essentially stay in the EU where it counts (financially and from a business point of view). It is patently obvious that this is not going to happen as Britain has refused to yield on key points regarding immigration and the Europeans have proven to be quite hostile to the aims of the UK. It is going to be a bitter and nasty divorce.

The slide towards dictatorship in Turkey is distressing in a wide variety of ways. It makes it all but impossible for the EU to consider Turkey for membership and it essentially removes Turkey as the European stalwart in the Middle East. The Turks will inevitably have to turn to other nations in the region for support and Russia will doubtless play a bigger role. That compromises Turkey as a Nato ally as well. The country is now as deeply divided as it has been in decades and that is going to severely hamper the economic development of the country. Erdogan has proven to be a corrupt and wildly unstable leader and that is certainly not what anyone needs in this volatile region.

Perhaps the most far reaching development would be a French election that brings either the radical right or the radical left to power. If the polls are correct it is now certain that Marine Le Pen will be in the second round of the Presidential election. It was assumed just a few weeks ago that she would be facing Emmanuel Macron in that contest and it was to be a clash between the populist and the pragmatist. That was before the late surge by the left wing candidate – Jean Luc Melanchon. He has not eclipsed the candidacy of the Socialist Benoit Hamon (who was considered the far left option within the ranks of the Socialists). He has been gaining on Macron with each poll.

It was assumed the vote would come down to everybody vs. Le Pen and that she would lose. Now that scenario is far less certain and she could be facing off against Melachon. This would utterly polarize the electorate. The moderate right would have to decide between the mercurial and extreme Le Pen or the hard left Melanchon and it appears that many would elect to support neither. This is an election that may see the bulk of voters sitting it out and letting the two candidates battle it out with their core base. That will mean that neither will do the usual drift to the middle and will stay anchored to their extreme supporters.

The Europe of 2018 may well be radically different than the Europe of today and many fear this would precipitate a real collapse in an already weak economy. The events of the last few months have already taken their toll on the euro and investors continue to shy away from long term commitments in the region. The hope is that sense starts to prevail but not many are all that hopeful at this stage as Europe’s voters are angry and simply want a massive change.

 

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.

 

Fragility

I will not go into any detail – this is the personal business of my friend. He has been dealing with a serious illness that has been affecting his father and has sent the family in and out of crisis as they have tried to figure out what to do. He is among the hardest working people I know and he has been unable to devote the time he once did to his business. This is as it should be and is a reminder of just how fragile our lives can be. We can make plans if we wish and of course we do. At the same time, we are well aware that these plans have been thrown out by any of a million things.

There is really nothing to be done about this. Our health can break or that of a family member. We can be in an accident or experience some other reversal. It is certain that something unexpected and unwanted can and likely will happen. We certainly can’t live in dread but we can’t ignore the possibilities either. Much has been said about living for the moment and taking advantage of what we have right now and that is sage advice but we also have to understand that it is as likely we live to 100 as it is that we succumb earlier and it is ok to make plans for that uncertain future.

 

 

 

 

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Interesting Insights from the ISM on Prices and Shortages.  Many of us in the business community ignore one of the most important parts of the ISM reports on business – the raw material and labor price/shortage report. Companies reporting in the monthly ISM reports indicate what items are up in price, down in price, and in short supply. We thought some of these items would be of interest to many of you based on what you use as inputs into your business models. The number in parentheses indicates how many months the item has been on the list in that category.

 

Commodities Up in Price

#1 Diesel Fuel; Bacon (2); Beef; Concrete Ready Mix;Copper (6); Copper Products; Gasoline; Highway and Road Construction Services;

Labor — Construction; Labor — Temporary (2); Laboratory Supplies; Lettuce; Lumber — Pine, Plywood and Spruce (2); Medical Supplies;

Memory Products; Nitrile Gloves; Plastic Film Wrap; Polypropylene Products; Software Maintenance (2); Steel Products (4);

Transportation Costs.

 

Commodities Down in Price

 

Cheese; Computer Accessories;

 

Commodities in Short Supply

 

Labor — Construction (12); Labor — Temporary; Labor (2); Memory ProductsCapacitors; Electronic Components; and Methacrylates

 

It’s interesting that three of the four items in the “shortage” category are labor related. Demand is stronger, shortages are limited to just a few items at this time, but prices across the board are generally higher.

 

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Business Intelligence Brief: April 17, 2017

Short Items of Interest – US Economy

 

 

  • More Controversy Over Assertions Regarding China – For the better part of a year the paper that has been circulating regarding China trade has been intensely controversial. The paper is now referred to as ADH in recognition of the three authors. The assertion was that China was responsible for the collapse in manufacturing in the US as well as the high unemployment rate that followed. Nobody questions the fact that Chinese competition played a big role in this economic shift but it has been considered controversial to blame it all on China alone. There are simply too many factors and the most important of these has been automation and robotics. Did the automation come because of the Chinese challenge or was the development more independent? That becomes the crux of the debate.

 

  • Tourism Industry Reacts – The Trump policies regarding immigration and security have been hurting tourism and now the companies that depend on these overseas visitors are speaking out more aggressively. The head of Marriott has now added his voice and joins other hotel magnates as well as the entertainment industry in pointing out the impact these policies have had. Many foreign visitors have expressed concern about the hassle of visiting the US and have altered their plans. This is a multi-billion dollar industry and losing this income will have an impact on the overall economy.

 

  • Dip in Inflation and Car Sales – There was an expectation that inflation would be spurred by the Trump effect but the latest data shows that inflation is slowing again. The Fed had been encouraged by the uptick and expressed some additional confidence regarding rate hikes. Now these are somewhat in question. There was also a pronounced dip in auto sales and that signals that consumers are not as active as it was assumed they would be. The Trump impact on inflation appears to have been fleeting.

 

 

Short Items of Interest – Global Economy

 

 

  • Ross Calls Out IMF and Others – The question is whether the US is pursuing a protectionist approach to trade. The comments by IMF head Cristine Lagarde and others suggest that it is the US that has been leading the charge as far as protectionism is concerned and that position has been aggressively disputed by the US. On the eve of the meetings of the IMF and World Bank there has been another salvo fired by Commerce Secretary Wilbur Ross. He points out that Europe, China and Japan have all been far more protectionist than the US and have largely exploited the free trade stance of the US while imposing a raft of tariffs and regulations to blunt US exports. The debate is in full swing and will likely anchor the meetings this week.

 

  • Extreme Positions in French Election Roil Markets – There has been a comforting assumption among investors as they have looked at the French elections. They had accepted that Marine Le Pen would make it to the second round but then she would face the centrist – Emmanuel Macron – and he would rally all those that do not like the National Front. That tidy story has started to unravel as the far left candidate has surged in the polls. It is not out of the realm of possibility that Jean Luc Melanchon makes it to the second round instead of Macron and suddenly the French have the choice of the far right or far left as their next President.

 

  • North Korean Show of Strength Fails – Well, that was pretty anticlimactic. The North Koreans elected to defy the US and China and go ahead with a missile launch to demonstrate their military prowess. Unfortunately for the reputation of Kim Jong-un it exploded on the launch pad and this marked another big fail for the regime. It has been reported that several scientists and others have already been executed and more will likely follow. It is tempting to dismiss this crackpot as a fake threat but on occasion his launches succeed and the unreliability of the system is perhaps the greater threat. It is not clear they have any idea where these things will go if they do get off the ground.

 

 

 

When Do Confidence Levels and Reality Converge?

And when they do – which one will come to dominate? Will the levels of business and consumer confidence pull the economy ahead and into a faster growth mode or will the slow economic growth that has been manifested thus far drag down these confidence levels in the months to come? It has been noted many times in the past that perception is reality when it comes to how the average person reacts to the economy. They may not have lost their job or even have come close to losing their job but it the rate of unemployment overall is high the consumer starts to get worried and they pull back on spending – almost guaranteeing there will be more job loss due to retail slowdown. On the other hand, if the news is full of expansion talk and the stock markets are surging the consumer gets excited – whether they have a clue as why any of this is taking place or not.

 

Analysis: At the moment, there is a disconnect between the actual performance of the economy and the level of confidence that has been expressed by the consumer and the business community as a whole. The year started with the usual bounding enthusiasm that generally comes with a new administration. Each and every time there is a new President hope springs eternal and there is expectation of change. This time the enthusiasm was more than usual as the promises made during the Trump campaign were more all-encompassing and that may prove to be a problem now.

Most of the economic data of late has been weaker than expected. Banks had been expected to loan more aggressively as they saw their margins increase a little but that has not been the case – if anything they have been even more cautious as some are waiting to see what happens with reforming bank reform. The majority of the economic forecasts have weakened somewhat – going from an expectation of growth between 2.1% and 2.5% to something between 1.8% and 2.0%. The latest evidence of rocky economic progress is the fact that retail sales have been down for two months in a row. This is despite the consistent reporting from the various consumer surveys. They all indicate that consumers are confident but that is not what the retailers are seeing.

One of two reactions will develop from this point. The good news version is that all of this enthusiasm and confidence will propel people to act accordingly. They will engage in more spending on big ticket items and they may elect to upgrade their housing. They may elect to take trips or just splurge on gift giving occasions. Their confidence levels will provide the justification for their actions. On the other hand, they may experience the “Wil-e-Coyote” effect. You know the one – he runs off a cliff and doesn’t realize he is suspended in mid-air until he looks down. This is the consumer that suddenly realizes that economic progress has been missing and there is no real reason to be all that optimistic. The reversal in mood can be very quick and that would reinforce the slow growth experienced to date.

 

 

Backing Away on China

One of the assertions made in the heat of the election battle was that the US would officially label China a currency manipulator once Trump was elected. China is nearly always trotted out as an election issue as there has been a long-standing competition between the US and China and there has been reason to assert that China has played unfairly in trade issues. On the other hand, many of the reasons that China sports a trade surplus with the US is simply that this is still a developing nation with low wages and low production costs. The Trump campaign asserted that everything would soon change as regards the US-China relationship but the fact is that this relationship is very complex and the two nations need one another far more than either would care to admit.

 

Analysis: The latest report in China from the Treasury Department attempts to split the difference as it criticizes China but stops short of actually labeling the country a “currency manipulator”. The nomenclature matters as once a country has earned that title there are a whole host of restrictions and punishments that can come into play. Trade restrictions follow and most assume that any of these moves would be enough to spark Chinese retaliation and from there a real trade war. It seems the US would like to avoid that outcome and the Chinese have indicated the same desire.

Much of the report centers on what China did in the past and notes that years of exchange rate manipulation did indeed provide an export advantage for Chinese companies. The report also asserts that China has done far less of this in recent years as they have allowed the yuan to appreciate. There are some analysts that assert the Chinese currency is now valued at what it should be. Others  assert that it remains undervalued. Since the elevation of Xi Xiyang there has been a shift in priority for the Chinese economy – towards the consumer and slightly away from the export sector. This is a controversial position within China and Xi has powerful rivals that would like to see a more overt support for those export industries again (most notably Le Keqiang). One of the elements of that consumer centered strategy is keeping the currency stronger than it was in past years. A stronger currency means that imports are less costly and that generally benefits the consumer at the expense of the export sector.

The reason that the US hesitates to escalate the confrontation with China is that there are issues far beyond the purely economic and right now the top of these concerns is North Korea. For all the fulminating and threats coming from the Trump White House there is very little that can be done to Kim Jong-un without Chinese approval. An attack on Pyongyang without at least tacit approval from China will risk a real confrontation between the US and China as the North Koreans are allies. The Chinese are showing a willingness to crack down on Kim and the US basically has to leave this in their hands. China wants to know what’s in it for them.

 

 

Lots of Data to Pore Over This Week

The week ahead is bringing a rich collection of data releases and meetings between some of the major economic players in the world. The same interest that has been devoted to the US is focused on the world in general as analysts try to separate the assertions of continued confidence and the underlying performance of the global economy. The assumption has been that performance is not going to really justify the levels of enthusiasm that have been registered thus far.

 

Analysis:  Today we got the data from China’s first quarter and it was better than many had assumed. It came in at 6.9% and that was higher than the consensus view of 6.7% growth. It is true that this number will be revised in another month or so and usually these revisions are a bit weaker than the original. The point is that China is growing at a more rapid clip than had been expected and that is generally good news for the region as a whole. If China is growing they will be demanding more in terms of commodities, raw materials and intermediate goods and that will ultimately be good for the US. It is not that the US sells a lot to China (not compared to what the US buys). The US does sell a lot to the countries that sell to China and that means growth in China is good for the US indirectly.

On Tuesday the US will release housing data and it will have to be parsed carefully. It is expected there will be a decline between 3.5% and 3.9% from February’s reading but this will have to be taken in context. The housing starts in February set a record due to the combination of warm weather, increased demand and generally optimistic home buyers. Inevitably there has to be a return to more normal levels and as long as the decline is not more than forecast it will still suggest that the housing sector is strong. This would be good news as the sector heads for its strongest time of year. On Friday, there will be a report from the National Association of Realtors as far as sales of existing homes and that will be another opportunity to gauge the health of the market.

Japan is not expected to get good news this week due to the overall rise in the costs of energy. This has long been the country’s Achilles Heel as it must import the vast majority of what it consumes. Imports are expected to have risen by around 8% and exports have only gone up by around 7%. Most of the additional import costs have been in energy and the exports have mostly been manufactured goods shipped to the US. The recovery in the US economy will have a lot to do with what happens in Japan through the course of the year.

On Thursday, the annual meetings of the IMF and World Bank take place and most of the world’s central banks will be attendance and making speeches. This will provide an opportunity to hear strategies. The majority of the central banks are still focused to some degree on stimulation and have not made plans to raise rates as the Fed has done. This will be a chance to see if any of them are starting to tilt in the direction of higher rates and how soon.

 

 

Death of Democracy in Turkey?

The referendum was close but the voters in the rural areas came out strongly in favor of granting Reccip Tayyip Erdogan near dictatorial powers. He is no longer subject to the rulings of the country’s parliament nor the country’s high court. He can rule by edict alone and is not really subject to any formal control. The one institution that has enough power to thwart him is the military but even they have been constrained of late – especially after the abortive coup attempt. The core of the army was not engaged in this attempt to seize power but enough of the officers were implicated to compromise their authority and give Erdogan more of an excuse to grab power.

 

Analysis: The voters in the urban areas voted overwhelmingly against this referendum and protests have erupted already. The rural areas are far more conservative and distrust the urban elites as they practice a much stricter form of Islam than is common in places like Istanbul or Ankara. They also responded to the law and order message as Erdogan has been playing up the coup for months as a dire threat to the very existence of the country. He has promised economic growth in these areas but he has been promising this for years and all that has happened thus far is that his cronies have gotten wealthy and usually at the expense of those in the poor parts of the country.

These expanded powers will make dealing with Turkey that much harder for Europe and the US. It is now a dictatorship and this is anathema to the democracies in Europe. The tensions are high and getting far higher.

 

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.

 

 

Old Fogeyism Run Rampant

I really am old – probably older mentally than I am physically. At least that is the way I sound to myself these days. I was watching my neighbors troop off to church yesterday for Easter services and then saw many of the posts that others made to Facebook. I was struck by the almost total absence of even semi-formal dress. There were lots of people in clothes that I would hesitate to wear to visit the hardware store. What happened to the notion of one’s Sunday best?

It isn’t limited to church attire. The stuff that people wear on the plane gives the impression they just rolled out of bed and headed straight to the airport. Suits have become rare enough that I get comments from gate agents and flight attendants. Casual Friday has spread to the entire week and on Friday it has apparently become optional to even bathe.

To each their own I suppose but I have found that being well dressed tends to get one better treatment than would otherwise be the case. That alone would be enough I would think. We struggle to defend our dignity as it is and if wearing a tie gets people to take me a bit more seriously – I am all for it.

 

 

 

 

These are quick summaries of articles that appear 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. Drop a note to ksanchez@armadaci.com

 

Interesting Insights from the ISM on Prices and Shortages.  Many of us in the business community ignore one of the most important parts of the ISM reports on business – the raw material and labor price/shortage report. Companies reporting in the monthly ISM reports indicate what items are up in price, down in price, and in short supply. We thought some of these items would be of interest to many of you based on what you use as inputs into your business models. The number in parentheses indicates how many months the item has been on the list in that category.

 

Question about Recession Risk.  I had a question from a credit professional about the recession risk indicators that we put out from time to time. The most recently updated data shows that recession risk is actually getting a bit further apart. One of the charts that we like to pull is the one at right, which shows a comparison of GDP and more importantly the St. Louis Fed Financial Stress Index. In most cases, the stress index has moved above “zero” before we get into recession risk.  But, as you can see, it didn’t hold up in the 1994-2000 period.

 

Digest This Oil Statistic Just for a Second.   Last year, the US had 440 oil rigs active at this time.  This year, there are 847 active, nearly double. About 683 are oil rigs and the remaining 162 were natural gas operations.

 

Breaking down how the rigs were added by region:

 

o          New Mexico:              7

o          Oklahoma                    3

o          Texas                           2

o          California                    1

o          North Dakota              1

o          Ohio                            1

o          Mississippi                   -3

o          Alaska                         -2

o          Louisiana                     -2

 

 

 

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Business Intelligence Brief: April 14, 2017

Short Items of Interest – US Economy

 

 

  • Retail Sales Down Again – For the second month in a row the retail sales numbers were down and this is now the worst streak seen in over two years. The consumer is working hard to confuse the economists again as the surveys on consumer confidence have been as strong as they have been in several years. So, if they are so confident why are they not spending? It seems that the majority of the decline has been due to reduced auto sales and reduced spending at the gas pump but there was a general reduction across the board. Retail sales were down by 0.2% and perhaps more importantly the revisions for February showed a reduction of 0.3% instead of the initial assessment of a 0.1% gain.

 

  • Slip in Inflation Numbers – The Fed has been confident that inflation had become a major factor again and would justify a string of rate hikes this year and into next. The core rate had finally reached the 2.0% level the Fed has been seeking. The favored measure of the Fed when it comes to inflation is personal consumption expenditures and the latest readings on this index are not out yet. The data from the Consumer Price Index is and it shows a retreat as far as inflation at the core rate is concerned. This is not likely to cause the Fed to change course right away but it is a trend that will bear watching to determine what the pace of interest rate hikes could be. A substantially lower rate of inflation would mitigate against three more rate hikes this year and might even reduce the hikes to just one more.

 

  • Recovery for the Export-Import Bank – The controversy over the Ex-Im Bank has always been perplexing. It has become a target of the Tea Party wing of the GOP as they interpret this as “corporate welfare” but in fact the vast majority of those that use the Ex-Im Bank are small companies and farmers. The idea is that foreign entities borrow money from the Ex-Im Bank so that they can buy US products. The US gets the sales and the loans are paid back – seems a win-win. The Trump stance on Ex-Im had been hostile but this position has shifted and now he has sided with the business community in favor of extending the mandate.

 

 

Short Items of Interest – Global Economy

 

  • Test for Erdogan’s Expansion of Power – Over the last few years the power of President Reccip Tayyip Erdogan has inexorably expanded to the point that he is essentially the country’s dictator and now he seeks to enshrine this power in a revised constitution. The old system tried to balance the power in the country between the President and Prime Minister but Erdogan has been fighting his PM and the legislature constantly as he has expanded his own power. This process accelerated after the coup attempt of a couple of years ago. The public seems ready to grant him these powers – at least those voters in the rural areas.

 

  • France and the Eurozone – The French voter is frustrated and that is not so unusual. This has been a wrenching period in history and many millions of people are suddenly adrift as far as their economic future is concerned. The frustration has set off a search for something to blame and for many this has been the Eurozone and the EU in general. The fact is that exiting either or both would devastate the very people who have felt so isolated and vulnerable to the changes that have swept Europe. The reaction against the EU is knee jerk and is really a very bad idea.

 

  • China Growth Expected to be Near 6.5% – The fourth quarter numbers will be coming from China and they are expected to be ok but not great. The growth rate will be somewhere near 6.5% and that is about what was targeted. The problem is that China was once growing at twice that rate and it is assumed that 6.0% growth is tantamount to recession in a country that has to generate 1.4 million new jobs every month (the US is flying high if it generates 250,000 a month).

 

 

 

Populism vs. Pragmatism

The Trump campaign was a mystery from the very beginning. Pundits did not give this effort much of a chance and assumed that it would fade as soon as voters started to make real choices. Obviously, this didn’t happen. The problem for many analysts was that Trump had no real track record as far as politics or governance was concerned. It was not all that clear what he would do once in office and positions tended to shift as the campaign demanded. This was a populist insurgency and one driven by voter anger and frustration as opposed to a distinct set of policy prescriptions. The people who surrounded Trump were generally just as new to governing as Trump.  The assumption was that the Trump team would evolve over time but nobody really had a sense as to how this would take place. Now that evolution has started to take shape and it seems that pragmatism is slowly overtaking populism.

 

Analysis: One of the key differences between the campaign and the Presidency thus far is that the advisors have changed – at least some of them. The emerging inner circle is far more corporate and business oriented than was the inner circle during the race. The voices that are catching the ear of the President are pursuing a far less radical agenda and look a great deal more like the traditional base of the GOP. They have been far less antagonistic towards trade and far more supportive of agreements such as Nafta. There has been a reversal as far as support for Nato and the Export-Import Bank and suddenly there has been far less criticism of China and even Mexico. This doesn’t mean that all of the populist messages have been abandoned and many will likely remain part of the White House strategy but when it comes to the day to day of governing there is more reliance on those who have been around longer and have more trust in the overall business community.

Three areas that have changed more radically than others include China policy, position on Nato and overall trade policy. Throughout the campaign, China was positioned as enemy number one. They were responsible for the decline of manufacturing jobs and the loss of US competitiveness and they would be now be dealt with severely. They were going to be labeled as currency manipulators and the US would impose everything from tariffs to legal restrictions to blunt exports from China. Today most of these policies have been abandoned and China has returned to its former status as partial ally. The fact is that China is vastly important to the US business community and it is needed to put the brakes on North Korea. The Chinese never assumed the rhetoric was real and patiently waited for Trump to come around and with the advice of his advisors he has returned to the positions the US pursued towards China under Obama and Bush (and before).

A second major change is regarding Nato. During the campaign Trump asserted that the alliance was obsolete and that the US should no longer finance it. The policy was connected to the assertion that Europe had not being paying its fair share and owed the US money. This position was roundly criticized in Europe and stressed relations with several key US allies. That stance has now been softened and Nato is back in the good graces of the US. It was made apparent by his military advisors that the US could not do what it wanted in the rest of the world without the support of these allies and the criticism has been replaced by praise.

The third major shift has involved trade policy. The Trump of the campaign trail was a classic populist and supportive of an isolationist stance that was based on strict protectionism. That stance has been changing by the day as there has been more reliance on pro-trade advisors as well as Congressional leaders that favor expanded trade. The promised changes to Nafta are now likely to be minor and the White House position on the Ex-Im Bank has shifted towards support. The US seems willing to pursue trade pacts again but there will be more attention to the economic implications than to the political motivations.  The bottom line is that there have been many that are making the case that the US benefits from free trade more than most nations – after all exports account for 14% of the total GDP of the country.

 

 

Forecasts Dim as Reality Sets In

The expectations were high when Trump took office. This is not all that unusual as there is always a certain level of excitement when a new leader takes over. The assertions made during the campaign are expected to be followed up even though history is replete with examples of broken promises and delays. The sober reality of how the US system works has sunk in by now and analysts are revising their expectations. It is now understood that most of the big changes discussed will be hard to fulfill, that was made abundantly clear when the revisions of the ACA failed to win support from within the GOP.

 

Analysis: At the start of the year the forecast was for reasonable growth – something around the average that has been achieved over the last decade or so. The range was between 2.1% and maybe as high as 2.5%. This was far less than had been promised by the Trump team but few have seen a realistic path towards 4% growth – even if all those promised reforms and changes took place.  Now that it seems obvious that these changes are going to be very tough to pull off the expectations for growth have fallen to between 1.8% and 2.0%. This is actually a little less robust than has been taking place in the past year or so. The headwinds seem to be getting stiffer as the year progresses. Not only is there division to fight in Congress but some of the underlying economic issues are manifesting. The housing sector has slowed a little as home prices have risen and there has been some reduction in export growth as the dollar strength continues to play a role. There is little support for the assertion that another recession is around the corner but there is little support for the assertion that fast growth is near.

 

 

How Bad Can it Get in North Korea?

Has a line been crossed that will plunge the region or the world in general into all-out war? Thus far the analysts assert that it has not gone quite that far but they also acknowledge the risks are far greater than they have been previously. As expected the regime in Pyongyang is bellicose and threatening as that has been their style for decades. Lots of threats to launch attacks and use nuclear weapons despite the fact that such a response would invite annihilation. The difference this time is that other players are involved and nobody quite knows what their stance will be. The Trump team has expressed far more hostility than in the past. There was once a US policy that was content to ignore much of the raving by Kim Jong-un but that may no longer be the case. The Japanese are less tolerant as well as the Defense Minister (Tomomi Inada) is an ardent nationalist and has run out of patience with the North Korean threats. The new President of South Korea, on the other hand, is less bellicose than his predecessor and has urged more negotiations with the North.

 

Analysis:  There are basically three scenarios in play at this point. The first holds that Kim elects to pursue his nuclear testing and missile launches in defiance of the Chinese, Japanese, Americans and South Koreans. These become increasingly provocative and continue to test the resolve of the other players. The US reacts with a series of preemptive strikes against the missile launch sites and the facilities that are being used to develop the nuclear weapons. This is the riskiest of the actions that can be taken as nobody knows what will follow. Will this provoke a massive response from the North Koreans? They could do significant damage to Japan and South Korea and that would invite even greater retaliation against the North. Would that force the Chinese to engage? That could easily lead to open combat between the Chinese and the US.

Scenario number two holds that China steps in aggressively and warns North Korea that it may be willing to carry out some kind of attack to neutralize their capability. There are thousands of Chinese troops on the border now and more arriving every day. China would also be capable of engineering an internal coup of some kind but that risks civil war and the collapse of the regime in Pyongyang. The one thing China wants to avoid is a situation where millions of North Koreans attempt to cross the border into China.

Scenario number three is basically the status quo. The North Koreans will be tolerated as they launch their missiles into the sea and boast of their nuclear capabilities. They will be reminded that taking further steps will provoke a massive response but it is not clear how the US and others can make their case given that so many “lines in the sand” have been crossed. The assumption is that Kim is like his father and grandfather and will be content with posturing and saber rattling but he has been far more mercurial than his forebears and seems capable of extreme actions that would leave little choice but to react in kind.

 

 

End Game for Maduro?

There have been protests before in Venezuela and they have been large and threatening but in the end they broke under the weight of government assault. The Maduro regime lacks the charisma that supported Hugo Chavez but he still retains the loyalty of most of the military and police and they have been able to crush the protests. The latest round of demonstrations feel different and they have been far harder to break up. The fragmented opposition has been able to set aside their differences to focus on the goal of kicking Maduro out of office. The chances remain slim due to the fact the military remains connected to Maduro but most of the changes that have taken place in this country have been due to a coup and this will likely be no exception.

 

Analysis: The primary question is what happens when Maduro falls. It will all depend on how he is removed. If the military turns on how the most likely scenario will be a junta of some kind that will use the protests as the pretext to take power and restore order. This could be a very repressive regime or one that starts to reverse some of the policies that have led to the isolation of the country. The second scenario is a kind of civil war as the opposition finds a way to unite against Maduro and the powers that be. This will be bloody unless the military elects to remain essentially neutral. Their stance may well be determined by the nature of the opposition. If the leaders of the opposition are from the business community or from the expatriate community the generals will see this as a threat and will be very defensive. If the left-leaning opposition prevails the military will be more tolerant and would likely support a civilian leader. The fact is that many of the supporters of Chavez were upset with the promotion of Maduro in the first place and believe he has betrayed the principles that Chavez espoused and they want him out and replaced by a Chavez loyalist.

 

 

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.

 

 

Takes All Kinds

I have to concede that my exposure to humanity is skewed. Most of my time is spent talking to groups of people and by definition these are people engaged in some aspect of business. I see a great many accountants, bankers, credit managers, manufacturers and the like. My interaction with the more general population is at airports and on airplanes and I am well aware that these are not normal places for most of us and it is therefore somewhat unfair to judge by behaviors manifested in that big aluminum bird. That said, I have come to categorize my fellow travelers into three basic groups.

The nicest group consists of people who understand the need to be patient and gracious when crammed together like sardines. These are the people who help the elderly get their bags in the overhead, wait to get all their accoutrements out until the row is filled and interact politely with the flight crew. Luckily they are still in the majority.

The worst group consists of those that have determined that they are the only people in the world that matter. They shove and push their way along, never help a fellow passenger and gripe incessantly at the flight crew. They are the ones who try to ward people away from the middle seat by piling their junk up. They slam that seat back as far as it will go and glare at anyone who has the temerity to want to use the lavatory. They are the ones who dump hot coffee on the heads of others and generally try to ignore every social nicety they can.

The middle group is what I would call the stoics. They endure. They are not all that helpful to others but they are not rude either. They clamp on the headphones, close their eyes and just wait until it is all over. These are often the most frequent flyers – those who get no pleasure at all from the flight – they are just commuting to work. I would like to think I am in the first category but most of the time I am in the third – at least not in the second!

 

 

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Consumer Sentiment Continues to Inch Up.  If there are economic uncertainties developing, nobody has told the consumer. US consumer sentiment rose to 98.0 from 96.9 in March.  The current economic conditions index hit its highest level in 17 years – rising to 115.2 in April. Perhaps most important to watch is the future conditions index from the University of Michigan. If there was concern about the future at a consumer level, it would start to show up in the consumer sentiment index. The April future conditions index rose to 86.9, up slightly from 86.5 in March.  Many consumers will unconsciously use their views of the economic future to make purchase decisions. They are more likely to take on big, long-term purchases if they feel better about their future.

 

 

Keep Watching Heat Wave in India.  A strong heat wave in India has pushed temperatures above 110 degrees Fahrenheit in many regions.  And, with the extended heat wave still in place across the region, the risk of business interruption and supply chain disruptions continue. US exporters that have grains and materials used in India for construction or drought relief activities (water treatment systems, irrigation, cooling and HVAC, etc.) should see increases in demand.  A nearby early-season tropical cyclone is not going to give the region any relief.  Current movement of the system as shown by the Accuweather map at right shows that it will track to the east.

 

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Business Intelligence Brief: April 13, 2017

Short Items of Interest – US Economy

• Another Decrease in Jobless Claims – The jobs data from last week was a bit of a disappointment although it has been pointed out that there were plenty of factors that contributed to the low hiring numbers and that many of these were temporary. Now comes the news that there was good news from the jobless claims. They were down again – to 234,000. This pattern has been in place for several months now and suggests strongly that companies are not engaging in lay-offs. The average person who has been let go is finding a new job within 60 days and many are finding new work in a matter of just a few days. The challenge as far as jobs are concerned still lies with trying to deal with the long term unemployed.

• Why Do People Quit? – It has been observed that the quit rate has not moved much in the last several months and that is a bit of a concern. The quit rate is interpreted as a signal of confidence within the ranks of the workers. The question is why people quit and seek other jobs. Most of the time it is related to a desire to make more money and this is an important observation. It has been noted that employers are trying harder to retain key workers by paying them more. This may be reducing the number of people that feel compelled to quit in search of higher pay.

• Growth Forecasts Fading – The pattern is common enough. At the start of a new Presidential term there is enthusiasm based on all the promises and assertions. This was evident with the election of Trump but it took place when Obama was elected and when Bush was elected and so on. In the cold light of day these expectations fade. The assessments in December called for the US economy to grow by 2.1% due to all the stimulating ideas and changes outlined. It is now evident that many of these will not take place as planned and the forecasts are fading – to growth of maybe 1.8% to 1.9%. They may dip even further as the year progresses and the reforms are further stalled.

Short Items of Interest – Global Economy

• Zuma Faces United Opposition – For the first time the opposition to Jacob Zuma in South Africa has been able to unite – at least enough to stage a unified protest. The Zuma government is corrupt and has become increasingly autocratic but has benefited from the fact the opposition has been fragmented between those on the left and the right. This united demonstration hardly means they will be able to unite enough to challenge Zuma but at the very least they are talking and may be able to find some common ground that would enable them to field a candidate they might all support in taking on Zuma. His poll numbers are very low but so are the numbers for many of the potential challengers.

• Rising Tensions Between Japan and China – Over the last year the Chinese have been prodding and poking Japan to see what kind of reaction they can evoke. Chinese aircraft have been flying very close to Japanese airspace and the Japanese air force has responded with a record number of scrambles. These flights are designed to push intruding aircraft back and of the 1,168 scrambles – 852 were provoked by the Chinese. These are record numbers and Japan is angry about it. They assert that China is probing Japan’s defense system and could be doing this on behalf of the North Koreans. More likely, China is concerned that Japan might attack them as they elect to push Kim Jong-un.

• Coal Conversion Operations Return in China – The crash in the price of coal has prompted the Chinese to resurrect the big coal conversion operations that had been shelved a few years ago. These plants convert coal to other liquid fuels and they are environmental disasters. They are heavy polluters and use an enormous amount of water. The Chinese pledge to reduce its carbon footprint is facing opposition from those in western China that focus on the money that can be made from this conversion and most of the mothballed projects have started up again.

Market Reacts to Trump Comments
The interview that Trump gave to the Wall Street Journal was intended to clarify some of the economic policies favored by the new administration and there was some of that. There were also comments that muddied the water and sent foreign exchange markets into a temporary swoon. The fact is that many of the policy statement made by Trump in the campaign and shortly after his election have been abandoned and reversed. This is not all that unusual as politicians shift to accommodate the mood of the electorate and there is a need to adjust to the actions of the legislature and the rest of the world. The issue for analysts is that it has been hard to identify consistent positions. Several policies established under Obama were expected to have changed by now but now seem more entrenched than ever. The US position on Russia has reversed and hardened again and the expected pressure on China has not taken place. In his interview, he stated that China would not be labeled a currency manipulator and that had been a pivotal point in the campaign.

Analysis: The comments that got the most attention were those that related to the strength of the dollar and the interest rate policy that has been pursued by the Fed. It is rare that Presidents attempt to manipulate currency value and it is not clear that this is what Trump intends. It is not unheard of for Presidents to comment but usually the currency value conversation takes place at the Fed or at the Treasury Department.
Trump opined that the dollar was too high right now and that is an opinion shared by many analysts. It has made exports harder to sell and it has allowed imports easier access as buying from overseas has been a real bargain. The discussions over taxes designed to promote exports and discriminate against imports have been interrupted by the reality of the dollar’s value and the impact that has on trade. The comments from Trump did not include any strategy on how to reduce the strength of the dollar although he remarked that he was generally in favor of lower interest rates at the Fed. This is a reversal of his position during the campaign when he accused Yellen of favoring a cheap money policy to promote Obama. The reality is that the Fed is well aware that its positions affect the value of the dollar but they do not manage rates to affect the strength or weakness of the currency. By all accounts the Fed will be hiking rates this year – probably twice and perhaps three times. That will make the dollar that much stronger as this move will make the US more appealing to investors worldwide and they will need more dollars to invest in the US.
The factors that would need to change include a shift in the attitude towards fiscal stimulus in the US, a strong assurance from the Fed that monetary tightening will be gradual and a shift in the attitude towards monetary tightening among the other major central banks in the world. None of these are under the direct control of the executive. One of the policies that has propelled interest in the US is the infrastructure effort. If that trillion-dollar investment is actually made it will be a major stimulus and the reaction globally would be include a much stronger dollar. The Fed has been expressing caution when it comes to rate hikes but it has also been made clear that hikes are called for right now. As for the other central banks, there are none that think the time is right for them to start reversing course and the best that can be assumed right now is that they will stand pat.

China and Currency Manipulation
The accusations have been flying for many years and there have been many confrontations between China and the US as well as between China and other countries it does business with. The assertion has been that China was deliberately undervaluing the yuan in order to make it easier for its exporters to compete. A weak yuan would mean that everything China sold internationally would be at a discount but it also meant that everything China imported would be more expensive. In a country where the consumer had more power the added costs for imported goods and commodities would spur protests over such a weak currency policy but the consumer has not had much power in China until fairly recently. The truth is that nearly every country does a certain amount of currency manipulation – intentionally and accidentally to a degree. Only a few years ago the US was accused by the Brazilian government of keeping its interest rates artificially low as a means by which to weaken the dollar and promote exports.

Analysis: The about face on China and currency manipulation stems from at least two factors. The first is that China has been allowing its currency to strengthen for the last few years. There are some who assert that the yuan is still not valued as it should be but others assert the Chinese are about where they should be. The motivation for this shift in policy is the desire to build a stronger consumer based economy in China and that means making imports less expensive. The second factor is less economic and more of an acknowledgement of the complex nature of the US-China relationship. The US needs China to engage with North Korea in an aggressive manner and that carries a lot of risk for China. They do not have the control they once had over Pyongyang and Kim Jong-un. The assassination of Kim’s older half-brother was a blow to China as he was under their protection and was seen as an alternative to Kim Jong-un if one was needed. China has to be prepared for a real confrontation with Kim and it could involve military intervention. The Chinese position is that the US needs their help in controlling tensions in the region and China is demanding there be something in this for them. The Chinese have leverage at the moment and they are using it. Trump seems to be acknowledging priorities and has not been pursuing the kind of aggressive trade policies that were once part of his campaign and approach. This hardly means that China and the US will become boon companions but the confrontational politics of just a few months ago seem to be fading.

Developments in Latin America
There has been quite a lot of activity in Latin America of late – somewhat overshadowed by the attention that has been directed at Europe and the new administration in the US. It was not that many years ago that this part of the emerging market was the future and Brazil was at the top of its game – the lead state as far the BRICs were concerned. Argentina was a mess and mired in a decades long set of poor economic decisions. Colombia was still fighting the FARC in a protracted civil war that zapped the ability of the economy to grow. Venezuela was in trouble after decades of mismanagement but the high price of oil was sustaining them. Mexico was emerging as the manufacturing platform for the US and seemed to be poised for more growth. Not all of this has changed but much as altered as some countries have accelerated their growth and others have started to fall faster than anticipated. Politics has been volatile as usual and that has affected economic futures as well.

Analysis: Brazil has been on a roller coaster for the better part of the last decade. The country looked poised to take its place as the engine of Latin America but one crisis after another dropped the country into a recession and a severe one. The country that was ready to proclaim its arrival with sponsoring the World Cup and the Olympics watched these events zap the limited resources of the country and the plan backfired as Brazil was exposed as a state that was in true financial distress. The recession has been deep but there are some recent signs that conditions are improving. The central bank has elected to start slashing interest rates in order to boost the economy as they have seen inflation numbers start to improve. There is nothing automatic about the strategy but at least the bank can make an attempt now that inflation has been brought under control.
Argentina elected a new President about a year ago and Mauricio Macri ran on an overt promise to reform the economy after years of the Kirchner/Fernandez strategy that paralyzed the majority of the business community, savaged the export sector and rendered the country unacceptable to the financial community. These reforms have met with mixed reviews and the population has been impatient. On the positive side, there has been substantial renewed interest in investment now that Macri’s government has been honoring the debts of the country. Exports are heading up as well.
Mexico was stunned by the election of Trump and expected the worst given the rhetoric of the campaign. It seemed that Mexico was getting the blame for all that ailed the US. The peso collapsed, investment froze and the growth rate faltered. Now it seems that some of the more radical ideas are being dropped or at least reconsidered and the rhetoric has changed. The growth rate is starting to recover and the peso has gained a bit as well. There are still worrying plans in development and Mexican leaders remain wary but the catastrophe that had been anticipated has not come to pass.
Ecuador has a new President but the same leftist government. Lenin Moreno was the chosen replacement for Rafael Correa and is expected to follow the same policies but with a more pleasant demeanor. The ongoing tragedy in Venezuela gets worse every day and the rest of the region has been getting more concerned about what happens when the Maduro government collapses altogether. Street protests are daily and getting more violent.

Rethinking Russia
The shifts in US strategy towards Russia, Nato, China and Syria have been swift and somewhat disjointed. It has not come as a huge surprise that these have been as vexing to this President as they have been for previous inhabitants of the White House but as these adjustments are made there has been some confusion with allies and enemies alike.

Analysis: Russia is the albatross that it has always been. The hoped for rapprochement with Putin has floundered as Russia has never wavered as far as it goals are concerned. They will not abandon Bashar al-Assad in Syria no matter what the world thinks. They are not backing away in Ukraine or anywhere else and the US is on the defensive most of the time. The Trump critique of Nato has been reversed and now it is being hailed as a bulwark against terrorism and against the Russians. The organization changed nothing but the purpose of the alliance has been made clearer. Russia is now and has long been more enemy than friend. The US works through its differences with China as there is a strong trade relationship with that nation. Russia is not a major trade partner and never will be. What it has to offer is of very limited use to the US and there is little incentive to make concessions. The Putin strategy is not consistent with US goals and will never be – leading to more confrontation in the future – not less.

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.

What is Valued Most
The United saga just gets weirder and weirder and it has stimulated a lot of conversation regarding the correct approach to customer service. The fact is that customers are not always right despite those pat statements that pass as consumer strategy. Every business knows full well that consumers would prefer getting first class treatment for free. That is not going to make business very successful. There are operational realities that will interfere with what the customer wants. The airline will bump people, the delivery company will miss a deadline, the retailer will not have all that is desired in stock at all times. The real question is what the consumer really wants as they know full well that they can’t always have everything their heart desires.
It comes down to respect. That may be what people crave the most – as consumers, as workers, as citizens. Many people get very little respect at all. They are ordered around and treated like cattle. The become numbers or simply cogs in a machine and that breeds intense resentment. There will be times that we will be disappointed and inconvenienced but the way we are treated will make all the difference in our reaction. Being dragged down the aisle of an airplane is not showing respect. I have seen my share of airplane removals. Some have been due to the overbooking situation and others have been prompted by bad passenger behavior but even the latter can be handled with respect. I saw a very drunk young man get pulled from a flight from Vegas. He was shouting and belligerent and the police were called. The cop that “escorted” him spoke slowly and softly and kept trying to establish some rapport. “You had a good time in Vegas, right?” “You don’t want to ruin the buzz do you?” “Let’s chill a bit and just remember the fun ok?” The kid started to listen and agree “It was a blast, what a trip”. Suddenly the whole incident was defused and the kid agreed to sober up a while and try to get home later. The cop came back to the crew and just said “Kids are kids, we don’t want to ruin everything for them”. Respect.

These are quick summaries of articles that appear 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 Biggest Data Point Missed in the Labor Report. Everybody seemed to miss the U6 figure in the Friday Labor Report. It dipped below 9% for the first time since December of 2007. That’s big news. The U6 unemployment rate fell to 8.9% in March (down sharply from 9.2% the prior month), and the first time in nearly 10 years that this important figure has been below 9%. In fact, this places the U6 number below rates that we saw in the strong economic growth period between 2004-2006.

Latest Changes to Q1 GDP Forecast. The Atlanta Federal Reserve released its latest GDPNOW Q1 forecast and it came in a lot weaker than expected – showing Q1 GDP at just .6%. Although the Atlanta Fed forecast is not the official initial reading of GDP, it does give us an idea of where GDP could come in. At this point in time, GDP is trending at .6% growth in Q1. That’s commensurate with some of the heavy weather-impacted Q1’s that we saw back in 2013/2014. Given where the Blue Chip Economists estimates are (1.7%), we would anticipate that the official GDP forecast will come in somewhere around 1% – 1.1%. We typically see the official reading somewhere between the Atlanta estimate and more optimistic Blue Chip forecasts.

March Swoon Shows Up in Demand Index. The Transportation Demand Index for March was just released and it showed the same “March swoon” that we have seen across several different economic indexes. There are two key take-a-ways from the composite transportation demand index. First, at 50.6, the index was slightly lower than the 51.1 posted in February. Overall demand was slightly weaker M/M. In most transportation cycles in most years, we see this March lull just prior to a strong April and May of pre-summer shipping activity.

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Business Intelligence Brief: April 12, 2017

Short Items of Interest – US Economy

 

 

  • Not Much Change in JOLTS Report – There has been quite a bit of good news as far as the labor market is concerned but not everything is pointing at growth. The Job Opportunity and Labor Turnover Survey (JOLTS) has been essentially stagnant for the last six months. The latest data shows the hiring rate fell from 3.7% in January to 3.6% in February and the quit rate fell a little to 2.1%. This rate is still higher than it was during the recession but the number of people willing to just quit and search out a new job is a good indicator of worker confidence in the economy as a whole and it seems there is a little less confidence than had been indicated a few months ago.

 

  • Where is the Big Money? – To be sure the highest incomes are generally going to those that live on their investments but there are plenty of people who get paid good salaries as well. The $100,000 a year club has been expanding as more and more technical professions develop. The vast majority of those earning in the six digits are in the medical field – everything from doctors and dentists to the specialists whom one encounters in the hospital. There are lots of engineering careers as well as scientific avocations as well as finance and business management. The number of professions that command over $100,000 a year salaries has been expanding and the one thing they all have in common is education.

 

  • Clarification on Syria – Russia immediately demanded an explanation from the US and the subject was top of the agenda when Trump met with China’s Xi Xiyang. The European allies wanted clarity and the various players in the Middle East were trying to determine next steps. Not that any statement made now can’t be changed later but the Trump comment was that the US had no intention to get engaged in the Syrian civil war. There will be no ground troops and it is unlikely that any more missile strikes will take place. It now appears that the attack was a one-off move to express anger at the use of Sarin gas but there has been no promise it will happen again if Syria uses gas in the future.

 

 

 

Short Items of Interest – Global Economy

 

 

  • Iranian Political Intrigue – Elections are hardly open and fair in Iran. The clerics that really control the country decide who is and who is not allowed to compete for positions and they have routinely denied reformists from standing for President. This doesn’t stop challengers from forcing the Supreme Council to make that choice. The latest wrinkle is that the former President Mahmoud Ahmadi-Nejad has declared that he wants to stand for election despite opposition from Grand Ayatollah Khameini. He will most certainly be blocked from running but that sets him up to be an opposition player when Khameini dies. His candidacy could split the hardliners and that may be what current President Hassan Rouhani needs to stay in power.

 

  • Crisis and Opportunity in Africa – The continent has the youngest population in the world – over half of those in Africa are under the age of 30. This is a similar situation as was faced by China some thee decades ago. The Chinese found a way to mobilize that young population and emerged as a global growth engine. Thus far the youth in Africa are unemployed, unskilled and frustrated. These are people more likely to be recruited into terror groups and insurgencies and Africa has only a limited time left to address that trend.

 

  • Bank of Canada Holds Rates Steady – The decision by the Bank of Canada was no shock although some thought the economy in Canada had been doing well enough for an adjustment. The decision did allow the value of the “loonie” to rise and that is not altogether a good thing for an economy that is reliant on commodity sales. The low prices of oil has been hurting Canada and now that oil has been made a bit more expensive for the world to buy.

 

 

 

IMF Encouraged but Worried

The latest report from the International Monetary Fund sounds more upbeat than has been the case in recent months as there is an acknowledgement of the economic progress that has been seen in some of the key markets like the US, parts of Europe and parts of Asia. It is not entirely optimistic however as there remains deep fears that protectionism is still evolving in these same countries. It can be read as partly congratulatory and partly a cautionary tale. This report has been issued right before the meeting of the world’s finance heads and is designed to inform some of that discussion. The head of the IMF has been accused of being something of a downbeat actor throughout her term. Cristine Lagarde is not one to shy away from criticism and sees her role as both champion for the traditional economic development ideas and a defender against knee-jerk response to local economic issues.

 

Analysis: In the estimation of the IMF there are two prime drivers as far as global growth is concerned. The more important of the two is the economic rebound in the US but the other has been a rebound in many of the emerging market states. These are largely Asian and Latin American and there have been radical differences within both of these regions. The point the IMF report makes is that one of these growth motivators is feeding the other and vice versa. This is what worries the IMF about the protectionist trends in the US and in some of these developing nations. The growth in the US has been accelerated by access to cheaper commodities and intermediate products from these developing states and they have seen their growth expand due to the demand from the US for those commodities and materials. If the US elects to reduce its trade with these states the impact would be bad for both the US and for the emerging economies and the pace of global growth will retreat.

The high value of the dollar has been both an advantage and a disadvantage – it all depends on which side of the equation one is on. The US is getting a major break as far as the oil, metals, lumber and other raw materials it buys from around the world. There is also an advantage to be had in terms of buying goods that will be converted and assembled into another finished product. The US loses when it tries to export all this stuff as the dollar’s value makes US output more costly. It is a trade-off that is good for some and not others.

The consumer has come back to life in the US and that has propelled much of the expansion that has been taking place but at the same time the IMF has noted that growth in the US is not exactly robust at around 2.0%. This is better than it has been and better than growth numbers have been in Europe where they are still languishing under 1.0% for the most part. The expansion in the US is good relative to what it has been and there is hope for better numbers but few expect to see anything approaching 3.0% any time soon. That makes global growth fragile. If the US manages to isolate itself to some degree through protectionism the pace of growth would slow quickly and send the world and the US close to another downturn and even a recession.

 

 

 

“Pleasant Surprise” in Store on Nafta?

The latest meeting between Trump and a group of business leaders was reported to have gone pretty well. The conversation was not long on specifics but the mood was upbeat and most of the attendees came away encouraged that reforms they have been counting on remain on the agenda. There remains concern that getting Congress behind these changes will be far tougher than anybody had assumed they would be but there is some confidence that movement on regulatory issues and infrastructure development will remain priorities. There was less confidence expressed over the chances for tax reform or the revamping of the ACA. One of the more interesting comments was the assertion that the business leaders would be pleasantly surprised by what the Trump team has in mind for Nafta.

 

Analysis: There was no detail offered and it doesn’t appear that the changes will be taking place all that quickly. The study of the Nafta deal is underway and no preliminary report has been issued. If one looks at the attendees and takes Trump at his word one can surmise that some of the more radical changes originally suggested may no longer be in the plan. Mary Barra from GM was at this meeting and she has been critical of the attacks on Mexico and the suggestion that high tariffs will be imposed on all imports from Mexico. GM has a significant interest in the Mexican manufacturing sector as well as production in many other countries. It would not be in GM’s interest to see a major cut-off in trade. She got no solid assurance from Trump but a pleasant surprise for her would be a less draconian revamp of Nafta.

The selection of participants was made largely by Stephen Schwarzman of the Blackstone Group and the group has been pegged as “advisors” in some respect. They are at least a sounding board for Trump and members of his Cabinet. The invited members of that team suggest where the priorities may be headed. Transportation Secretary Elaine Chow was in attendance and that provoked a lot of conversation regarding infrastructure. Scott Pruitt from the EPA was there and that stimulated talk regarding CAFÉ standards and other environmental regulations. Commerce Secretary Wilbur Ross was there to discuss economic growth and what these companies wanted to see as far as trade while the Education Secretary Betsy deVos got an earful about the challenge business faces in finding qualified workers. This is a theme that has also been picked up by the Labor Secretary and that may mean some real attention may be paid to getting more skilled labor in the pipeline. The presence of OMB head Mick Mulvaney was also significant as he is something of a leader of the Tea Party wing of the GOP and that was the group that shot down the attempt to change the ACA.

 

 

 

What is Wrong with this Picture

Not that we want to pile on – United Airlines is having a bad week as it is. What has made this episode so interesting from a business perspective is the cascade of mistakes that one would assume a major corporation would not make. The incident itself was bad enough but the response and reaction made it worse and at one point the company had lost almost $900 million in stock value. I guarantee this will soon be a case study in what not to do for business and management classes the world over.

 

Analysis:  For those who have been living in a cave cut off from YouTube, the media and every form of news and infotainment the story (as we know it now) goes like this. United had overbooked a flight from Chicago to Louisville – a practice that is very common on all airlines. Last year alone United booted over 3500 people from flights without incident. They were asked to change flights, got compensation and reaccomodation and life went on. There were many thousands more that gave up their seats voluntarily in exchange for all that compensation. This sounds like a lot of people until one realizes that 1.7 million people are flying every single day on some airline or another. Overbooking takes place as airlines are well aware that people elect to be no-shows and they do not want to fly a plane with empty seats. If the number of no-shows is less than anticipated there is an overbooking issue.

The problem started when the computer selected Dr. David Dao for removal. This is a random assignment but it is the policy of most airlines to take into consideration the situation of that randomly selected passenger. After all it is not the fault of the person who paid for a ticket that the flight was overbooked. I have been approached under similar circumstances and was allowed to point out that I was scheduled to speak before a group of 600 people and missing this flight would mean missing that talk. I was required to provide proof of my assertion and when I did they moved on to somebody else. This was not United’s policy and Dr. Dao’s assertion that he needed to be at the hospital the next morning was not heeded.

This is when the whole situation escalated into a corporate crisis. Dr. Dao was manhandled and dragged from the airplane as dozens of other passengers took videos and protested. He was injured badly enough to require hospitalization. The United response was weak and seemed to place all the blame on the passenger. Was he belligerent and uncooperative? Most certainly. Did he have a right to be upset? It would seem so. Every statement and attempt to place blame dug the hole deeper for United and within hours it was the hottest story on social media and United was the butt of jokes. Most importantly it was losing business and money and is now engaged in a massive effort to rebuild a reputation that wasn’t all that good to begin with. Any crisis management team would have handled this very, very differently and there have been many situations where such an incident fails to spread. United has just provided a textbook case of ineptitude and it will be a long time recovering from this.

 

 

 

US Tourism Industry Faces Challenges

There are few things quite as delicate as tourism. The person planning a trip for pleasure is far different than the business traveler who needs to make the journey regardless of the hassle. The tourist wants safety and wants to be hassle free. Over the years there have been many countries that have seen their tourist industry fall apart due to fears over drug violence or terrorism. The US tourist industry is facing a challenge from internal actions and decisions by the government. This is an industry that is worth $1.5 trillion and accounts for 8.6% of the national GDP. It is a prime producer of jobs in the service sector and it is estimated that almost 45% of all small business is geared towards tourism.

 

Analysis: The unfortunate fact is that foreign visitors are dwindling fast and this year will see a drop of more than 20%. There are many reasons that people would choose to avoid the US. Many cite worries about the attitude of the US government and the extreme vetting that they may be subjected to. Visits from the Middle East and South Asia have fallen dramatically. There has also been concern about safety as reports of crimes committed against certain ethnic groups become more common. The high value of the dollar has also been a big issue as the US is pretty expensive for those whose currency has weakened against the dollar. The potential visitor has a delicate choice to make as they want to have a good and relaxing experience. Anything that would seem to make that more difficult pushes people to other destinations. This can even affect domestic tourism. If travel is seen as onerous and complicated it may be more relaxing to just stay home, sit on the deck and drink wine.

 

 

 

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.

 

 

 

Old Home Week

There are groups that I have been speaking to for many years. These are beyond any doubt my favorite speaking gigs. The attendees are friends now and that opens up all kinds of possibilities as far as a program is concerned. It becomes a continued conversation with people I know. This week is Riemer Reporting Service’s annual meeting and I have worked with Lois and Kristine and Joanne for years. They are beyond charming. They are efficient and organized and pull together a really top notch meeting of people in the credit industry. I gather that they learn a little something from me but I am quite sure I learn far more from them.

I speak to many people involved in credit management as well as many people in manufacturing and accounting and law and many other fields. I am the economic analyst for the National Association for Credit Management and speak to dozens of these groups every year. They are always aware and engaged but the nature of credit management makes this group especially attuned to the world. They are not engaged with their own company as much as with everybody else. They need to know what makes their customers succeed and fail and need to look out in the future. They have a clear-eyed view of the world and see all the factors that could make or break a company. They have to. They have to have an inkling of what is to come before they put their own company at risk and that makes them voracious consumers of what I have to offer. My family and friends may have started ignoring me years ago but as long as I have credit manager friends I will have somebody to talk to.

 

 

These are quick summaries of articles that appear 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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Quick Review of Where Jobs Were Created in February.  Most of you know already that 235,000 jobs were created in February, this was well ahead of analyst estimates and we got a January revision that pushed job creation from 227,000 to 238,000. The unemployment rate fell to 4.7% and the U6 (which is what we prefer to watch) moved down to 9.2%. The Labor Force Participation rate remained unchanged at 63%.

 

CBO Report on the American Health Care Act – the Real Story.  To the degree possible, we wanted to try and give you the straight answer as to what the CBO report on the AHCA said – and what it didn’t. Many analysts are going to be fighting for days over the impact of the AHCA with many opinions (both pro and con) being weighed in on the issue. In our own bi-partisan way, we’ll try to offer up some bulleted-takes on what we think is really being said by the CBO.

 

Producer Prices Higher in February.  Core producer prices rose the most in more than 10 months according to the Labor Department today. Prices for final goods rose by .3% in February.  This was slightly lower than the .6% jump we saw in January. For the past 12 months, producer prices have risen about 1.8%.  That’s slightly behind where we think the inflation rate is at 1.9% – but both have been accelerating in the past four months.

 

February Transportation Demand Index Breaks Out.   The transportation demand index for February came in surprisingly strong with the composite figure jumping into the expansion zone at 51.1, a 4.1% improvement over January and a 24.6% improvement over February of 2016.  This was the first time since November of 2016 that the composite was in expansion mode.  The transportation demand index shows whether freight demand is increasing or decreasing across four modes of transportation.  And, since it is an early indicator of broader economic activity, we think it’s a strong barometer for good economic activity happening now.

 

 

 

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Business Intelligence Brief: April 11, 2017

Short Items of Interest – US Economy

 

 

  • Conference Board Indicator Rises – The Employment Trends Index from the Conference Board is one of the better measures of employment in the US as it aggregates a lot of data related to the hiring and firing of people. It is more reliable than just one set of observations but it is also somewhat complex as it has a great deal of specificity. The latest index number is at 131.43 and that is up over the reading of 131.09 in February and it is 4.3% higher than it was at this time last year. This is another signal that the labor market is far steadier this year than it has been in some time. The gap now is between the need to hire workers with appropriate skills and the lack of candidates but that is another issue and one we have been beating to death lately.

 

 

  • Another Reason Not to Worry About Last Week’s Job Numbers – The analysts are asserting that much of the disappointing job data is really all about weather and nothing to worry about. The year started with very mild weather in parts of the country that usually get lousy conditions this time of the year. That allowed construction projects to proceed and that limited the number of layoffs. There was even more hiring. March came in like the proverbial lion and changed all that. Construction slowed dramatically and so did hiring in that sector. In other words, the job growth in January and February was inflated somewhat and in March the reality of winter caught up.

 

 

  • No G-7 Climate Statement This Year – The meeting of the G-7 Energy Ministers can be a pretty dry affair as all the nations get together to talk technology and energy policy. It has become customary for the group to issue a statement as they wrap things up that reasserts their commitment to the climate change goals outlined in the Paris Accord. That did not happen this year as the US declared that its climate change policies are under review. The G-7 meeting did outline the stark differences between the member states and illustrates just how tough progress will be.

 

 

 

Short Items of Interest – Global Economy

 

  • Meeting Between Trump and Pope Will Not Take Place – Every President since Roosevelt has made a point of visiting the Pope when they make their first trip to Europe. This tradition ends with Donald Trump as the Vatican has been left off the itinerary. In the first weeks of the Trump term the Pope has been critical of many of the emerging policies but the Pope has been critical of most of the western leaders of late. He has not been easy on other parts of the world either as he has styled himself as the conscience of the world when it comes to the poor and less fortunate. Trump apparently wants to avoid the lecture the other world leaders have received from Pope Francis. Both the Pope and Trump are downplaying this and assert that it is only a matter of logistics and that a meet will happen later.

 

  • French Election Tightens – It is coming close to decision time in France and there has been a last minute surge from the left. Not for the official Socialist candidate but for the more radical Jean Luc Melanchon. This leaves Marine Le Pen with 24% support, Emmanuel Macron with 23% and Melanchon with 19%. The French are committed to only one thing it seems – change.

 

  • Venezuelan Protests Grow – The increasingly tyrannical regime of Nicholas Maduro has elected to ban the chief opposition leader from holding public office and that has triggered mass protests that have spilled into the streets of all the major cities. The government is desperate and the public is angry – a very bad combination that could easily lead to civil war of some kind. Thus far Maduro has maintained control of the army and police but some of the suspect units have been assigned remote postings to keep them away from centers of power. The opposition remains weak and divided but that may not matter if the public essentially forces Maduro out.

 

 

 

Making the Case for Multilateral Trade Pacts

Trade between nations is controversial – it really shouldn’t be but it is. It becomes one of those “greater good” arguments and those are always tricky. When a country elects to buy something from another country there will likely be those who get upset because they wanted that market to themselves. It is obviously easier to sell one’s product or output when there is less competition. When there is an import, the domestic producer is facing competition and almost by definition that competitor has an advantage of some kind – usually in price. If they didn’t there would be no reason to export that product and deal with all the additional costs of shipping and distribution. The loser in this situation is easy to see and the winner is far more diffuse. The consumer is the winner as they will get access to a product at a cheaper price. Over the years many have attempted to quantify just what advantages trade brings to the consumer with estimates ranging from $4,000 to $9,000 saved by the average consumer due to their access to imports. This is a subject that hinges on where one is in this equation.

 

Analysis: The US has long been a champion of trade as there have been enormous benefits for the country over the years. Not only does the US have a major appetite for these less expensive imports to satisfy a voracious consumer but the US is a major player as far as exports are concerned and needs other markets to remain open. The export sector accounts for 14% of an $18 trillion GDP. To put that in perspective the export sector is 14.7% of the Japanese GDP. The US sells virtually everything to everybody – food, high tech, manufactured goods, services, consumer goods – you name it. The US also buys from nearly everybody and often the very same things that it sells. This diversity of trade is one of the key reasons the US was the champion of multilateral trade deals and multilateral trade institutions such as the World Trade Organization. When a nation is doing business with a great many other nations it is far easier to do if the rules of trade are uniform. Companies in the US do not want to alter their product hundreds of times to satisfy the demands of hundreds of trading partners. The secret to production success has always been repetition – the ability to satisfy many markets with the same product so that there can be economies of scale. Getting involved in dozens and dozens of separate trade deals means inefficient production and the chance that some markets will be abandoned altogether.

At the end of the Second World War those that were trying to determine why this massive conflict broke out and engulfed the world in tragedy decided that one of the key motivations for the war was economic. The Germans had been crushed by the recession and the aftermath of WWI and the Japanese were bent on Asian expansion for largely economic reasons – the need to feed their Empire with goods and money. The sense at the end of the war was that economic peace was needed badly and thus the Bretton Woods conference and the creation of the “Three Sisters”. These were the International Monetary Fund, The International Bank for Reconstruction and Development (World Bank) and the General Agreement on Tariffs and Trade. GATT, as it was referred to, evolved into the World Trade Organization and its mission remained the creation of an open and fair trading system. It has had its success and it has failed on occasion as well.

The Trump approach to the WTO had been hostile at best and there have been assertions the WTO has ruled against the US too often. The reality is that WTO rulings have been in favor of the US position over 85% of the time. No other country has a track record this good as most other countries have been more protectionist and closed than the US. The attack on the WTO is not remotely in the best interests of the US as this institution has been an ally for the US since its start.

 

 

Deep Divisions Over Tax Reform

One of the key platforms for the Trump team has been tax reform but this is the area that has evoked the deepest skepticism. Repealing and replacing the Affordable Care Act has some support from some Democrats (although obviously not enough) and there is generally bipartisan support for an infrastructure build of some kind and even for hacking away at some regulations. Getting some Democrats on board is vital as these changes require 60 votes in the Senate (for the most part) and that means getting eight Democrats to work with 52 members of the GOP. The one idea that has been greeted with the most suspicion is tax reform and that has been the case for over a decade.

 

Analysis: Democrats have outlined their demands as far as tax change is concerned and these are not going to be accepted by most of the GOP. It is safe to say at this point that tax reform is going to hit a major roadblock right from the start. The Democrats oppose a tax cut at this point – especially for the wealthy. They do not want benefits concentrated in higher income households and they want a progressive system that benefits those who earn less money. They have been generally opposed to systems that are based on consumption taxes as these are generally regressive. To put it bluntly there is almost no common ground here.

The GOP leaders had hoped to gather some support from Democrats that are more conservative than some but thus far the fractious Democrats have been unified and it has been the GOP that is breaking into opposed factions. Concessions to Democrats will alienate the Tea Party Republicans just as the concessions regarding the ACA did and that same caucus will break from the GOP plan. If the Democrats remain unified there is no way to pass anything but very minor changes – a few loopholes eliminated perhaps. The issue of tax reform has been on the table for years and nothing substantial ever happens as this is an issue that requires finding common ground and this is near impossible in today’s political climate.

 

 

Syrian Fallout

The attack on Syrian positions by the US has triggered a whole host of reactions and it is going to be months before the dust settles and anybody can determine what has really changed. The strike was designed to be a shot across the bow as far as the al-Assad regime is concerned. The attack was limited and there was even an attempt to avoid damaging the airfield itself. The implication was that the US would have more in store for Syria if they crossed the line again. The problem is that nobody is quite sure what that line is. The strike was in response to the use of Sarin gas on a civilian population. Is that the line that can’t be crossed again? In the days after the strike the Syrian army has stepped up its attacks on the last remaining strongholds of the rebel army. These have involved air strikes, artillery barrage and tank attacks and there are reports of massive civilian casualties – far more than were killed in the gas attacks but thus far there has been no additional use of gas.

 

Analysis:  The US has been roundly condemned by Russia as would have been expected. It is unclear whether this has affected any of the emerging Russia-US relationship but there is certainly less room for rapprochement than before. Europe has taken a stand against Russian support for al-Assad and China has condemned both Russia and the US for intervention in the affairs of another state. They clearly have their eye on what all this means for their alliance with the North Koreans.

The rest of the world is puzzled as to what the US wants from this region. The US has been unwilling to offer much support to the rebels in Syria as many of those attacking al-Assad are affiliated with ISIS and al-Qaeda. The US is not willing to put troops in the region and there is not much support for further air strikes. The first attack caught the anti-aircraft forces by surprise and there is little capacity to defend against missiles in any case. Putting aircraft in the fray would risk having planes shot down and either losing the pilot altogether or seeing them held prisoner.

The rebels in Syria thought this was a change in US strategy and assumed there would be a follow up. There has not been and it is unlikely there will be. They are under more aggressive assault than ever and most analysts assert they will be crushed completely by year’s end. All that will be left of the rebellion will be the occasional guerilla attack and al-Assad will be more firmly in power than ever. He and the Russians know the US faces severe limitations as far its influence here and the missile attack only underscored these limitations.

 

 

Exploiting Sectarian Divisions in Egypt

The ISIS attack on two Coptic Christian churches killed 47 people and injured scores of others. It also opened the gaping wound that has always been just under the surface in Egypt. This is a country with one of the largest Christian populations in the Middle East and it is also a country with a long history of Islamic extremism. The Muslim Brotherhood has not been the pure terror group that ISIS is but it has generated its share of extremism and terrorism and the government in Egypt has been attacking members of the Brotherhood with zeal and extreme violence. The Coptic Christians get caught in the middle more often than not.

 

Analysis: The anger at the ISIS attack swiftly became anger at the government and protestors are demanding action and protection. The government of Abdel Fattah al-Sisi has been generally popular with the Copts as he was credited with driving the Muslim Brotherhood from power but now there is disappointment with how aggressive he has been with the Muslim extremists. It is clear that ISIS seeks to exploit the sectarian divides in Egypt and find a way to turn the population against one another. Not only is there hostility between the Copts and the Muslims but there is division between the Sunni and Shiite as well as smaller sects affiliated with Islam. It is also important to note that Egypt has a large population that is unaffiliated with any religion – there remains a strong leftist group in the country that eschews both the Christians and Muslims and the military is full of people who may have nominal ties to a religion but whose loyalties are to the military itself. The confrontations that have erupted since the attack have been between angry Coptic Christians and those they connect to the Islamic extremists and the military is trying to restrain both sides.

A destabilized Egypt is bad for the region and for the western states that had been hoping that al-Sisi would be able to restore order to the country. There are no illusions as far as the underlying tensions but there had always been enough desire in Egypt to tolerate difference to keep these divisions from creating a civil war.

 

 

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.

 

 

More Airline Horror Stories

These accounts always grab my attention. Given the fact I fly a great deal I am always waiting for one of these episodes to affect me even as I realize that 1.7 million people are on airplanes every day. The odds are greatly in my favor and thus far I have not been witness to fist fights, confrontations or the other events that grab attention. The latest fracas involves the practice of overbooking flights. All the airlines do this because they know that every flight will have no-shows. We hear the announcements every time we fly. “Ernie Shlabotnik, your flight is leaving” and Ernie is nowhere to be seen. The airline assumes there will be a few of these every flight and this is where the stand-by passenger gets their break. But occasionally Ernie and all his friends show up and the airline has too many people for the seats available. We hear these announcements as well – “we need volunteers to take a later flight”. It doesn’t usually take much as there is always somebody who wants the extra cash.

What happens when nobody wants to leave? This usually happens when it is the last flight of the day and the alternative is arriving the following day. This is a major problem. I have only been singled out for removal once but had the opportunity to plead my case to the Southwest gate agent. I pointed out that 600 people were expecting to see me speak the following day at 8:30 AM. My arriving at 11:30 was going to be a problem and they let me stay on the plane as they sought some other passenger with a less urgent schedule. Every year the airlines collectively have to remove thousands of people from flights against their will. Tens of thousands voluntarily leave but there are times when bribes fail.

There is absolutely no excuse for dragging a passenger down the aisle by force and injuring him. This is assault. The issue with United was not the need to get somebody off the plane – it was their method. I never fly this airline as they are incompetent beyond belief.

 

 

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Quick Review of Where Jobs Were Created in February.  Most of you know already that 235,000 jobs were created in February, this was well ahead of analyst estimates and we got a January revision that pushed job creation from 227,000 to 238,000. The unemployment rate fell to 4.7% and the U6 (which is what we prefer to watch) moved down to 9.2%. The Labor Force Participation rate remained unchanged at 63%.

 

CBO Report on the American Health Care Act – the Real Story.  To the degree possible, we wanted to try and give you the straight answer as to what the CBO report on the AHCA said – and what it didn’t. Many analysts are going to be fighting for days over the impact of the AHCA with many opinions (both pro and con) being weighed in on the issue. In our own bi-partisan way, we’ll try to offer up some bulleted-takes on what we think is really being said by the CBO.

 

Producer Prices Higher in February.  Core producer prices rose the most in more than 10 months according to the Labor Department today. Prices for final goods rose by .3% in February.  This was slightly lower than the .6% jump we saw in January. For the past 12 months, producer prices have risen about 1.8%.  That’s slightly behind where we think the inflation rate is at 1.9% – but both have been accelerating in the past four months.

 

February Transportation Demand Index Breaks Out.   The transportation demand index for February came in surprisingly strong with the composite figure jumping into the expansion zone at 51.1, a 4.1% improvement over January and a 24.6% improvement over February of 2016.  This was the first time since November of 2016 that the composite was in expansion mode.  The transportation demand index shows whether freight demand is increasing or decreasing across four modes of transportation.  And, since it is an early indicator of broader economic activity, we think it’s a strong barometer for good economic activity happening now.

 

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Business Intelligence Brief: April 10, 2017

Short Items of Interest – US Economy

 

  • Why 98,000 Jobs Added is Nothing to Panic Over – The jobs report from last week was not what was expected. The assumption had been that there would be some 200,000 jobs added – just as there has been almost every month for the last couple of quarters. Instead there was a drastic drop in the number added. The markets shuddered a little but the fact is the unemployment rate went down despite the low number of added positions. It seems that the economy is pretty close to full employment and this creates another issue. If we are at that full employment level how are we going to cope with the 8 million people who are not employed? What is going to be done to fill the 7 million jobs that exist today? Apparently, those looking for work are not qualified to take these jobs.

 

  • Why are so Many Unemployable? – This is a very tough question to answer and there is really no good answer. The employers have their reasons and the potential employees have theirs. The three biggest issues appear to be skill, motivation and accessibility. Many lack even the simplest skills as they struggle with basic language and numbers. One employer reported that over 50% of those that applied for a job in construction could not read a tape measure. The second issue is motivation as many take jobs and quit them only a few days or weeks later. Perhaps the biggest issue is that people are trapped in a place where jobs are few and can’t relocate to where there are jobs.

 

  • Kevin Hassett Named to Head CEA – This appointment is one of the more interesting so far. It was only a month or so ago that Trump indicated that he had little faith in academic economists and he was not even sure he would form a CEA. It is not clear yet that Hassett will be made part of the Cabinet as other CEA heads have been. He is a “classic” economist from the American Enterprise Institute (a leading conservative think tank but thoroughly in the mainstream). He is also an expert on tax policy and how it can be used to bolster growth.

 

 

 

Short Items of Interest – Global Economy

 

  • Tensions and Concessions – If one wanted any more proof that the relationship between the US and China is a complex one, you would not need to look any further than the statements that came from the meeting between Trump and Xi. As one would expect the Chinese condemned the attack on Syria – not because they have any fondness for Bashar al-Assad but because they do not like the implications as far as North Korea is concerned. At the same time the Chinese offered two trade concessions to the US in an attempt to defuse a trade war. The US is getting access for beef exports and will get concessions as far as financial sector investments. The fact is that China and the US will be in a love-hate relationship for many years.

 

  • Shifting Drought Conditions in Africa – The drought that has affected the southern parts of the continent has started to abate and the expectation is that renewed agricultural activity in South Africa and nearby nations will lead to better economic growth this year. Meanwhile the lack of water in the sub-Saharan region has become acute and has fed the worst drought in decades. This means several million people will be facing starvation and this leads to mass migration. It is that movement of people searching for food and water that triggers more wars and genocides.

 

  • Demographic Time Bomb in Japan – This is a problem that has been building for years and years but it is now coming to a head. Japan is running out of people. By 2065 the population will fall to just 88 million from the 127 million today. That is a 31% decline and that plunges the nation into crisis. Either the nation starts demanding that every woman in Japan have five to six kids or the country will have to accept mass immigration. Both of these would mean massive and unwanted cultural change but the alternative is far worse.

 

 

 

IHEA/CCAI Report

It is that time again as we bring this month’s version of the index of indices that we prepare for the Chemical Coaters Association International and the Industrial Heating Equipment Association. These are both organizations that are sensitive to industries that use metal as these are companies that either chemically coat metal or heat treat it. We look at a variety of sectors that matter to these companies.

This may be the transition month but that remains to be seen. To recap the last few months we had a market panic as it became clear that Trump had a chance to win. Nobody had really figured this possibility in and it took a while to digest. Then the market boomed as the business community, investor and consumer took him at his word and came to expect wholesale change in the economy – everything from tax reform, deregulation, the end of Obamacare and the end to imports that competed with US goods. This fed a good a bit of euphoria that was described as “animal spirits” or the “Trump Bump”. Now the enthusiasm is waning a bit as the reality of US politics sets in. These projects all rely on Congressional support and it has become obvious that Trump can’t rely on his own party to support him. There are still signs of confidence and progress but there are also signs that business is getting nervous and more suspicious.

We will start with the seven index readings that are trending positive but we should add one important caveat. In many of these readings the change has been very slight and would almost be better described as flat. The difference between positive and negative has not been very significant in many respects. The “Sales of Automobiles and Light Trucks” reading was one of those that changed quite a lot as there was an unexpected surge that may have been spurred by the early year confidence levels. The rise in “New Home Starts” has also been impressive and suggests the headwinds that were supposed to slow this sector have not been a big factor yet. The “Metal Prices” data was actually mixed with aluminum heading up consistently on the back of demand from aerospace and copper remaining volatile along with nickel prices. As pointed out later there has been a reduction in steel demand and that has had some impact on those prices as well.

After an extended slump there was a very slight improvement as far as “Capital Expenditures” are concerned. The good news is that the reading has improved but the bad news is that it is still very close to the low point reached last month. It is going to take a while before the expenditures numbers are where they need to be. The rise in “Durable Goods Shipments” was impressive but it has to be pointed out that much of this is attributable to the rise in demand for airplanes of late. There are some other durable goods sectors reporting better news though – automotive and construction at the top of the list. Others are not seeing the expansion (agriculture and power generation). The news as far as “Factory Orders”: are concerned was better as this was a solid gain over last month and that would indicate that consumers are getting into the game again.

Now for the negatives and bear in mind that many of these are only barely in the negative category. The “Steel Consumption” reading as down quite a bit on reduced demand for construction materials but this comes after a stronger demand earlier in the year. There was a small slip as far as “Industrial Capacity Utilization” is concerned but it has to be remembered that almost all the movement thus far this year has been within the range of 75.0 to 76.0 so the movements are very subtle. There was a slight dip in the “PMI New Orders” category and again this is not much to worry about as the reading is still close to 65.0 and that is a record level since the end of the recession. This small dip matches the small dip that has been recorded in the overall PMI. This is nothing to be concerned with as the numbers remain near record highs – this is more of a breather than a shift.

The numbers for the Credit Managers’ Index were down slightly but again the overall scores remain comfortable in expansion territory and there are only a few areas that are causing concern. The dollar collections numbers are down and so is the rating of accounts beyond terms. These are both early warning signs that could signal that something worse could be coming. The Transportation Activity Index slipped as well but only a little and is still in the 50s (but only by a bit). The rail sector has been affected by reduced coal demand by the utilities and the sluggish farm sector but trucking is looking healthier than it has in a while.

 

Automobile and Light Truck Sales – After a slump the sales of cars and trucks jumped back up again. This has been an interesting year for the sector as it has continued to baffle the analysts and in both directions. The first unexpected move was the surge that marked the end of the year. The explanation was basically that people were responding to the big sales and decided to make an auto purchase part of the holiday festivities. Then came the second surprise and the big drop in demand at the start of the year. The learned ones asserted that this was to be expected and the long-awaited decline was now underway as people would not have the same desire to buy. Now comes surprise number three with a big rebound at the very time that most thought the consumer was going to be in limbo. The best that analysts have been able to do with this surge is that it may be related to the “animal spirits” that boosted the stock market and increased overall confidence in the economy. If that is the case the latest indicators suggest that some of that confidence may be eroding and car sales could start to slump again next month.

 

If you have an interest in seeing the entire report (complete with charts and graphs) just drop an e-mail message to me at chris.kuehl@armadaci.com . There are several sections included in the report that we do not have space for in the BIB

 

CCAI/IHEA Continued

New Home Starts – The pace of new home starts is another example of an unexpected burst of enthusiasm. The expectation had been that starts would slow as there had been some slippage as far as permits are concerned. There was also a sense that conditions were not as favorable as they have been for the housing sector. Interest rates have gone up a little but most importantly there has been an increase in the price of homes and that has meant higher down payments. The millennial buyer is still not all that engaged and still leans towards the multi-family unit while the Boomer has been propelling demand for senior and assisted living. Part of what has been helping the home construction sector move forward is that this has been a warmer than normal winter and this has extended the construction season all across the board – everything from private housing to road construction and public sector building.

Steel Consumption – The boost in steel consumption that marked January has eroded and that has implications for both the automotive and construction sectors in the next few months. It can be argued that steel consumption will always precede growth in the areas that needed that steel. The carmakers added to their steel inventory in advance of building more cars and trucks and the construction sector also loaded up in anticipation of needing more in the near future. The fact that consumption is down now would suggest that there may be less output from these sectors in the not distant future. The fact remains that prices are relatively low and demand has not been overwhelming so the steel producers have been reducing their output in hopes of starting some kind of price response. Once demand really begins to pick up that strategy should be bearing fruit but for now the demand is on the weak side.

Industrial Capacity Utilization – The rate of capacity utilization continues to slump but not at a very rapid pace. It looks bad on the chart but it is important to note that the range is very narrow. Almost all the movement in the last year has been between 75.0% and 76.0% – the variation has been in increments. The ideal place for capacity utilization is between 80% and 85% (and I am sure you never knew that). The fact is that we have not been all that close to the bottom range of normal for some time and that indicates that even with the growth we have seen over the last year there remains a lot of slack in the system. As long as that slack is maintained there will be little additional hiring and relatively little investment in new equipment and technology. The fact is that readings between 75% and 76% are not awful, there have been years that capacity utilization has been as low as 65% but that was in the middle of the recession.

Metal Pricing – For the last few months there has been a fair amount of volatility as far as metal pricing is concerned. Aluminum has been climbing pretty steadily on the back of demand from the aerospace sector but copper has been more or less flat with nickel bouncing around with the ups and downs of the steel sector. All of these metal producers have some control over their market and can shift production emphasis from week to week. There are also longer term decisions that will take metals off the market for more extended periods of time and there has been evidence that this has been happening pretty consistently. The fear at some point is that demand will start to spike more consistently and the producers will not be able to gear up fast enough. That is when prices will start to rise and stay high for a while.

PMI New Orders – The PMI has been on a roll for several months and it now appears that it is time for a bit of a breather. These numbers are anything but bad as they remain very close to the high point reached last month. The New Orders index is the more forecast oriented of the measures and has been hovering at the 65.0 level. The little dip seen this month matches the small decline of the overall PMI index as well as many of the other sub-index readings. It would be a mistake to make too much of this reduction as it is coming on top of one of the most robust months in over five years. The overall sense of the PMI is that there remains a lot of confidence in the manufacturing and industrial sectors. The latest data from the PMI’s service index showed more weakness there than in manufacturing. Much of this enthusiasm is still based on expectations and these have started to fade as reality sets in but thus far confidence levels are still high enough to drive growth.

Capital Expenditures – The long drop in capital expenditure numbers has ended but the levels are still very low and the index is barely showing any upward movement. This is something of a good news and bad news month as there has been a small improvement but the emphasis is on the “small”. The levels of expenditure are still towards the bottom of the recent range. The sense is that some companies are starting to get engaged and therefore considering more investment but caution remains the watchword. The bottom line is that business hates uncertainty and lately there has been far too much of that for big spending decisions to be made. Now that Trump White House is facing the reality of working in this political system that sense of uncertainty will become more manifested.

 

 

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.

 

 

No Longer the Iron Man

I know this is just temporary but every so often it feels the world has it in for me. I once took pride in the fact I rarely got sick but this year has been full of maladies that seem to be related to being on far too many flying petri dishes and too many late nights in airports. I have yet another cold albeit a minor one. The problem is that I elected to combine this with a rib strain that was acquired when trying to reach over the arm of my chair and lunging for that last few inches. Again, a minor deal that hardly affects normal walking or other activities. It is when these two combine forces that I am in trouble. Each and every time I sneeze or cough or even attempt to blow my nose the rib sprain makes its presence known with a nice sharp pain.

As I have mentioned before – aging is not for the faint of heart. Those things that once seemed effortless now require…well, effort. My brain still thinks I can do all those things I always did and my body disagrees. I know that the time has come to get really organized and focused on health. I have taken this for granted for too long I am afraid. I read a story of a guy who still runs marathons at 90+. He has always run marathons and in his prime he competed three or four times a month. Now he chooses one or two per year and prepares for them carefully. He also knows that recovery will take far longer than it once did.  I am not quite at the same stage but I am starting to appreciate my limitations!

 

 

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The Biggest Data Point Missed in the Labor Report.  Everybody seemed to miss the U6 figure in the Friday Labor Report. It dipped below 9% for the first time since December of 2007. That’s big news. The U6 unemployment rate fell to 8.9% in March (down sharply from 9.2% the prior month), and the first time in nearly 10 years that this important figure has been below 9%. In fact, this places the U6 number below rates that we saw in the strong economic growth period between 2004-2006.

 

Latest Changes to Q1 GDP Forecast.  The Atlanta Federal Reserve released its latest GDPNOW Q1 forecast and it came in a lot weaker than expected – showing Q1 GDP at just .6%. Although the Atlanta Fed forecast is not the official initial reading of GDP, it does give us an idea of where GDP could come in. At this point in time, GDP is trending at .6% growth in Q1.  That’s commensurate with some of the heavy weather-impacted Q1’s that we saw back in 2013/2014. Given where the Blue Chip Economists estimates are (1.7%), we would anticipate that the official GDP forecast will come in somewhere around 1% – 1.1%.  We typically see the official reading somewhere between the Atlanta estimate and more optimistic Blue Chip forecasts.

 

Services Sector Also Feels “March Swoon”.  The ISM released its services sector report for March, and it showed some generally weaker trends for the month. Employment, new orders, production, and even prices were down. Imports and exports were generally stronger. First, the headline PMI figure was down 2.4 points to 55.2 in March.  Anything over 50 still signals that the sector was in expansion mode, but this was a fairly significant dip in the month. New orders, which we typically equate to predicting next month’s index, were down also by 2.3 points to 58.9.  But, at 58.9, there is still robust activity in the new orders complex.

 

California Drought Officially Over.   California’s Governor has proclaimed that the 5 year intensive drought is officially over. There are still some spot areas of abnormal conditions, but nothing significant like the state has seen for the past several years. Farmers and other citizens in California will still have to be watching some conservation efforts in the state.  Many farmers are reporting that although some water supplies are at 150% of their “standard”, those farms will only get 56% of their water allotment. Officials are still concerned that the drought could return and the state would be right back in the water crisis it just emerged from.

 

 

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Business Intelligene Brief: April 7, 2017

Short Items of Interest – US Economy

 

 

  • Reductions in Recent Job Totals – The parsing and interpretation will now commence as the analysts sift through all the new jobs data to get a read on the economy now. The robust job creation totals that were reported in the first two months of the year have been revised downward a little – turns out there were 38,000 fewer jobs created than originally assumed and the latest number for this month is weaker than expected – only 98,000. The surge in confidence and enthusiasm that had been reported has not had the impact on hiring that was expected and now the sense is that job creation will be slow the rest of the year.

 

  • Is This Low Rate of Hiring All Bad? – The initial response to the weaker than expected job numbers is a collective wringing of hands and some dire warnings that all the recent enthusiasm over the “Trump Bump” was just a mirage. There may some truth in this as these job numbers are worse than anything since the middle of last year. On the other hand this may also signal that the economy is very near full employment. The fact is that many companies would be hiring right now if they could find the people they wanted to hire. The hiring pace is not what many would like it to be but the issue may not be willingness to hire but an acute lack of people worth hiring.

 

  • Reactions Nonetheless – It is way too early to really know the full story behind the latest job numbers but that doesn’t keep the markets from rallying and reacting. There will likely be major shifts in the weeks to come as people assess the data and make more informed decisions. Right now the dollar has weakened a little and treasuries rallied as there are many that have elected to scurry for some haven. It also has to be noted that some of this caution is prompted by the US actions in Syria. There is generally a lot of nervousness in the markets today.

 

 

Short Items of Interest – Global Economy

 

  • Greece Makes Accommodations – It seems so long ago that Greece dominated the financial news. It has been the turn of the British and French and Germans since although Greece still has the same issues it has always had. A new agreement will ensure that Greece continues to get the bailout money it needs. This is as long as the government continues to make changes in the tax system as well as pension reform. The bottom line is that Greece needs to collect more revenue and spend far less on pensions and that means tax hikes and spending cuts – not very popular moves with an electorate.

 

  • Ferment in Latin America – This has been a busy year in Latin America. There has been a series of major national strikes launched by the left against the more pragmatic governments that have taken power in Argentina and Colombia. The Maduro government in Venezuela tried to strip the legislature of its power and that provoked the Mexican President to attack Maduro. The Paraguayan congress was suspended and the left squeaked out a very narrow victory in Ecuador. The angst is omnipresent in the whole region and much of this is attributable to uncertainty over the US and its emerging policies.

 

  • German Economic Growth Barrels On – The German economy is reacting very well to the expansion in the global economy of late. This is not to say that global growth has been all that impressive but it is trending in the right direction. Industrial production in Germany was expected to dip in the last month but instead it rose by 2.2%. The trade surplus has widened in part due to the demand coming from Southeast Asia and South Asia. Exports were up by 3.1% and imports up by 3.7%. Much of what Germany imports is soon turned into other goods and subsequently exported. The unemployment rate in Germany is now lower than it has been since the 1990s and growth is as fast as it has been in over six years. The sluggish growth of the last year has vanished and with all this good economic news the political prospects for Angela Merkel have been improving again.

 

 

 

Latest Labor Data Released Today

By the time you read this the Bureau of Labor Statistics will have released its latest data on the employment situation. There was not expected to be much of a surprise in the release as there have been no significant shifts in the economy that would trigger either a big jump in hiring or layoffs. But there was a big decline in the number of jobs added. The factors that will be under examination will include the extent to which this month continues the pattern of the past few, what the nature of the new jobs might be and how much they pay, where the jobs are being gained and where they are being lost and to what extent there is shift between different BLS categories (from U-6 to U-3 for example).

 

Analysis: Thus far the year has been going pretty well from an employment point of view. There have been about 235,000 jobs added each month and the expectation was that there would be similar numbers this month. There are a couple of factors that might have had an impact on job growth this month however. The data in January and February reflected a more active construction sector that continued to grow through the winter due to the warmer than average temperatures. This boom in construction jobs may start to taper off in March to some degree – partly due to the wetter and stormier weather. Then there is the federal hiring freeze that will limit the growth of government jobs. That will show up over the next few months and could accelerate if there are more layoffs at the government level. This may explain the anemic growth numbers this month – 98,000.

There has been solid wage growth thus far this year – an increase of 2.8% over last year. This is close to the fastest pace seen since the end of the recession (formally) in 2009. This is an indication that the labor market is getting tighter. It would seem that having some 8.5 million people out of work would be enough to hold wages down but that has not been the case. The fact is that most of those who are without jobs right now are essentially unemployable for one reason or another. Many lack the skills needed to land the jobs that are on offer. Others are just in the wrong place at the wrong time and can’t move to where the jobs are. The point is that employers are struggling to find the workers they need and that means they will have to pay more to recruit. The most common method for adding to the workforce these days is poaching some other company for their workers and that generally means that these workers are being offered more money. To keep one’s own worker means they are going to get paid more as well.

One of the readings to pay attention to is the movement of both the U-3 and U-6 measures. We have beaten this issue to death over the years but the difference between these two is significant. The U-3 reading is the most commonly referred to measure of the jobless situation but it has limitations as it doesn’t count those who have given up the formal search for a job (the “discouraged worker”). It also doesn’t count those who are “involuntarily part time”. The U-3 rate now in February was 4.7% but the U-6 rate was 9.2%. If there is an increase as far as U-3 is concerned while the U-6 rate is being reduced this will suggest that more people are getting back into the formal search. The Eurozone unemployment rate is now at 9.5% but the European system more closely matches the U-6 readings in the US and that means that Europe and the US are experiencing about the same levels of unemployment.

In the days and weeks to come there will be more data arriving that will provide more insights. There will be the state by state measurements and it is expected that there will still be big gaps between the low unemployment locations such as North Dakota and Nebraska as compared to the high jobless rates in the southern states and in places like Nevada. There is also the JOLTS report and the data it provides as far as the quit rate is concerned. That rate has been going up steadily since the end of the recession.

 

 

 

Rethinking Minimum Wage

The drive to hike the minimum wage to $15 an hour has started to fade as many political leaders who once supported the idea have started to reverse course. The issue is how the community and the businesses in that community react to the change. The notion behind a hike in the minimum is simple enough – find ways to allow people to make wages that support a decent lifestyle. There have always been two approaches to this problem. The first is for people to gain the skills they need to get a better job and the second is to essentially demand that higher wages be paid. Business reacts very differently to these approaches.

 

Analysis: Many local leaders are confronted with similar reactions from businesses that are required to pay higher wages. There are usually one of three reactions. The most common is that employees are fired as the business tries to keep its labor costs at the same rate as before. This may mean that other workers are required to pick up the slack and it also often means that technology is substituted for the dismissed worker. The gas station attendant is a relic of the past as self-service pumps took over and soon the touch screen will replace the person at the fast food counter. The second reaction is to relocate to a place where the wages are not as high. This is not an option for some local restaurant or retail outlet but it can be for the small manufacturer. The third and most extreme response is to go out of business altogether. The fact is that many small operations have to exist on very narrow margins and sharp increases in the costs of doing business can render an operation unprofitable. It is rarely just the minimum wage hike that puts a company over the edge – it is the combination of higher taxes, regulatory fees and other expenses. At some point one of these will break the camel’s back. The resistance that is now building towards a minimum wage hike should not be construed as opposition to people getting a better income. The shift should be towards preparing people to take the many good jobs that go unfilled month after month. There have been severe job shortages for years in manufacturing, transportation, construction, health care and so on.

 

 

 

Implications

The Trump administration just changed the dynamics of the Syrian civil war in one evening. Several days ago it was revealed that Syrian military personnel used poison gas against civilians in a city that has been a stronghold for the rebels that have been trying to unseat Bashar al-Assad. The gas used is Sarin – one of the deadliest nerve agents in the world. This flagrant violation of every agreement that most nations are party to was shocking and revealed the desperation and depravity of the Syrian regime. There has been a flurry of debates and policy meetings trying to determine what the appropriate response should be. The crucial issue is as it always been. How much of a reaction can there be as long as al-Assad is being supported by the Russian government?

 

Analysis:  The missile strike ordered by Trump was shocking to most observers and analysts. Not because the strike was unwarranted as all agree that al-Assad had gone much too far this time and a strong response was needed. The surprise is that the attack was unilateral and there was no consultation with Russia or anyone else. The missiles were directed at the largest airbase in the country and the one that was used to launch the gas attack. The reaction to the attack says it all. The Syrians asserted that there was extensive damage and many jets destroyed, the Russians said that none of the missiles hit the airfield and that only a couple of older planes were damaged and they were under repair anyway. The Syrians are howling with outrage and Russia is accusing the US of violating international law. Thus far there is no indication that retaliation will be attempted against the US warships that fired the missiles nor against US positions but most analysts expect there will be.

What has changed now that the US has taken such a major step? The most obvious issue is the relationship between Russia and the US. There is no chance now for a combined effort on Syria – the two nations are diametrically opposed now. In truth they always have been on this issue but during the Trump campaign and after it was hinted that the US might be willing to back off from its demands that Bashar al-Assad be removed from power and face war crimes prosecution. Now the Trump team has made it abundantly clear that al-Assad is the enemy and has to be deposed one way or the other. This is not the Russian position.

The second major change is that this signals a direct engagement in Syria by the US. It may be limited to missile attacks and air strikes but the possibility of more exists. It would be extremely awkward to put US troops on the ground in Syria as it is not even clear who the allies for the US might be. The US may engage more heavily in arming those that oppose al-Assad but that runs the risk of arming elements of ISIS as they have been at the forefront as far as attacking the Syrian military.

The third change is that an attack like this one sends a global message. Without warning or consultation the US took direct action against a perceived threat. If this has not been noted by the Chinese and the North Koreans they are being very obtuse. The US has all but promised a unilateral strike at Kim Jong-un and now he has a good idea of what that might look like.

 

 

 

Economic Reactions

The two most immediate reactions were both based on the uncertainty that is expected to follow this attack. The price per barrel of oil shot up but this will be very temporary. Syria is not an oil producer and those states in the region that do produce oil have been overwhelmingly supportive of the strike. The immediate reaction is almost a knee-jerk response to anything that happens in the region. The overall market response has been to seek shelter in “haven” investments while everybody determines what is likely to come next

 

Analysis: This has been a war zone for the better part of a decade and the investment community wrote this off a long time ago. The only issue of real concern now is whether this changes the US position and whether that change will upset the Russians. The US has been at odds with Russia over strategy for years and all this really does is end the flirtation that seemed to be in the offing when Trump came to power. Russia is not likely to risk a reprisal over this but any chance of cooperation is now over. The markets will calm pretty quickly unless there are further attacks and at the moment that seems unlikely as well. The US wanted to fire a warning shot and it has. Bashar al-Assad has been put on notice – again. The economic impact will be limited and of short duration.

The interesting conversation will be the one that might take place between the US and China. Beijing can’t help but notice the act and wonder if this is what is in store for Kim Jong-un. The US has now signaled that it has become more willing to take high risk moves and that shifts the conversation.

 

 

 

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.

 

 

Does Anybody Really Respond to These?

I am half convinced that many of the ads and promotions that I am subject to are being developed by the competitor of the company that is ostensibly running the campaign. I am trying to while away some time at an airport by fiddling with a game of solitaire and am bombarded with intrusive ads that interrupt me. Is this supposed to be compelling? “I couldn’t wait to buy your product because you annoyed me so much”. Then there are the phone calls that sneak through even though I am on that no-call list. Again, when did interrupting and annoying a customer seem like a good idea?

I suppose that people do respond – otherwise these companies wouldn’t engage in this activity. I just wonder what these buyers are like. Do they prefer eating at restaurants where the server flings food in their lap? Do they patronize stores where the sales people try to trip them as the go down the aisle? I tend to shun those who intrude and annoy. If I am in need of something I will look for it and will respond to those that offer friendly and attentive service and solutions. Buy maybe I am weird and the rest of the world likes being smacked in the mouth.

 

 

These are quick summaries of articles that appear 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.

 

To get a FREE TRIAL go to www.armada-intel.com/trial

 

 

Quick Review of Where Jobs Were Created in February.  Most of you know already that 235,000 jobs were created in February, this was well ahead of analyst estimates and we got a January revision that pushed job creation from 227,000 to 238,000. The unemployment rate fell to 4.7% and the U6 (which is what we prefer to watch) moved down to 9.2%. The Labor Force Participation rate remained unchanged at 63%.

 

CBO Report on the American Health Care Act – the Real Story.  To the degree possible, we wanted to try and give you the straight answer as to what the CBO report on the AHCA said – and what it didn’t. Many analysts are going to be fighting for days over the impact of the AHCA with many opinions (both pro and con) being weighed in on the issue. In our own bi-partisan way, we’ll try to offer up some bulleted-takes on what we think is really being said by the CBO.

 

Producer Prices Higher in February.  Core producer prices rose the most in more than 10 months according to the Labor Department today. Prices for final goods rose by .3% in February.  This was slightly lower than the .6% jump we saw in January. For the past 12 months, producer prices have risen about 1.8%.  That’s slightly behind where we think the inflation rate is at 1.9% – but both have been accelerating in the past four months.

 

February Transportation Demand Index Breaks Out.   The transportation demand index for February came in surprisingly strong with the composite figure jumping into the expansion zone at 51.1, a 4.1% improvement over January and a 24.6% improvement over February of 2016.  This was the first time since November of 2016 that the composite was in expansion mode.  The transportation demand index shows whether freight demand is increasing or decreasing across four modes of transportation.  And, since it is an early indicator of broader economic activity, we think it’s a strong barometer for good economic activity happening now.

 

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