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Tuesday, December 04, 2007


NACM report was really bad:

There was a big rise in bankruptcies in the last month. 5.9 for services, and a shocking 7.8 for manufacturing.
The seasonally adjusted Credit Manager’s Index (CMI) fell for the third consecutive month in November, losing 0.7% as both service and manufacturing sector indexes declined. Although the drop was relatively small, all six unfavorable factors components fell, leaving five below the 50 level, indicating economic contraction. “This is the first time that there has ever been more than four components indicating contraction since the inception of the CMI in 2002, and it could well be a harbinger of things to come,” said Daniel North, chief economist with credit insurer Euler Hermes ACI.
Because NACM CMI basically measures interbusiness credit, it is a good indicator of how much damage the "real economy" is taking.

ISM Manufacturing wasn't that hot either. The PMI was 50.8. New orders are good and exports are growing, but employment dropped from 52 to 47.8 in one month. Inventories dropped, so we'd expect some better performance in the months to come. But prices moved from 63 to 67.5, which is a pretty strong indication that inflation will rise or profit margins will decline.

It looks as if manufacturing will need continued growth in overseas orders, but the worry is that other economies the US sells to will be sliding down the same slope. Bloomberg:
The European Commission, the EU's executive agency, last month forecast a 2.2 percent expansion next year, down from estimated growth of 2.6 percent this year. Since then, a measure of European services expansion fell to the lowest in two years in November, while executive and consumer sentiment dropped to a 20- month low.

Factory-gate prices increased 3.3 percent from a year earlier, the most since December 2006, after rising 2.7 percent in September, the EU statistics office in Luxembourg said today. The rate exceeded the 3 percent median forecast in a survey of 29 economists by Bloomberg News.

``With the present information our forecast would have lower figures for growth,'' Almunia said. ``We are facing downside risks for our growth scenario.''
In the meantime, you can follow the slowly snowballing story of government pools that invested in bad paper at Calculated Risk. There will be a lot of these stories coming out as the ratings continue to be cut, and losses must be recognized. This morning we read that Florida's pension fund took a little fling with the same sort of paper that caused the freeze in the municipal money market fund:
The State Board of Administration, manager of $37 billion in short-term assets, including the pool, also oversees the $138 billion Florida Retirement System. The board purchased $3.3 billion of debt whose top ratings were reduced following the collapse of the subprime mortgage market, according to documents obtained by Bloomberg News through an open records request.

Like the hundreds of school districts and towns unable to access $14 billion frozen in the Local Government Investment Pool, Florida's 1.1 million current and retired state workers rely on the board's management to boost returns on the funds that pay their pensions. That has left them vulnerable to the same potential for losses. A state-created home insurer and the treasury are also at risk.
It's less than one percent of the pension fund, although one wonders what else in there will be downgraded.

That Murray Rothbard book on the Depression says that manufacturing always takes a worse hit during crashes than anything else. His idea is that entrepenuers over estimate demand due to the distortions caused by excess liquidity. I wonder how much of that is what we are seeing right now?
Very possible. It's also true that high input costs combined with relatively lighter demand have led to an environment in which the prices of many durables are falling. That's a profit squeeze.
Hello MOM - on exports & mfg. Even bigger than increased exports is import substitution - replacing previously imported product with domestic sources. This is hardly mentioned by the MSM.

For example... a tractor mfg'r buys systems (hydraulics let's say) from a tier one supplier who then buys parts (connectors let's say) from tier two component suppliers... on down.

Even if the tractor is assembled domestically it could have a lot of tier one & two foreign content... this was especially true when the dollar was strong.

Now much of the tier one systems and even tier two components are being re-sourced domestically. I'll be in meetings the rest of the week covering similar issues.

How does this relate to the PMI? If the top level OEMs (like the tractor mfg'r I mentioned) are busy the PMI will be high - even if a lot of the content is foreign. So does that mean the domestic mfg economy is good?

Like wise a slow down in end producer OEM activity evidenced by a declining PMI could be somewhat moderated if they happen to be using more domestic content. Maybe the slow down isn't as bad as the raw number suggests?

Supposedly the PMI folks also query the lower tiers but I don't think they do to the extent the lower tiers produce 'value added'. Something like 70-80% of the COM for an automobile is in the components & sub-assemblies.

The stat's don't tell the whole story going up or going down.

I'm not saying things are 'honky dory' - but I've seen more effort on the part of large OEMs to source domestic lately and the dollar is a big part of it.
dryfly...to what extent do you think the added volumes for the suppliers will require them to buy equipment to add production capacity VS to what extent will they be able to handle the demand with existing equipment and extra shifts, etc?
Dryfly - it's absolutely impossible for some of that not to be happening.

That's why we look at things like metals, etc, to get a feel for how much of that is going on.

So far, I haven't seen the boost in that kind of shipment that I expected. I keep telling myself that it is coming. I hope I'm not wrong about that. I can't believe I am. It seems to be moving more slowly than I had hoped.
Mama, Siggy is referring to a post on his blog that you did on "Women Studies." Do you know off hand which post that is? I would like to read it.

I trust you are doing well.


P.S. Houston Public Radio has chosen one of my essays, "America, My New Home" to read for the program called "This I Believe." I go in on the 11th for a pre-recording. I was very suprised. vj
I hope that service jobs come back to the US also, but I will not hold my breath. There will have to be $ depreciation and shortages of workers overseas with wage increase for that to happen. As well as the economic health of the US either increase or at least not depreciate.

Then there is this headline

U.S. Companies Hired 189,000 in November, ADP Says indicating that hiring is still increasing despite all of the bearish news.
Viola, that is wonderful news!
Mama, do you know off hand what post Siggy was referring to?
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