Submitted by Jeffrey Snider – Alhambra Investment Partners
With the release of retail sales, the estimates for inventory across the whole supply chain are completed for December. The inventory-to-sales ratio for total business rose yet again to 1.39; the last time the series was that out of balance was May 2009, a ratio higher than what was registered in October 2008. The ratio for the manufacturing level surged to 1.38 from 1.35 in November, as sales declined quite sharply (by almost $7 billion SA). The inventory imbalance in retail was also the highest since May 2009. If jobs are truly the measure of economic growth through consumerism, they are truly absent here.
The inventory imbalance throughout 2015 was nothing like we have ever seen under similar circumstances of production volume and sales. In terms of manufacturing, this “manufacturing recession” already resembles in many important aspects the dot-com recession. It is entirely different in terms of inventory, though, which can only mean serious trouble.
In terms of just manufacturing alone, sales have fallen (on a seasonally-adjusted basis) for seventeen months and are down more than 8% since the July 2014 peak. The sales estimate for December was equivalent to November 2011, a stark appraisal that suggests also the scale of the contraction. On a cumulative CY/CY basis, total sales in 2015 were $258 billion less than 2014; $5.738 trillion vs. $5.996 trillion. It is inarguably a sustained and significant decline in manufacturing even if inventory continues to pile up.
By comparison, manufacturing sales fell by a little more than 10% before and during the dot-com recession, spanning only 14 months total peak to trough. Since inventory levels were also adjusting in the same direction then, that was the extent of the decline. By the middle of 2002, both sales and inventory were back on the cyclical upswing though very slowly at first (until housing mania kicked in).
Despite the similar magnitude and extent of the manufacturing recession so far when compared to the dot-com recession effects in the supply chain, the BLS instead estimates far different employment conditions. At cycle peak for manufacturing sales in September 2000, the employment statistics show 17.2 million manufacturing jobs. Because of the broad and sustained decline in manufacturing sales, manufacturing businesses, as you would expect, cut 1.4 million employees over those fourteen months.
By contrast, the current employment estimates show that manufacturing jobs have somehow gained slightly, by 167k across the last seventeen months of the “rising dollar” and manufacturing recession. There is no readily apparent reason, other than statistical modeling, why that should be. We might not expect the same level of drastic reductions as 2001, but you would be entirely reasonable in assuming something much different than slightly positive.
As if the drastic inventory imbalance were not enough, nor the obvious recession in manufacturing (even seasonally-adjusted), the employment statistics bear no resemblance to even the individual industry they are supposed to cover. The fact that manufacturing sales and inventories would seem to invalidate the BLS’s estimate for at least the manufacturing industry doesn’t necessarily transfer the questionable basis to the entire payroll framework, but the fact that they are all constructed using the same assumptions (especially trend-cycle) raises quite sensible doubts as to what the BLS is actually modeling for the whole economy. There wouldn’t be any productivity for all those employees.
In other words, in February 2016 everyone including the most fervent optimists and believers in the monetary miracle will admit that manufacturing is under significant and likely recessionary strain; everyone except the BLS. Again, it is entirely reasonable to assume if the BLS is so highly overstating (and the degree is certainly debatable) in manufacturing it might very well be doing similarly in other economic segments and industries if not all of them. As with retail sales and almost every other economic account, that is the most logical explanation. It just doesn’t pass muster that job growth is uncannily awesome but somehow leads instead to the spending and production figures we see broadly disappointing and alarming everywhere else.
The concern is actually greatest still in manufacturing because of the inventory; and rising inventory, especially to this degree, is an unmistakable sign of consumer problems. Sales, orders, production volumes have all declined and have steadily declined for now almost a year and a half – and still the inventory imbalance gains. It is simply unprecedented, which may be why the labor statistics are showing so much bias. The jobs numbers just don’t hold up and therefore will be less than useless, as they were last year, in trying to project the immediate and intermediate economic future.