US Manufacturing Sector Weakens Further – Alea Iacta Est?
On the first trading day of the year, China’s stock market crumbled, seemingly waylaid by yet another weak manufacturing PMI report and a further slide in the yuan. On the same day, a few Fed members came out affirming that several more rate hikes would be seen in the US this year (such as SF Fed president Williams and Cleveland Fed president Loretta Mester).
Image vie pixabay.com
Meanwhile here is the latest update of the Atlanta Fed’s GDP Now indicator:
The GDP Now model declines to just 0.7%, once again way below the consensus range
When we last mentioned this indicator in passing, it still stood at 1.7% – and that was on December 18! Not long after that, we posted a year-end overview of US manufacturing data with updated charts from our friend Michael Pollaro. This was on December 23, but in the meantime a wealth of additional data has been released, primarily in the form of district surveys and finally the manufacturing ISM release on January 4.
Michael has provided us with a fresh set of charts, showing the evolution of the most important data points of the district surveys as an average and comparing them to the respective National ISM data. In previous updates on manufacturing data, we have mentioned that we see little reason why the trends that have been in motion since early 2015 should reverse. And indeed, they haven’t – on the contrary, they seem to be accelerating.
The most upsetting releases of late have been the Chicago ISM (which contains services as well) and the national ISM released on January 4. Both came in way below already subdued expectations, with the Chicago number falling totally out of bed, posting a headline reading of just 42.9 – well in contraction territory. In the comparison charts below, the ISM manufacturing number is still as of November, but we show the updated ISM chart further below as well
First, the average of the regional manufacturing survey headlines vs. the ISM headline index. Note that the Fed surveys oscillate around the 0 level (expansion above, contraction below), while the 50 level is the equivalent level in the ISM. As you will see, the regional surveys tend to be more volatile and have led ISM in the last recession:
The next chart compares the average of the new order components of the regional surveys with ISM new orders:
Next we look at the regional employment average vs. the ISM employment index:
The next chart compares the regional averages of new and unfilled orders as well as inventories:
The next chart shows the regional averages of new and unfilled orders as well as employment on the same chart. As you can see here, although these data are tracking quite closely, in downturns, unfilled orders tend to slightly lead new orders, while new orders are leading in upturns – employment tends to lag and “catch down” resp. “catch up”, once the other two series enter a strong trend.
The Chicago ISM (headline) is shown separately below and compared to both the national manufacturing and services ISM headline series (the latter again as of November). As noted above, the Chicago ISM is peculiar in that it reflects both manufacturing and services. This was the final release of 2015, and it was quite a disaster:
Chicago ISM headline (red, as of Dec. 2015), vs. ISM manufacturing headline (green, as of Nov. 2015) and ISM services headline (blue, as of Nov. 2015). The decline in the Chicago ISM to less than 43 points took even the bears by surprise – click to enlarge.
Lastly we take a look at the updated National ISM data, this time incorporating the manufacturing ISM release of January 4. Services ISM data are still as of November, but the new release will be published on Wednesday. It will be quite interesting what it looks like, given the weakness in the Chicago ISM headline.
National ISM headline, manufacturing (purple, as of December) and services (blue, as of November). With a reading of 48.5, the national manufacturing ISM headline has declined to a level last seen in January 2009 – at the time the stock market was entering the final leg of its GFC induced collapse, which bottomed in early March of 2009 – click to enlarge.
The next chart shows new orders according to the National ISM:
Finally, here is a comparison of National ISM new manufacturing orders (as of December) vs. the y/y change in Industrial Production (as of November):
Then and Now
On the longer term ISM charts above it can be seen that a similar bout of weakness in 1994/95 did not lead to a recession. Along similar lines, it has been pointed out that weak readings in late 1986 and in the summer of 1998 did not lead to recessions either – however, the latter two instances were followed by stock market crashes (one more severe than the other, but both met with major interventions by the Fed, which was even midwifing a bailout in one of these cases, namely that of LTCM). 1994 saw sizable declines in both stocks and treasury bonds, though nothing that could be termed a crash.
To this we would like to point out that these periods of weakness were all preceded by noticeable monetary policy tightening moves at a time when there still were interest rates. These small downturns are likely best seen as minor malinvestment liquidation squalls, which the Fed was able to very swiftly arrest and easily counteract by cutting interest rates, quickly igniting economic booms again. Debt levels, while already high, were a far cry from today’s monstrous debtberg.
One must also not forget that the GSEs were used in all these previous cases to reliquefy the system by vastly stepping up their purchases of mortgages from banks and the pace of mortgage securitization. Needless to say, that ship has largely sailed.
Moreover, not one of these “soft spots” was preceded by a 115% expansion in the true money supply over the prior seven years – nor were the recovery periods that ushered them in considered “weak” by any stretch of the imagination. Lastly, these periods were accompanied, resp. followed by the integration of the former communist countries into the global market economy, as well as by the economic ascendancy of China and the concomitant enormous surge in global trade. In other words, Panglossian comparisons between today’s situation and these past instances seem spurious.
We clearly live in a much different word since the near systemic collapse of 2008. Banking systems around the world continue to look vulnerable and have largely been kept afloat by central bank interventions on an unprecedented scale – something that is yet to come in some regions. There is no longer a communist bloc waiting to join the capitalist system of production, nor is there another China lying in wait – on the contrary, China is more likely to suffer a bust of its own.
European bank stocks look anything but healthy, having lost 23.5% from their secondary July 2015 peak. All of the gains predicated on Mr. Draghi’s “QE” exercise have been surrendered – click to enlarge.
There is already a burgeoning crisis in the highly capital-intensive commodity producing sector, which is bound to redound on lenders all over the world, whether they invested in bonds or made outright loans. Is is not possible to tell yet how much unsound debt will eventually have to be written off in this sector, but it is likely going to be quite a bit when all is said and done.
Corporate profit growth is weak (or nonexistent, depending on where one looks) and without profit growth, capital accumulation will remain severely impaired. Obviously, we are not referring to “per share” profits artificially boosted by buybacks and dependent on ever greater balance sheet leveraging to fund them.
Finally, it was recently revealed that government data on construction spending have been overstated for much of last year due to a “processing error”, while one of the strong spots in the economy – sub-prime lending boosted car sales – suffered a “surprise bout of weakness” in December as well, with a 5% decline in overall sales coming in well below expectations of a 1-2% decline.
As we already pointed out in our year-end review, the increasing weakness in manufacturing data does not guarantee an imminent recession (it has definitely become more likely though). However, those who argue that the Federal Reserve has only just begun to tighten monetary policy err: the “tapering” and cessation of QE3 was already a tightening move (we estimate roughly equivalent to 75 basis points, based on research done by Fed economists on occasion of QE2). In that sense, we have just seen the equivalent to a fourth rate hike in December, not the first.
Still, one cannot rule out that we might see a few months of fluctuation in which the data temporarily improve again. In that case, the Fed will be tempted to tighten further. This plan would undoubtedly be derailed very quickly by a sizable stock market decline, but we have no yardstick by which to determine when the lagged effects of the previous huge monetary expansion on stock prices will finally wear out.
We also don’t know what threshold in money supply growth must be crossed to bring about a major trend change in stocks – apart from suspecting that it will be higher than in previous cycles. We already have some preliminary evidence that this suspicion will likely turn out to be correct, in the form of weakening market internals. With 490 stocks in the S&P 500 going down last year and the index being held up by the outsized performance of just 10 big cap stocks, something is clearly amiss already.
As a final remark, we are entering an election year in which the incumbent will be replaced. The last two such election years were 2000 and 2008, and they were not particularly kind to the economy or risk assets. This year election-related uncertainties are likely to be higher than normal, with the current front-runners highly controversial candidates, to put it mildly.
Charts by: Atlanta Federal Reserve, Michael Pollaro, BigCharts
It is that time of the year again – our semi-annual funding drive begins today. Give us a little hand in offsetting the costs of running this blog, as advertising revenue alone is insufficient. You can help us reach our modest funding goal by donating either via paypal or bitcoin. Those of you who have made a ton of money based on some of the things we have said in these pages (we actually made a few good calls lately!), please feel free to up your donations accordingly (we are sorry if you have followed one of our bad calls. This is of course your own fault). Other than that, we can only repeat that donations to this site are apt to secure many benefits. These range from sound sleep, to children including you in their songs, to the potential of obtaining privileges in the afterlife (the latter cannot be guaranteed, but it seems highly likely). As always, we are greatly honored by your readership and hope that our special mixture of entertainment and education is adding a little value to your life!
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
One Response to “US Economy – on the Verge of Recession?”
Most read in the last 20 days:
- A Date Which Will Live in Infamy
President Nixon’s Decision to Abandon the Gold Standard Franklin Delano Roosevelt called the Japanese “surprise” attack on the U.S. occupied territory of Hawaii and its naval base Pearl Harbor, “A Date Which Will Live in Infamy.” Similar words should be used for President Nixon’s draconian decision 45 years ago this month that removed America from the last vestiges of the gold standard. Nixon points out where numerous evil speculators were suspected to be...
- Insanity, Oddities and Dark Clouds in Credit-Land
Insanity Rules Bond markets are certainly displaying a lot of enthusiasm at the moment – and it doesn't matter which bonds one looks at, as the famous “hunt for yield” continues to obliterate interest returns across the board like a steamroller. Corporate and government debt have been soaring for years, but investor appetite for such debt has evidently grown even more. The perfect investment for modern times: interest-free risk! Illuustration by Howard...
- News from TINA Land
Distortions and Crazy Ideas We have come across a few articles recently that discuss some of the strategies investors are using or contemplating to use as a result of the market distortions caused by current central bank policies. Readers have no doubt noticed that numerous inter-market correlations seem to have been suspended lately, and that many things are happening that superficially seem to make little sense (e.g. falling junk bond yields while defaults are surging; the yen rising...
- Trump's Tax Plan, Clinton Corruption and Mainstream Media Propaganda
Fake Money, Fake Capital OUZILLY, France – Little change in the markets on Monday. We are in the middle of vacation season. Who wants to think too much about the stock market? Not us! Yesterday, Republican presidential candidate Donald Trump promised to reform the U.S. tax system. This should actually even appeal to supporters of Bernie Sanders: the lowest income groups will be completely exempt from income and capital gains taxes under Trump's plan. We expect to hear...
- The Great Stock Market Swindle
Short Circuited Feedback Loops Finding and filling gaps in the market is one avenue for entrepreneurial success. Obviously, the first to tap into an unmet consumer demand can unlock massive profits. But unless there’s some comparative advantage, competition will quickly commoditize the market and profit margins will decline to just above breakeven. Example of a “commoditized” market – hard-drive storage costs per GB. This is actually the essence of economic...
- An Old Friend Returns
A Rare Apparition An old friend suddenly showed up out of the blue yesterday and I’m not talking about a contributor who had washed out and, after years of ‘working for the man’, decided to return for another whack at beating the market. Instead I am delighted to report that I am looking at a bona fide confirmed VIX sell signal which we haven’t seen for ages here. Hello, old friend. Professor X and Magneto staring each other down in the plastic...
- The Fabian Society and the Gradual Rise of Statist Socialism
The “Third Way” “Stealth, intrigue, subversion, and the deception of never calling socialism by its right name” – George Bernard Shaw An emblem of the Fabian Society: a wolf in sheep's clothing The Brexit referendum has revealed the existence of a deep polarization in British politics. Apart from the public faces of the opposing campaigns, there were however also undisclosed parties with a vested interest which few people have heard about. And...
- Silver is in a Different World
The Lighthouse Problem Measured in gold, the price of the dollar hardly budged this week. It fell less than one tenth of a milligram, from 23.29 to 23.20mg. However, in silver terms, it’s a different story. The dollar became more valuable, rising from 1.58 to 1.61 grams. Who put that bobbing lighthouse there? Image credit: John Lund / Corbis Most people would say that gold went up $6 and silver went down 43 cents. We wonder, if they were on a sinking boat,...
- Retail Snails
Second Half Recovery Dented by “Resurgent Consumer” We normally don't comment in real time on individual economic data releases. Generally we believe it makes more sense to occasionally look at a bigger picture overview, once at least some of the inevitable revisions have been made. The update we posted last week (“US Economy, Something is Not Right”) is an example. Eager consumers storming a store Photo credit: Daniel Acker / Bloomberg We'll make an...
- The Fed’s “Waterloo” Moment
Corrupt and Unsustainable James has been a big help. Trying to get him to sleep at night, we have been telling him fantastic and unbelievable bedtime stories – full of grotesque monsters... evil maniacs... and events that couldn’t possibly be true (catch up here and here). He turned his head until his gaze came to rest on the barred windows of the main building. Finally, he spoke; as far as I was aware these were the first words he had uttered in more than five years....
- Good Money and Bad Money
Confidence Gets a Boost OUZILLY, France – Last week’s U.S. jobs report came in better than expected. Stocks rose to new records. As we laid out recently, a better jobs picture should lead the Fed to raise rates. This should cause canny investors to dump stocks. Canny investors at work (an old, but good one...) Cartoon via Pension Pulse But the stock market paid no attention. It follows logic of its own. Headlines told us that last Friday’s report “boosted...
- Real vs. Nominal Interest Rates
Calculation Problem What is the real interest rate? It is the nominal rate minus the inflation rate. This is a problematic idea. Let’s drill deeper into what they mean by inflation. What to include, and how can it even be added up? Illustration by alekup You can’t add apples and oranges, or so the old expression claims. However, economists insist that you can average the prices of apples, oranges, oil, rent, and a ski trip at St. Moritz. This is despite...