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Wednesday, September 02, 2009

A Very Busy Schedule Today

I'm not sure that I'll have time to get back to this blog although I am very curious to see what CF has to say. He did, after all, correctly predict the supply-indicated oil price a long time ago, which is an impressive feat.

But see the post below from yesterday if you haven't read it, and here is some food for thought.

The first has nothing directly to do with economics, but I think it is great for providing a mental background to our discussion here, and it is interesting regardless. The Shorpy photo blog has a range of early American photos from various periods. If you are inclined to run in circles prophesying doom, I strongly recommend spending some time with it. Those shabby figures from the 1930s dealt with a depression and a world war and then emerged to build the US of the time that we now think of as golden. Generally, the situation of most people has vastly improved. There is always hope.

Regarding the current trajectory - I think we gained enough to emerge to piddling growth over the summer, but I am pretty much in John's frame of mind. Right now we don't seem to have enough velocity built up to navigate the winter without falling back. The ADP employment report shows the trend I have been fearing - that small businesses are slowly going to keep eroding the job basis before bigger businesses gain enough to stabilize employment.

In general, freight from June (rail, trucking, inland water) on showed trends that lead me to believe that we did resume some sort of growth in various sectors. I am still hopeful that we've got a little charge left in the battery, and it would be especially helpful if the cash-for-clunkers dealers got some cash ASAP. That would help them rebuild inventory and send some much-needed impulses through the economy.

However two data points may show why I am so skeptical that we have attained carrying velocity: See Rebecca's (News N Economics, a very good blog) post on industrial production and current levels. Resumption of growth here is great, but rebounds from very low levels may still indicate a gap between obligations and profits that may restrict further investment. In short, we have a capacity mismatch of major proportions, and the probable emergence of supplier and shipping problems poses new concerns for manufacturers. But see her post:


World trade has dropped so far that we have a huge shipping mismatch! The Asian lines are still not able to raise prices enough to make money, and the oil prices aren't helping. In the US, ocean port traffic is still way, way down:
Monthly declines for import cargo volume at major U.S. container ports remain largely down, with total volume expected to come in at 12.3 million containers for 2009—an 18.8 percent annual decline from 2008’s 15.2 million TEU (twenty-foot equivalent units) and the lowest total in seven years since 2002’s 11.6 million TEU—according to the monthly Port Tracker report by IHS Global Insight and the National Retail Federation.
...
NRF Vice President for Supply Chain and Customs Policy Jonathan Gold said in a statement that the national recession has clearly been reflected in the volume of cargo U.S. retailers have imported this year. But he pointed out there is some good news, too, based on the fact that while monthly numbers are still down they should be shifting from double-digit declines to single-digit declines by year’s end.
The YoY improvement is not as great as it sounds, because of course YoY comparisons are going to improve as we start comparing current trends to the period in which trade and shipping was plummeting like a stone. We need to get to YoY improvements!

Also, we now must take into consideration the issuing of people falling off unemployment, an expected slight cut to GDP from the effects of swine flu in the US and trading partners, the slight retraction in Q1 2010 from the effects of double-counting the consumer $400 tax credit, higher gas prices, etc. So more stimulus is needed in some way, shape or form.

Further, the price trends I was discussing for the US yesterday are not limited to us. European negative CPI is dying out more quickly than expected, and the real reason is energy and manufacturing costs. The Asian export situation is not going to improve that much as a result, and it really isn't that good right now. These types of persistent collapses in Indian exports have me in a very cautious frame of mind.

So we have declining volume and the pressing need to raise pricing, as in shipping:
Shippers on the Asia-Europe trade are facing a stunning barrage of general rate increases from carriers on the route, with one line seeking GRI hikes of US$1,275 per TEU between April and September.
The series of rate restoration moves have been coming in hard and fast since April as shipping lines try to find revenue on a trade route that is suffering from a chronic imbalance in supply and demand.
According to data compiled by PR News Service, GRIs being sought on the westbound Asia-Europe route since April will total over $10,000 per TEU by the end of September, with the average per line equating to around $700 a TEU.
...
The financial abyss into which lines have fallen can be seen in the dismal first half results of some of the larger carriers. Average losses in net profit at OOIL, Hanjin and NOL Group were around $300 million, a clear indication of the depth of the problem facing the container shipping industry.
There are two types of costs - fundamental, and monetary-related. We have a fundamental cost adjustment still pending. If adjustment for lowered incomes and lowered borrowing cannot come from price decreases, it must come from final demand.

PS: US petroleum demand (product supplied):


And imports:

We should start to see some sustained demand increase if we can transition to real growth.

Still, we have a remarkable mismatch between demand and stocks (excluding the Strategic Petroleum Reserve):

The situation has gotten pretty bad, with some refineries shutting down. The gap between theprices refineries have to pay and the price for which they can sell is minimal, so the less efficient producers are impaired. This resulted earlier this summer in Singapore shipping fuel supplies being quite short.

Major structural imbalance, Batman! Refining margins have been a problem for several years and continue to be weak. So weak that I do not believe this can continue for long. For a time crude speculators have been cushioned by a growth in refinery capacity and compressed margins, but all such trends have their end.

Comments:
"So we have declining volume and the pressing need to raise pricing, as in shipping:"

While this statement reflects current overcapacity throughout the world in most business segments it also points to underlying issue with modern manufacturing which turns on productivity gains via acquiring the latest equipment and processes.
I am not an economist but years of running a medium size manufacturing business and finally retired from it has made me uneasy about the dogma that new technology creates new jobs etc.
The structural economic patterns created by automated manufacturing an the complex financial,marketing and IT costs that follow have been rationalized
by current economic thinking but the impact has been hidden beneath the surface and what I fear is occurring is not another business or credit cycle downdraft but a fundamental economic breakdown that our data centered economic thinkers have missed.
 
Those shabby figures from the 1930s dealt with a depression and a world war and then emerged to build the US of the time that we now think of as golden.

Amen! My grandfather got married and started farming in 1929. The farm economy of the 1930s was in a similar position to the manufacturing economy now. My generation of the family grew up with his stories. He managed, and so can I.

I also suspect that this crisis isn't going to be as bad as the 30's. They had three coincident crises that occurred starting in 1929:

1) The automobile revolution shifted from exponential to linear growth.

2) A financial and banking crisis

3) A demographic crisis

Presently, we're getting rolling crises. The technology sector probably shifted from exponential to linear growth in 2000, our banking crisis started one or two years ago, and the demographic crisis doesn't really get started until next year or the year after.

Hopefully, that means the overall magnitude of the economic decline won't be as bad. The equity markets do not seem to be following a 1930 course anymore, which is probably good news.
 
"The equity markets do not seem to be following a 1930 course anymore, which is probably good news."

That's a risky little game.

Prefer the Japanese pattern? Wild bear market rallies fueled by stimulus, followed by lower lows, for years and years?
 
MoM, my comment about hitting the plateau and going sideways was based on what I'm seeing with vendors and customers. It has quit getting worse each month, but isn't getting better. There are supply chain disruptions because manufacturers are doing one week a month shutdowns or 4 day weeks or both. Customers are focused on getting more out of existing equipment and less on replacing aging equipment. I expect that to carry through to the end of the year.

Come January, folk will look back at the past year, realize that the up side of the V never happened, and react accordingly, hence another leg down. There's financial reasons too for another leg down, as the second wave of resets hits and as the foreclosures and bankruptcies build from the long-term unemployed.
 
Neill,
I was born in 1933. As a child of
6, I remember the general feelings that things were never going to get better. Then Pearl Harbor came and we were losing the war for the first two years. I remember asking my grandfather if we were going to lose the war. I also remember his answer, "No, we're just catching up. Once we get the weapons to them that our boys need, there's no way we will lose. Our boys are free men and they are fighting for freedom." He was right!

Korea began as I graduated from high school. We were losing there for the first year too. I was in the service for the end of Korea and then Vietnam. All during those years things never looked very rosy. But people kept doing their jobs, building businesses, serving in the military, working for a better life in a free country. During the 70s we experienced high inflation and then in the 80s the Savings and Loan meltdown. All those years -1929 to 1989 it was just one damn thing after another. But the country kept growing, kept moving forward, and life for most people improved.

In 1989, the Berlin Wall came down and the Cold War ended. The period from there to 2000 was unusual; no war, more trade, more progress on many fronts.

The technology bust and 9/11 put us back in a more normal situation. At least from my perspective. It's just one damn thing after another again. But people keep going to work, volunteering for the military, doing the best they can. We're in a rough patch now, but we can make it because we are free people and we know how to do what it takes to get the country moving again. Yes, it's going to take getting some fiscal conservatives in Congress and a business friendly administration. That's going to happen, but it will take time.

The next few years are going to try our souls, but I believe in this country and our people. You have the confidence and determination that we all need.

In 1939 I never would have believed I would see all the improvements in living standards that I have seen. It has been awesome to behold.
 
Jimmy & Neil, that's exactly what I meant by that. I'm not denying that we have new challenges - one of the biggest being a higher ratio of older to younger people - but if we look at the situation then vs the situation now, it's clear that we shouldn't be complaining too much.

Even one of the causes of this downturn (the debt) will be one of the seeds of our resurgence. People saved then, and too many had stopped saving now, and the country will eventually be better off when we figure out that rolling credit card balances are no substitute for a savings account in terms of household finance.
 
Ronald - I don't know quite what to make of manufacturing trends.

They are, of course, power-hungry, so the first thing any country needs to do is ensure that the power supply is ample and cheap. If we are to go to electric cars in the metro areas, then we have an additional need for electricity on top of that.

But automated factories can be incredibly flexible and have lower costs for rapid changes. In general, that flexibility is an economic bonus. It is very capital-intensive.

They also create a chain of service jobs that are well paid.

My concern is more that the US has been infrastructure-averse and manufacturing unfriendly to the point that we have hurt our own ability to compete.

From my perspective, one of the most pressing realities is that at the time the quality of Chinese goods is plummeting, the cost of labor and transport is making them less competitive. One would generally expect that this would shift manufacturing growth away from China, and I still believe this will happen.
 
Ronald - The structural economic patterns created by automated manufacturing an the complex financial,marketing and IT costs that follow have been rationalized
by current economic thinking but the impact has been hidden beneath the surface and what I fear is occurring is not another business or credit cycle downdraft but a fundamental economic breakdown that our data centered economic thinkers have missed.


Could you expand on this? More detail?
 
I'm not qualified to comment on the economic aspects of this blog or the comments to them (makes me a troll I think??), but I am a serious student of American history.

With that I will mention, in an aside to Jimmy J, that he is absolutely right and it goes farther than he mentioned. The U.S. has lost every war it has been engaged in from the revolution to the present---------right up to the point where we won them. Many have observed that we are slow to fight but terrifyingly efficient at it when we are finally aroused. That, and we are wonderful and rapid learners about how to go about that winning. In the end all that's really necessary to win is political support and I think that's the key ro all of our problems as a nation, including economics. It's only when we have half the country trying to throw a wrench in the works that we struggle and, whether from ingnorance, arrogance, or plan (or all three) that's what we are seeing today.
 
Churchill compared the United States to a large steam boiler. Slow to start but a tremendous force once at full pressure.

That said I believe our country has lived beyond it means the last 10 or 15 years, and is not willing at the moment to make the tough choices that need to be made. Energy policy- we need more domestic production. Health care- It's not possible for every man, woman and child to have cutting edge medical care. If you don't believe me get out a pen and paper and do the math.

There's a giant margin call coming and I don't think it works in it's current form.
 
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