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Thursday, June 05, 2008

The Oil Drama Continues

As I wrote yesterday, the future of the German expansion is crucial to European growth prospects. German factory orders fall again:
German manufacturing orders unexpectedly declined for a fifth month in April, adding to evidence that growth in Europe's largest economy is slowing.

Orders, adjusted for seasonal swings and inflation, fell 1.8 percent from March, the Economy Ministry in Berlin said today. ... It's the first time since July 1992 that manufacturing orders dropped for five consecutive months. Orders rose 15 percent in the year.
...
``Germany will be hit by the slowdown in neighboring countries,'' said Alexander Koch, an economist at Unicredit Markets and Investment Banking in Munich. ``The euro area and the U.K. account for half of German exports. Still, emerging markets growth will provide a bit of a buffer.''

April is the third month in a row that orders defied economists' expectations of an increase. Foreign orders fell 3.8 percent in the month, while domestic orders gained 0.3 percent. Demand from countries in the euro region declined 5.6 percent and orders from outside the currency area dropped 2.3 percent.
It's stuff like this which is going to push the Euro down. That in turn will tend to make the manufacturers a bit more competitive, but if the overall European economy is allowed to slacken too much, the marginal advantage won't be enough to help. The slump has gained considerable momentum already. The five month decline is significant.

More house price declines in the UK. As for emerging markets, it remains to be seen how well they can sustain expansion with these price increases for basics. The position of the consumer is not so hot in many. Let's take India, for example.

India finally passed a price increase for energy. It was a relatively small increase, and altogether the measures taken only cover about one quarter of the energy companies' deficits. Still, the response was almost savage. The opposing party:
BJP on Wednesday reacted strongly to the government's decision to hike fuel prices, saying a "directionless" UPA has unleashed "economic terror" on the nation.
...
"If the price rise is inevitable then the exit of the Prime Minister and the government is also inevitable," BJP spokesperson Rajeev Pratap Rudy said.
That may in fact be true. There was a 12 hour stoppage in protest in West Bengal. Inflation has reached over 8% in India, and in fact inflation now is outrunning income gains. Some of the major auto companies claim that the fuel hikes will hurt sales. Certainly in the near term the hikes will tend to boost inflation, but by supporting the currency import prices will be cut.

As for initial unemployment claims in the US, there is a noticeable drop in the YoY overages on NSA and SA initial claims and continuing claims. It's difficult to reconcile this with FUT, except perhaps for the differential between small firms (hiring) and big firms (firing) noted in yesterday's ADP release. Because of timing issues, FUT at this period is dominated by the large firms.

It will be interesting to see how the monthly employment report looks tomorrow.

At this point I cannot say that the US economy has bottomed, but there are clearly positive influences controlling the rate of descent. What happens in the long term depends on whether the US does something dumb like imposing carbon taxes or cap and trade (completely insane, especially given the sun's lack of activity), and how other trading partners handle the economic headwinds.

Oil prices should be somewhat restrained going forward now that the Asian countries have begun to cut subsidies. The general trading trend is lower. Of course, one good hurricane in the right place, and speculation will drive the price sharply higher!


Comments:
More anecdotal evidence of a manufacturing shift. A German oilfield equipment manufacturer (customer of ours) has shifted the manufacture of $30 million worth of quite large oilfield equipment to the US. Final destination for the products are the Middle East. Cheaper to use Euros to buy dollars, build it here and ship it than it is to build in Germany and ship. We're seeing more and more of this to the point that some of our larger items are backlogged until 2012.

MC
 
Thanks, I really appreciate the info.

There has to be a lot of this, or shipping - especially metals - wouldn't be so high considering the auto slowdown. Also, services should not be picking up, but a manufacturing expansion in some sectors would explain that handily.

Now if we can just keep the Congress Critters from messing this up...,
 
MoM,

Another part of this is coal.

It's actually cheaper (currency conversions, etc) for SE Asia and Europe to buy US thermal and metallurgical coal in the US and ship it than it is to develop it themselves. Due to a lot of major problems with coal production worldwide, and the state of the dollar, coal is a huge export right now.

MC
 
MoM, how do you figure the recent posts at Salon and Econbrowser factor into this. Essentially the argument is that increased shipping costs are going to have some effect in unwinding outsourcing of manufacturing:

http://www.salon.com/tech/htww/2008/06/06/reverse_globalization/index.html?source=rss&aim=/tech/htww

http://www.econbrowser.com/archives/2008/06/more_on_degloba.html

http://research.cibcwm.com/economic_public/download/smay08.pdf
 
MC - yes, I noticed the pop in coal shipments.

John - it depends on many factors, and shipping costs are among the more minor factors. However in some contexts they are significant.

A far more significant impact is going to be the unwind or cost of the fuel subsidies in Asian economies. Take a look at this Indian article. Mind you, the public increases are set to cover about 1/4th of the cost increases to the energy companies.

The cost of fuel and food subsidies literally has the capacity to force a major change in economic growth ratios. The bind is that if subsidies are continued to keep costs to the public and businesses low, they have a competitive advantage, but the debt is going to drive their currencies down. Since many of these economies are dependent on foreign capital inflows, that is a problem for them. But if they increase public food and fuel costs, labor and product costs must rise.

Also the developed economies are generally more fuel efficient, so now the competitive advantage shifts somewhat back to those countries.
 
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