Short Items of Interest—U.S. Economy
Changes in the Supply Chain on the Immediate Horizon
There are several factors that are all conspiring to force significant change in the way that companies handle their supply chain. Some of these changes have been coming for some time, but the pace has been accelerating due to the fact that driver shortages and other capacity issues have reached a crisis point. The average age of a driver is now in the 60s. There are very few young people moving into that field. The recession damaged the economics of the trucking industry and many companies did not survive. This has meant a lot of missing capacity and now that the economy is growing again, there is simply not enough to meet the demand. Add in the higher costs of fuel and there is ample reason for companies to rethink almost everything about how they ship and how often.
Global Economy Threatened
The global system is under simultaneous assault from high oil prices and the new-found strength of the U.S. dollar. One of these would be enough to create challenges in the developing world, but the two together can be crippling. Many of these emerging markets had just started to see real recovery and now they face the double whammy of a rising dollar value that lures investment out of their economies and the higher costs of oil. The U.S. is not affected in a negative way by all this as the dollar has strengthened the import side of the economy. Now that the U.S. is an oil producer in its own right, there’s more money to be made from that oil.
Gains Expected in Housing Data
Last month, the housing data slumped a little and set off some alarm bells. The housing sector is an all-important part of the domestic economy for a whole variety of reasons beyond just the sale of homes and the economic engine that can be. This is where the U.S. consumer stores value. When there is a slump, the consumer starts to react negatively. The expectation is that this week’s data will show a nice little rebound, meaning a healthier summer. This is a crucial time to buy or sell a home as things slow down after the school season starts.
Short Items of Interest—Global Economy
Youth Unemployment and Politics
Europe has been watching this slow-moving crisis for years and it has become that much more urgent. Youth unemployment in Europe is as high as it has been in decades and in some of the southern tier nations, the rate is well above 35%. Those under 30 are simply putting their lives on hold with fewer marriages, fewer careers started and fewer investments in their personal futures. This is a very angry and frustrated group and they are fueling the rise of disaffected populism. The system has failed them and they are turning to increasingly radical ideas on both the left and the right. This usually serves to make the situation even worse, triggering deep angst in the political leadership.
German Immigration Crisis
The Merkel government is desperately calling on the rest of the EU to get engaged in a long-term solution for the immigration issue in Europe. Her own fragile coalition is at stake as the junior partner to the Christian Democrats has taken a very hardline position on the issue and threatens to split from Merkel’s party to team up with the radical AfD. The German patience with the migrants from the Middle East and Africa has been exhausted and it is no longer seen as anything approaching a humanitarian gesture. It has become a cultural threat and a very immediate, political one.
Duque Elected in Colombia
The protégé of former Colombian President Alvaro Uribe has been elected to the post in Colombia, as the majority of the voters expressed frustration that they only had the left or right to choose from. In the end, they decided they could trust Ivan Duque more than the man who was once a guerilla fighter, but there is still concern regarding what lies ahead.
An Even Split for the Indices
This has not exactly been the transition month that many have been suggesting, but it is starting to show some signs of it. Since the start of the year, there have been two questions that have surrounded the tax cut plan—an integral part of the current economic expansion. The first question was whether it was too late to have the desired effect and the second was whether the benefits of the tax cut would outweigh the issues that would be created by the larger debt and deficit issues. The White House continues to assert that there will be growth of over 3% for several quarters and that this will not only propel growth for the year, but also negate the damage of the higher deficits and debt. This very optimistic set of assertions contradicts the assessments of the Congressional Budget Office, the Federal Reserve and the IMF—assessments just made in the past week. These institutions hold that growth will be much more modest, perhaps 2.5% to 2.6%, which doesn’t solve many economic problems. The numbers this month from the CAAI index are showing as many areas of weakness as strength. Five of the index’s indicators are up, while six are down.
The down indicators include New Automobile/Light Truck Sales, but this was a fairly minor slowdown. The bigger story is that this indicator has generally been trending positive, despite the fact there have been factors that should have slowed it by now. The consumer is shrugging off higher prices and borrowing costs, as they are still confident in their job situation and not leveraged to the point they can’t buy. The New Home Starts were down as well and more significant because there have been enough inhibitions to affect at least part of the housing environment. The more expensive homes are still selling, but the less costly starter home is no longer a priority for most builders. There has also been some regional slowing as far as the multifamily housing unit. Steel Consumption has also trailed off since the higher prices are starting to work their way through the manufacturing and construction sectors. The early demand for steel was indicated by those that were trying to beat the price hike and now that these are in, there is a falloff in demand for that higher-priced commodity.
The fourth of the negative indices was capital expenditures—an area that creates some concern for the future. It seems that most of the companies that had a need to buy new gear have done so and there has been a reduction in demand. Until and unless there is demand driving these companies, as opposed to the temporary windfall from the tax cut, there will not be a surge in this category anytime soon. The fifth and sixth downward trending indices were durable goods and factory orders, both reacting to the general slowdown in industrial activity. The tax cuts were a nice sugar high, but now the consumer needs to be in the game more consistently.
The six positive trends are somewhat all over the place. Metal pricing is up, but much of that seems related to the actions regarding the tariffs and trade wars. More significantly, there was a gain in the level of capacity utilization as it creeps closer and closer to the normal levels that signal a reasonably healthy economy—not too fast and not too slow. The national numbers obscure the fact that some sectors are already there and have started to experience the flipside of shortages and bottlenecks. It is assumed that suppliers will allow that state to continue for a while so that they can make up some ground in pricing. Twinned with that is the reading from the PMI New Orders. This has been in the 60s, where it remains, even seeing some recent gain.
The Credit Managers’ Index bounced back from a pretty lousy set of readings last month, showing better numbers in the category of dollar collections. The rest of the index followed the pattern it has seen most of the last year: good numbers as far as the positive readings and weaker numbers in the nonfavorable categories. The transportation index was also performing pretty well, especially as far as the rail and trucking sectors. They did far better than did air cargo or ocean cargo.
New Automobile/Light Truck Sales
The pace of new vehicle sales has not slowed much and continues to baffle analysts. Never mind that analysts appear to be pretty easy to baffle these days. The question is really what has sustained the interest of the buyer in the face of headwinds that would discourage those under most circumstances. At the risk of being another one of those inaccurate analysts, it would appear that the end of this run may actually be in sight. The culprit may be a combination of higher input costs and higher priced car loans as the interest rate hikes at the Fed level start to have an impact.
There is no doubt that higher priced steel will have an impact on the costs of manufacturing, but the carmakers will be reluctant to pass that cost on. They will be more likely to demand that their suppliers take the hit and will pressure the smaller manufacturers to eat the price hike for the time being. The bigger issue will be more costly loans. These will be coming on top of increases in all kinds of other debt that will be hitting consumers, everything from credit cards to those adjustable rate mortgages.
The levels of capital expenditure often parallel the activity as far as capacity usage, but this month there has been a bit of deviation with a dip in cap-ex and a rise in capacity. The rationale for the decline seems to be seasonal to some degree because there is often a slowdown in the manufacturing sector this time of year. The recovery in the last few months has been connected to additional construction activity as well as some reaction to the tax cuts and the extra cash that business has had to work with so far this year. The area where cap-ex has been slow has been in real estate, most notably on the commercial side.
Transportation Activity Index
The Transportation Activity Index report for May was released a little late in the month this time and part of the reason was the fact that data from the rail sector had been weirdly contradictory. The issue was that summer temperatures had arrived earlier than had been expected and forced the utilities to burn far more coal and other fuels than had been anticipated. This threw many of the rail carriers into a temporary crisis since they struggled to get their stock in the right places. The trucking sector continues to boom alongside the suddenly busy rail sector, but the other transportation arenas were not faring quite as well because nobody seems to be in the kind of hurry that fuels demand for air cargo. This is not peak time for ocean shipping either, although those months are getting closer. In short, this turned out to be a business-as-usual month.
New Home Starts
The pace of new home starts has dipped a little, but the overall level has remained relatively high for the past several months. This part of the housing market is far smaller than the existing home sector, which also saw a little dip, yet it has remained reasonably healthy for a market that has been fighting challenges on several fronts. The average price of a home continues to rise and there has not been this kind of price hike since the boom years. The bulk of the activity in the new home category has been in the higher priced sector as the new home buyer is struggling to handle the higher prices in addition to higher mortgage levels. There has been powerful demand in key urban areas, where there has been job growth. These same areas have seen major shortages of construction labor that contributes to the higher prices. The pace of multifamily new construction has faded a little but remains strong in the areas where there has been steady job growth. Demand has also continued for all kinds of multifamily aimed at the aging Baby Boomer, everything from assisted living facilities to straight retirement communities. It is a little distressing that new home activity has fallen off in the middle of the summer since this is traditionally a time for stronger sales when kids are not in school. That is often a more convenient time to move.
The rate of steel consumption was expected to plummet sooner or later—a response to the higher priced steel hitting the market as a result of the ongoing drama over the steel and aluminum tariffs. This has been a ridiculous series of on-again, off-again tariff wars that have strained the patience of manufacturers in the U.S. as well as the allies to the U.S. that are under the rubric of the 232 regulations that supposedly allow the U.S. to impose steel duties when national security is at stake. It is one thing to worry about China (2% of U.S. steel imports) or Russia (8% of steel imports) on national security grounds, but to assess Canada (17% of imports) or the EU (16% of imports) as a national security risk is beyond ludicrous.
The rise in consumption numbers earlier in the year was motivated to a degree by those that were trying to get the steel they needed prior to the price hikes they knew were coming. Now that these increases are in effect, the pace has slowed way down. It will likely continue to do so as the higher prices for steel and aluminum will at some point affect demand and reduce the levels of consumption by either the consumer or others in the business community that need these metals to make intermediate parts. At this point, the tariffs are being imposed across the board, but most expect more negotiation and more volatility as the U.S. tries to extract concessions from those nations that need to sell to the U.S.
Industrial Capacity Utilization
The rate of capacity utilization creeps ever closer to those normal levels that would theoretically stimulate more investment and likely more hiring (assuming there are people who are hirable and have the necessary skills). The preferred position for the measure is between 80% and 85%, although there is considerable variability between sectors. Even now, they are part of the industrial economy that are at that normal level and even into the upper 80s, while other sectors have been below the norm by quite a lot. The presumption is that when the capacity levels are too low, there is too much slack in a given company, making them unwilling to invest in ore capacity—be that machinery or people. Until there is a pull on that capacity, the business chooses not to invest and there is a decision to make. Once the capacity reached 85% or above, there will be bottlenecks and shortages because the capacity is inadequate to demand. On the other hand, that situation allows for higher prices since the customers are facing shortages. The producers will likely exploit that situation for a while until the consumer rebels or a competitor elects to get in and take market share with lower prices. The levels are getting as close to that breaking point as they have been seen in several years.
PMI New Orders
There has been a great deal of attention focused on the data from the Institute for Supply Management lately. It has long been seen as something of a harbinger of things to come, both good and bad. The data from the PMI (and from the Credit Managers’ Index) provide some insight into business activity at the start of the process. There is even more attention focused on the new orders index because these are the future business indicators. The data has been exceptionally good for many months, consistently in the 60s and rarely even dipping into the 50s. This is for an index where anything over 50 is considered expansion and anything under 50 would be considered contraction. The peak was reached a few months ago and there had been a decline for the last few editions of the index. However, that slow decline seems to have reversed this month, with the reading back in the comfortable mid-60s range. This is also the case with the other readings for the index overall and for hiring as well as exports. The PMI is pointing at a very solid economy without a lot of trouble on the horizon.
I never cease to be amazed at the number of ways that people hurt themselves these days. Not that there wasn’t damage inflicted in my tender youth, but today, there seem to be ways that were wholly unfamiliar to those of my generation. Take the cell phone for example. I read of the hundreds and perhaps thousands of people who walk into walls, fall into holes, wander into traffic, all because they can’t seem to look up anymore. I can attest to the fact that people at airports appear to be human versions of a pinball, ricocheting off each other all the way to their destination. Then, there are the accounts of people walking off a cliff to get that perfect selfie. Don’t even get me started with carpal tunnel syndrome or texting thumb.
There are other means by which our modern society conspires against us. There are the GPS systems that insist on having you turn into a lake or ask you to make a U-turn on the interstate. Some home devices are downright diabolical with minds of their own and can trigger trauma. The alarm system that reacts to the cat jumping off the bed with a klaxon blast and a promise to alert the National Guard or the garage door opener seized with a fit of indecision so that it can’t decide if it wants to be open or closed. The list goes on.
Back in the good old days, we had none of these threats. We just cheerfully played on asphalt playgrounds, swinging from solid steel structures. There were the spirited dirt clod fights and, in the winter, the ice balls. Sleds had no apparent means of control and each voyage down the hill was an adventure. This is when I adopted my weekend motto, “If I am not bleeding, I am not having any fun.” Now that I frolic less than I once did, that motto has altered somewhat to, “It’s not a real weekend project unless there is blood.” Over the years, I have fallen through the garage ceiling twice, gashed my leg cutting carpet, slammed my head with a post driver, shot myself with a nail gun (twice) and bashed my hands with every type of hammer known to man. Who needs a stinkin’ cell phone to have fun at the emergency room?