Monday, August 10, 2009
Wanted To Make Sure
David asked about NACM, and had earlier commented on incomes. NACM is similar to ISM. The latest reports for both NACM and ISM show manufacturing either on the verge of entering into a growth cycle or soon to get there, but have services falling back. For example, between June and July NACM showed a huge jump in manufacturing credit apps. (For manufacturing, the turn was in May for credit apps.) Conversely, in July there was a small drop in services credit apps and collections. Generally NACM services will follow manufacturing trends in one to two months, but manufacturing was still marginally negative in July. Based on credit apps and collections for manufacturing, one would expect an improvement in services activity by October at the latest. It all depends on whether manufacturing can sustain the current trend and whether declines in consumer spending do not overwhelm the manufacturing growth (when that occurs).
In ISM, the services divergence is more striking, especially when one looks at the detail. Last month's export orders contracted sharply, employment is declining faster, and inventory sentiment, although improved from the prior month, is still quite negative at 62.5 (too high). Further, prices turned and dropped.
Chicago PMI is a nice detailed survey, and in July was pretty consistent with the others. A smaller decline offering future hopes, but continued declines in employment, and lower prices (prices were increasing in manufacturing ISM). The three surveys offer a picture of an economy with slowing business activity in July, but the rate of decline was small enough to offer hope and support to those who are forecasting a return to growth over the next few months.
However, the naysayers are still free to observe that trends in consumer spending and small business appear to be worsening a bit (see the NFIB July report). These are large economic segments, and the sharply negative employment outlook for small businesses combined with their extraordinarily low capital expenditure projections can hardly be considered a positive. The latest figure for actual sales (June) in small businesses matched its prior low in March. Thus, I turn a cold and fishy eye upon the ISM's claim that their manufacturing survey indicates that the economy has been expanding for three months. The only real bright spot in the small business survey is that the one thing they ain't complaining about is credit. Only 6% of firms reported financing and interest rates as their major problem. Most, in fact, were concerned about poor sales.
Now this is where the whole thing gets interesting. Internationally, the major industrialized countries (save for China) show similar trends: improving manufacturing conditions, weak consumer spending, worsening unemployment, falling prices, a growth in business failure loan losses, and weak business investment. Thus, it is doubtful that the US economy will get much help from external buying.
The situation in retail is quite difficult. Many retail ops are still going out of business, light stocking is quite prevalent and seems to be getting worse, and food prices have fallen so hard in the last few months that there will have to be a rebound. Producers will sell under cost in order to get loan payments, but they don't restock and resupply when the prices they receive add up to less than their production cost.
Further, any hint of an economic rebound is tied to significant jumps in oil prices. Consumption is still falling, and stocks are very high, but that means nothing in this environment. This leads me to several conclusions, the primary conclusion being that the Fed really needs to raise interest rates a couple of times before the end of the year. That will knock the stuffing out of what is currently one heck of a bubble. If they don't, I think the chance of another retraction after a few months of growth (when we get there) is nearly 100%.
Next I would like to discuss what I have on retail and what I think it means.
Yes! But I suspect it won't.
Keynesian policies are, indeed, working as they must. Inject money into the economy and economic activity increases -- in all the wrong places.
Why do you see the Fed needing to raise rates later this year? They've been pretty consistent in saying that they are not going to raise rates for the purpose of bursting an isolated bubble. Especially if consumer prices (ex food and energy) are still going nowhere....
raise taxes to slow any bubbles. They will also
count on oil prices to slow the economy before they raise rates.
the Fed is stuck between high nominal energy prices and high interest rates it seems to me.
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