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Monday, January 31, 2011

On The Production Side, Nearly Optimum

Honestly, you can't get much better than this. The Fed should come off its buying program - the real threat here is inflation.

Look at Chicago PMI, and then go to the back page of this release and look at the 40 year minimums, means, medians and maximums. We are way far up on the top side of this.

The reason net growth isn't that strong is that we are working off structural problems, and there is no cure for that but to work them off. We have made progress on household debt loads. We should clear a lot of foreclosures this year, and that has to happen. The government cutbacks have to happen.

Underneath all that, we have a production rebound of the type last seen in the 1983 bump. The slow growth is just because of what went before, and no amount of jimmying with the works is going to change it. From here, meddling will just mess things up.

There is no doubt that incomes, especially in the bottom half, are a real problem. But that will gradually correct on its own. The only thing we could do to improve matters is to make it easier to declare bankruptcy which would accelerate debt writedowns.

I am preparing a data dump of why I think this. Unfortunately, it is somewhat technical and it will be long. But overall I think there are pretty positive implications.

Inflation in China, India and Europe (December 2.4) show that the constriction is going to be from inflation.

2011 marks the five-year point in the recession - and at five years, you start to see constructive recovery even in depressions. In all honesty, the underlying mechanics in this are much more like a depression than anything else. Thus time is now on our side. However inflation trends are not. If you look at the back page of the Chicago PMI report, January prices paid are at 81.7, and the maximum through 2000-2010 was 87.1. This is too close for comfort if it continues.

It's notable that buying policy for MRO (Maintenance, Repair, Operations) Supplies and Capital Equipment plummeted in January. The tax expensing provision was extended through 2011, but the extension occurred at the last minute and there may be a noticeable 2011 effect.

Employment at 64.1 is quite close to the 40 year maximum of 67.4.

Paradoxically, being this far to the high side means that an inflation/margin induced slowdown is more likely. These numbers would tend to suggest that the contractionary cycle for production is past and that ramp ups will cost increasingly more. At this stage in recoveries, many companies become quite sensitive to margin impairments, because they can get in a cash squeeze very easily. Thus, they may choose to ramp production down for the maximum margin rather than increase production if costs seem uncontrollable and variable. The first indications of that squeeze are showing up in the Manufacturing section of NACM's most recent (December 30th).

I should have the data dump up tomorrow.

comparing 40 year data points is interesting but generating or making assumptions about future or today's business trends based on these data points seems a stretch given industry consolation,and productivity over the past 40 years. The main takeaway I get from the report is the business volume seems to be export driven along with higher input prices and the continued deterioration of the local RE market. Local RE usually reflects employment which indicates to me that RE is either expensive, overbuilt or both relative to the local employment base.
Without certainty in energy price trends any
Recovery will be timid. Demographics and
Tax and trade policies are also strong headwinds.
"A majority of House Republicans are taking aim at decreasing federal funding for reproductive health by changing the definition of rape in a newly-filed bill."
The bill introduced by Rep. Chris Smith (R-NJ) was the second major piece of legislation filed by the Republicans after its attempt to repeal "The Affordable Care Act." Speaker of the House John Boehner (R-OH) hailed Smith's bill as "one of our highest legislative priorities."

The Republicans and the Tea Party are off again on a social agenda far removed from its aim to reduce the Federal lard. This will remove hope that many including myself have that the Tea Party was something beyond guns/and abortion.
Guess not.

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