Note: This post is largely about the future of domestic demand curves in the US. However, to understand just how wretchedly the global economy is doing, take a look at the latest round of Markit PMIs, and Germany's manufacturing PMI for July. Pay some attention to the far Asian numbers, because those have started running in tandem with the exception of Indonesia, which benefits from Japanese energy problems and Chinese outsourcing. This is now a global downturn with some epic staying power. The cure can only come from lower prices adjusting final demand upward, and lower prices won't be that quick to appear. India's power problems are going to affect their current-quarter production and GDP negatively, and the monsoon isn't that great either. End note
Take a look at two CMIs. This one is from July 2008
. This one is July 2012
The first table in each release is for combined manufacturing and services. The table for the 2008 version goes from July 2007 to July 2008. We moved into recession sometime between August and October of 2007, but of course it wasn't apparent till later. It never is. The official date is December 2007.
The takeaway here is that the numbers for July 2012 are considerably worse than they were for July 2007. Of particular concern are the unfavorables, which are now in contraction and have shown a nasty, determined five month slide. The reason why this is of concern is that when collections continue to drop like this, eventually credit-granting strategies have to tighten. When that happens, abruptly you find yourself on the chute in the economic game of Chutes and Ladders.
Now July 2011 and August 2011 are very, very similar to the current period, but this is not comforting. Last year these numbers were strongly affected by the manufacturing supply constraints from the Japanese tsunami disaster, and WE KNEW THERE WOULD BE A FALL UPTICK. No such structural uptick is in the cards this year.
Services are slightly worse this year than they were in July of next year. Services are significantly worse than in July of 2007.
I'm not saying that we are crashing, but the economy appears to have very little momentum.
The reason why this matters so much is because of the economic season of the year. Those are roughly:
Ding: Jan 17-20th through April 17-19th. Consumers get the bill for Bling spending.
Major positives: COLA adjustments for federal benefits, tax refunds.
Major negatives: Consumers get the bill for holiday spending. They have to pay it off. This is a tighten your belt, get through the economic winter season.
Major variables: Weather, fuel costs for the north, tax policy. This year the economy got nearly half a percentage point of additional GDP from a mild winter.
Bring: April 19th through July 12th: What do we bring to the economic table?
Major positives: Construction, summer hiring, autos (usually), Easter (spring break), farming.
Major negatives: Depending on the prior months, consumers may still be trying to recover their financial health. Spending can be very tight in this interval if consumers aren't flush. Gas costs have a disproportionate impact. Schools let out and while summer hiring creates cash flows, the huge number of education employees have tightened cash flows (many on unemployment).
Major variables: Weather, prior fuel costs and prior weather move consumer bank balances by hundreds of dollars either way, auto production, truck production. Home construction/remodelling is a huge, huge one. Bring sets up the rest of the year. Consumers and businesses either get their legs under them or they don't. AC costs for much of the south are a real factor, so southern heat waves constrain other spending.
Ring: July 13th/14th through October 19th: The biggest retail dice toss of the year. This can either be quite solid or very sparse, and sales early in the season have a lot to do with how stores stock later. Retail cash flows are very important predictors of activity in the next season.
Major positives: Back to school, vacation spending, harvest payments may send money through the midwest.
Major negatives: There shouldn't be major negatives. On occasion untoward events will throw a spanner in the works. Hurricanes, drought, etc can really move numbers in this season if they affect waves of production in farming/energy.
Major variables: Auto production scheduling. Stocking for retail. Gas/diesel/heating oil prices.
Bling: October 20th - Jan 17th. We throw a spending party with whatever money/credit we have.
Major positives: Holiday spending! It starts with Halloween and just doesn't quit.
Major negatives: Weather can be a factor, but generally not.
Major variables: Expected consumer winter heating costs, consumer experienced inflation in prior months, retail balance sheets at the end of Ring, autos! Auto production schedules can vary a lot depending on inventory.
So, where we are now is that Bring went quite badly, and we aren't starting Ring very well. Retail stocking is still pretty good, but probably trending down. There are ominous signs that inventories are beginning to back up a bit, (also in manufacturing
), and that back-to-school spending won't be that good. Retail indicators are poor. Company profit margins are pressured. It is likely that small service businesses are beginning to crack.
Last year we knew we would get a boost from the adaptation and rebound out of the Japanese supply chain crunch. This year we do not get that boost, and worse - there is huge economic uncertainty because of pending tax policy and regime changes. The economic uncertainty has got to be worrying companies hugely. The Euro shock
is real and it is apparent that manufacturing is going to be much less of an add than it has been in the last few years, and housing spending hasn't picked up enough to compensate.
The good part is that companies are mostly running tight already, so you don't expect a big axe to slash fat. And the downturn, while real, is kind of a measured slow response. Real GDP didn't slacken much, once you adjust for weather effect, from Q1 to Q2.
The really bad part is that autos and truck production can't increase too much more and almost certainly must slacken. We are very close to a diffusion of the early stages of a very slow consumer recession into manufacturing, which will then turn around and kick the consumer recession faster along the road.
Food prices are a very negative indicator for Bling of 2012.
Any fantasy that the Fed can influence outcomes much is astounding in its disconnect from reality. All of the influences here are either stemming from different countries or purely Main Street. Congress could do something to juice up the consumer economy. The Fed cannot.