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
Dear Readers! We are happy to report that we have reached our turn-of-the-year funding goal and want to extend a special thank you to all of you who have chipped in. We are very grateful for your support! As a general remark, according to usually well informed circles, exercising the donation button in between funding drives is definitely legal and highly appreciated as well.
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
One Response to “US Economy – on the Verge of Recession?”
Most read in the last 20 days:
- Alan “Bubbles” Greenspan Returns to Gold
Faking It Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets, since every credit instrument is ultimately a claim on some tangible asset. […] The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. — Alan Greenspan, 1961 He was in it for the power and the glory... Alan Greenspan gets presidential bling...
- End of an Era: The Rise and Fall of the Petrodollar System
The Transition “The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or euros. The sooner the better.” Ron Paul A new oil pipeline is built in the Saudi desert... this one is apparently destined for the Ghawar oil field, one of the oldest fields in Saudi Arabia...
- Writing on the Wall
Time to Sell... Maybe BALTIMORE – Yesterday, the S&P 500 hit a new all-time high. And the Dow just hit a new record close as well. If you haven’t sold yet, dear reader, this may be one of the best times ever to do so. It's still flying... sorta. Meet Bill Bonner's tattered crash flag Image credit: fmh We welcome new readers with a simple insight: Markets are contrary, pernicious, and downright untrustworthy. Just when the mob begins to bawl most loudly...
- A Fully Automated Stock Market Blow-Off?
Anecdotal Skepticism vs. Actual Data About one month ago we read that risk parity and volatility targeting funds had record exposure to US equities. It seems unlikely that this has changed – what is likely though is that the exposure of CTAs has in the meantime increased as well, as the recent breakout in the SPX and the Dow Jones Industrial Average to new highs should be delivering the required technical signals. The bots keep buying... Illustration via...
- The Central Planning Virus Mutates
Chopper Pilot Descends on Nippon Readers are probably aware of recent events in Japan, the global laboratory for interventionist experiments. The theories of assorted fiscal and monetary cranks have been implemented in spades for more than a quarter of a century in the country, to appropriately catastrophic effect. Amid stubbornly stagnating economic output, Japan has amassed a debt pile so vast since the bursting of its 1980s asset bubble, it beggars the imagination. A...
- Destination Mars
Asset Price Levitation One of the more preposterous deeds of modern central banking involves creating digital monetary credits from nothing and then using the faux money to purchase stocks. If you’re unfamiliar with this erudite form of monetary policy this may sound rather fantastical. But, in certain economies, this is now standard operating procedure. The “Tokyo Whale” Haruhiko Kuroda explains his asset purchase madness with a few neat little slides. Photo credit:...
- America Has Become a “Parasitocracy”
Dread and Denial So, let’s return to the discussion you can’t have with your congressman, your mailman, or your barmaid. It’s the important one. It concerns what the Fed is really up to. Eight years after achieving independence, a State modeled after the British merchant state was established in the US. It took a while for the Deep State to consolidate itself within it, a process that was accelerated greatly in the run-up to and aftermath of WW I. Illustration by Ana...
- Fat People for Trump!
Alphas and Epsilons BALTIMORE – One of the delights of being an American is that it is so easy to feel superior to your fellow countrymen. All you have to do is stand up straight and smile. Or if you really need an ego boost, just go to a local supermarket. Better yet, go to a supermarket with a Trump poster in the parking lot. The protest vote attractor with the funny hair. Image credit: Liberty Maniacs Trigger warning: In the following ramble, we make fun of...
- Long Term Market Perspectives
Methuselah Tree When looking for a good theme for this post I pondered for a while and then decided to use a picture of a bristlecone pine, which are widely considered to be the oldest living trees in the world. Ye olde bristlecone Photo credit: Kosta Konstantinidis You can find them near the Nevada/California border and if you wind up traveling in the area then I strongly recommend that head over to Bishop and from there head up high up into the White...
- EU Sends Obsolete Industries Mission to China
“Tough Negotiations” The European press informs us that a delegation of EU Commission minions, including Mr. JC Juncker (who according to a euphemistically worded description by one of his critics at the Commission “seems often befuddled and tired, not really quite present”) and European Council president Donald Tusk, has made landfall in Beijing. Their mission was to berate prime minister Li Keqiang over alleged “steel dumping” by China and get him to cease and...
- Gold is not Going to $10,000
One Cannot Trade Based on the Endgame The prices of the metals were down again this week, -$15 in gold and more substantially -$0.57 in silver. Stories continued to circulate this week, hitting even the mainstream media. Apparently gold is going to be priced at $10,000. Jump on the bandwagon now, while it’s still cheap and a bargain at a mere $1,322! All aboard... or maybe not? It all depends on what one wants to achieve – there's many a slip 'twixt the cup and the...
- The Real Reason the “Rich Get Richer”
Time the Taskmaster DUBLIN – “Today’s money,” says economist George Gilder, “tries to cheat time. And you can’t do that.” It may not cheat time, but it cheats far easier marks – consumers, investors, and entrepreneurs. Tempus fugit – every action humans undertake has to take time into account. In the economy, interest rates serve as the signal and regulator of the inter-temporal structure of capital. In an unhampered free market economy, they tell...