Submitted by Jeffrey Snider – Alhambra Investment Partners
In the manufacturing sector we find the most supreme test of economic credentials. Despite what is clearly taking place, the mainstream, orthodox outlook and assessment continues to dominate. There isn’t any doubt anymore about the manufacturing sector, as recession not only is broad enough there on its own it continues to deepen and darken. Yet, because Janet Yellen declared the US economy close to “overheating” by initiating a rate increase, there remains all sorts of confusion about how this contradiction could occur.
It stands to no reason that an overheating economy would be so incredibly weak in the one segment that should be most visibly revivifying. If American economic fortunes were so bright, there is no reason to suggest that Americans would not be buying as much as “stuff” as they possibly could. Frugality is not a current consumer trait, and the fact that the savings rate may be closer to 5.5% rather than 10.5% as it once was suggests that hasn’t been instituted out of anything more than necessity.
So the December ISM is reported today at a worse rate than any other since the Great Recession, with a clear downward trend extending all the way back into 2014. But for the media and economists, it has to be “something else” because there is no way, apparently, Janet Yellen would claim “overheating” where there clearly is none.
Manufacturing in the U.S. contracted in December at the fastest pace in more than six years as factories, hobbled by sluggish global growth, cut staff at the end of 2015…
Struggling overseas demand and declines in commodity prices that are hurting investment in energy and agriculture continue to limit orders for American manufacturers. At the same time, robust domestic growth buoyed by labor-market momentum and burgeoning wage gains are supporting consumers’ spending power and preventing U.S. factory activity from slowing even more.
It’s easy to point to everywhere else and suggest that as the cause of so much inconsistency and worry. There is the clear decline in economies overseas as well as the dollar, no longer strong, that supposedly makes the export economy and only the export economy so much worse. As the second quoted paragraph above implies, the economy would be in recession if it weren’t so robust. It’s just these kinds of absurdities that are “required” to maintain the view of overheating against what is clearly a manufacturing problem of recessionary (economy-wide) proportions.
Fortunately, the ISM itself (for what it may be worth, PMI and all) provides various subcomponents that speak to these individual circumstances. The export subindex, for instance, actually increased to 51 in the latest reading from 47.5 in November. Almost nobody expects that rebound to last, but it does at least allude to questions as to the “it’s all overseas” explanation. The prices paid component, however, sunk to Great Recession-type levels of contraction, hitting an astoundingly low 33.5 in December for the 14th straight sub-50 estimate.
That is such a low reading that the only other periods at or below 34 were all recessions except 1998 and the Asian flu. Incidentally, that was another very similar kind of episode in at least how the mainstream interpretations align with what “should” be taking place. In other words, then as now, weakness was believed to be entirely a foreign phenomenon with a robust (bubbly) US economy weathering (for a short time) what turned into a serious slowdown.
Even the ISM Manufacturing PMI, however, shows the difference then and now. While the mainstream wishes this current manufacturing slump as completely export-driven, it is imports where it all falls apart. The import subindex has dropped to nearly 45 and conspicuously what looks far too much like the past two recessions.
If there is robust US demand, as overheating demands, it is entirely absent from the one place it would inarguably show up – especially with the dollar creating every price incentive in orthodox theory to combine with all the purported job growth, there really should be something representative of the largest import surge in perhaps American history in these economic factors and accounts. Instead, import demand and trade activity (including freight and transportation) up and down suggests the dollar has had no accretive impact, none, leaving payroll expansion as yet again tellingly hollow. These figures from the ISM match the trade estimates from the US Census Bureau which likewise features an obvious dearth of US consumer demand.
Of course, that observation can be inferred if not directly observed from the very overseas weakness in question. The listlessness in those locations is really easily traced to this lack of demand from the US in the first place. In that respect, US manufacturing and foreign export economies are on the same level; they are both falling apart due to the lack of demand globally, a trend to which US consumers clearly belong.
To claim, “robust domestic growth buoyed by labor-market momentum and burgeoning wage gains are supporting consumers’ spending power” just isn’t supported anywhere except Janet Yellen’s proclamations about an unemployment rate that is of dubious value (which the Fed itself admits). In fact, in this specific case of the ISM, it isn’t even supported by the full coverage of the very index itself. If export activity is in great danger at 51 than US import activity is far, far more so sinking to 45 and still no end in sight. It’s not just that this lacks the clear and evident traits of overheating, it actually presents compelling evidence for full economic recession.
If manufacturing here and worldwide is actually heading into recession, there is no, nor can there be any, robust US consumer acting in complete and unrelated isolation. To suggest otherwise places an undue emphasis on the economic prowess of economists and policymakers that have shown nothing but the reverse of competence for at least the whole of the 21st century. Unfortunately, that statement applies not just to 2008 but, lest we forget, 2015.