Posted by: John Gilmore | September 16, 2006

Global Economy Gains Steam?

It appears that anxiety is rising over the stock market in recent days. Financial ‘experts’ are starting to focus on the underlying problems – sky high stock prices compared to plunging earnings, employment continues to deteriorate, September has historically been the worst month for stocks, etc. At the same time, we’ve seen a chorus of mainstream media articles trumpeting a global economic rebound. Headlines today (September 2, 2009) in the Atlanta Journal Constitution and Wall St. Journal (and many others) are touting recent ‘improvements’ in economic data.

I suppose this is why the IMF has revised its 2010 global economic growth forecast to 3% from July’s forecast of 2.5%. You might ask yourself – how can the IMF accurately ‘estimate’ global growth next year? What really caused their forecast to gain .5% over the past month? I have no idea – and I’m not sure anyone else does either. Most likely, someone at the IMF is taking an official dart and throwing it against an official wall labeled with various percentages. Who knows? Regardless, it seems like someone is trying to allay our fears by printing lots of positive economic news.

Let’s take a look at some of the information in the Wall St. Journal article below (front page headline article) and compare it to reality to determine if mainstream media is telling us the truth or ‘spinning’ misleading data.

The article begins:

“Manufacturing gains in the U.S., Europe and Asia added to evidence the global economy is improving at a faster pace than was widely anticipated a few months ago.”

The article is referencing the recent manufacturing activity index that reported a reading of 52.9. What does this really mean? Is manufacturing improving?

Let’s go to Nathan’s Economic Edge (http://www.economicedge.blogspot.com/) for the truth.
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Tuesday, September 1, 2009

Manufacturing ISM INDEX Shows Growth… or Does it?

The Manufacturing ISM index came in at 52.9 for the month of August, that is an increase from 48.9 the month prior, the headlines will shout that’s a 9% growth in manufacturing! LOL, NO, not even close.

Look, Manufacturing fell off a cliff after being in decline for years and years in this country. An index value of 50 indicates that the fall stopped, at least for now, and anything over 50 means that some growth is occurring over the last reporting period, and that’s what this report says. But it’s misleading for what it doesn’t say, and that’s that manufacturing is at such a low level that even cash for clunkers is enough to bump it up for a short time period. But cash for clunkers is now over. Is our manufacturing economy really now growing, and is a 50%+ market rally really pricing in reality?

Here’s Econoday:

Highlights


The ISM’s manufacturing index burst over the dead-even 50 level for the first time since the beginning of the recession, at 52.9 in August vs. 48.9 in July. New orders led the advance, at 64.9 vs. August’s 55.3 and pointing to rising business activity in the months ahead. Production was also very strong in August, at 61.9 for a 4 point gain and pointing to gains in durable goods shipments and total manufacturing sales. Backlogs also increased, at 52.5 vs. 50.0 in July. But manufacturers are not stocking up, instead they continue to draw down inventories where the index is a very weak 34.4 vs. 33.5 in July. Note that future gains in the inventories index, a seeming necessity given rising production needs, will help give the overall index a big boost. Respondents in fact think inventories at their customers’ firms are too low, with the customer inventories down 3.5 points to 39.0. Deliveries slowed substantially, up more than 5 points to indicate that current production needs are stressing what has become a pared down supply chain. Production activity and the gain in orders has yet to boost employment where the index only inched forward to a still sub-50 level of 46.4.


All the strength here is flowing through to prices where the prices paid index jumped 10 points to 65.0, an indication that buyers are bidding up prices for raw materials. No doubt boosted by cash-for-clunkers and gains in transportation, the manufacturing recovery is on the way and together with the gain in the pending home sales index indicate that two key sectors are on the acceleration. Stocks jumped in immediate reaction to today’s 10 o’clock data.

Wow, look at that chart! Heck, we’re right back where we were, right??? This is how misleading these indexes are… they do not reflect reality as they do not show you what is happening to the base.

Compare the chart above to this chart of manufacturing sector output which is also an index value, but one that’s tied to the manufacturing level in the year 1992:

Or to this chart showing manufacturing sector output expressed in yoy percent change:

You see, the charts above are indexed to a base year, but the ISM index number is based to nothing but the period preceding it. Now, which charts more closely show reality???

There is no doubt that the above charts of manufacturing output paint a far truer picture of what’s occurring because the index value has no connection to the base, it’s just plus or minus over time! So, for real meaningful growth to occur, the ISM must be above 50 and stay there for an extended time.

To confirm that hypothesis, one need only look at the shipping indexes which are simply still scary.

We can also look at the number of people employed in manufacturing durable goods, for example, and when we do we find that the United States currently employs about the same number of people for manufacturing as we did back in 1947! Now, you say that’s because we are way more efficient and productive? But remember that it requires people to earn money to buy things. It takes INCOME to service DEBT. The service sector has been growing while the manufacturing sector has been shrinking. Service sector jobs do not pay, on average, as much as manufacturing sector jobs. Yet DEBT had been skyrocketing until just recently. It takes INCOME to service DEBT.

We can also look at durable goods ORDERS and this is expressed in millions of dollars. Here you can see the cliff dive and the recent turn upwards:

So, you must ask yourself if the market is actually pricing in the future, 50%+ priced in already, or is it actually just disconnected from reality?
_______________________________________________________

Let’s look at a couple of other statements from the article below.

“Businesses and households have been regaining confidence, and economists have revised forecasts upward.”

I don’t know about you and what you’re experiencing – but I don’t see anything in the real economy that affects you and me (business sales/revenue, shipping/freight, employment, home prices, home sales, etc.) that would tell me anyone is ‘regaining confidence’. If you own or manage a business – chances are that sales are struggling and your access to credit is diminished – if not gone altogether. If you’ve lost your job – then you know how hard it is to find employment. If you’re selling your home – chances are that your home value has declined significantly and you’re having a tough time finding a buyer. Bottom line – there is nothing in the real economy that would cause me to ‘regain confidence’.

“U.S. auto sales were the best in over a year……”

Why were auto sales the best in over a year? I think it might have something to do with the ‘cash for clunkers’ program – which is now over. I wonder what auto sales are going to do over the next couple of months? It’s probably safe to say that auto sales are going to tank due to all of the sales pulled forward into August due to the program. I’ve also seen where supplies of new cars are very low due to production cuts and the ‘cash for clunkers’ program. Bottom line – we’re going to see a significant drop in auto sales for the remainder of this year.

Moving on……

“……. the National Association of Realtors index of pending home sales hit its highest level in over two years.”

Here’s a very good article from Chris Martenson that explores a problem with current housing information provided by the NAR.
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House Sales and Mortgage Applications – Something Doesn’t Add Up.

Sunday, August 23, 2009, 7:15 pm, by cmartenson

I was not a good father today.

Instead, I engaged in laboriously hand-entering data to satisfy a question that has been bothering me for a while.

The issue that was worrying at me was the apparent discrepancy I’d mentally noted between the happy-happy increase in existing home sales, as reported by the NAR last week, and what I remembered from the MBS mortgage application releases.

But who could be sure?

Perceptions can be tricked and need to be tested and subjected to fact-based inquiry.

Confounding things, the Mortgage Banker Association (MBA) application reports are notorious for changing their reporting methodology, most recently (during the past 3 weeks) dispensing with reporting of an absolute number in favor of a simple percentage change. Where, for example, the number used to change from 1000 to 1100, it is now only reported as having changed +10%.

After a few weeks, who can remember what +10%, -4%, -3%, +12% is supposed to mean? I certainly can’t.

At any rate, this shift to a percentage basis altered a convention that went back several years. Now we only get to read the weekly percentage and yearly changes, without the confusing benefit of an absolute number to guide our perceptions. So for those without the time or the inclination to dig through the data, it is what it is.

For me? The only way to resolve this was to obtain all the base data, hand-enter it into a spreadsheet, and see what was up.

Well, this is what’s up:

Where the NAR recently reported a gain of +5% in existing home sales for July09/July08, the reconstructed MBA report shows a -22% decline in purchase applications over the same period (in stark contrast to their misleading recent release, which spoke of a yr/yr gain, but was actually referring to a blended gain that included the highly volatile refi apps):

Where the MBA most recently said that purchase applications have been “trending up,” I am at a loss to see the period of time to which they are referring. I’ve boxed in 2009 for reference, but it is difficult to make a case for “trending up” unless one decides to begin randomly at some point after March.

Note that the data I have is all seasonally adjusted and straight from the MBA, so I doubt we are referring to different data.

At any rate, I am simply not in a position to believe that purchase applications are down 22% yr/yr while total sales are up 5%+. This would imply that nearly a third of all national sales are cash-on-the-barrel.

Sorry. No way. Somebody here is lying.

Somebody Not At all Reliable. However, I will retain my judgments – for now.
__________________________________________

The next couple of quotes in the article below are nothing short of ridiculous.

“We had been looking for improvement, but the speed at which it’s come and the magnitude with which it has come is surprising,” said J.P. Morgan economist Bruce Kasman. “We all went down hard and we’re all going up pretty well.”


President Barack Obama called the manufacturing data proof “the steps we’ve taken to bring our economy back from the brink are working.”

Our politicians (Republican and Democrat alike) love to grab onto something that appears positive – and then hope that no one actually checks their statements to the truth.

Are we all coming up ‘pretty well’? No. Does the manufacturing data prove that the government’s stimulus packages are working? No. Are Bruce Kasman and President Obama misleading us? Yes.

Here’s probably the most important statement in the entire article:

“One of the largest unknowns is how well the world economy can fare when the huge fiscal and monetary stimulus supplied by many governments, from the U.S. to China, wears off.”

I can tell you now how the world economy is going to fare when the various stimulus plans end. Since these stimulus packages the world over are currently propping up the world’s debt based monetary system (since household/consumer credit is plunging) – we’re going to see some very serious economic declines that will eventually lead to the collapse of the global financial system.

There’s been a lot of talk about China pulling the world out of recession – but here’s the reason the Chinese economy has rebounded and why their stock market is up 30%+ this year.

“China has been pulling out of the global slump more decisively than any other major economy, thanks to an enormous stimulus program.”

China’s banking system has pumped billions of Yuan into their system. Again – this is debt – and will eventually crush their economy – just like ours.

So – the mainstream media spin machine continues on……
__________________________________

SEPTEMBER 2, 2009

Global Economy Gains Steam

Jobs Still a Worry, but Factory Output Rises in U.S., China, France; Markets Falter

Wall St. Journal

By JUSTIN LAHART, ANDREW BATSON and MARCUS WALKER

Manufacturing gains in the U.S., Europe and Asia added to evidence the global economy is improving at a faster pace than was widely anticipated a few months ago.

For the first time since January 2008, an index based on a survey of U.S. manufacturing purchasing managers crossed a threshold indicating factory output grew. Manufacturing activity in China, France and Australia, among other countries, also expanded in August, separate surveys showed. The pace of contraction in Germany and some other nations slowed markedly.

Stocks pulled back Tuesday, but financial markets in much of the world have been rallying in recent months. Businesses and households have been regaining confidence, and economists have revised forecasts upward.

U.S. auto sales were the best in over a year, and the National Association of Realtors index of pending home sales hit its highest level in over two years.

“We had been looking for improvement, but the speed at which it’s come and the magnitude with which it has come is surprising,” said J.P. Morgan economist Bruce Kasman. “We all went down hard and we’re all going up pretty well.”

President Barack Obama called the manufacturing data proof “the steps we’ve taken to bring our economy back from the brink are working.”

The global economy remains far from healthy, and not all signs are positive. New figures Tuesday showed the U.K.’s manufacturing sector contracted in August. Banking sectors in several nations continue to struggle with bad loans, the latest worries being commercial real estate loans made by U.S. banks. Financial stocks led a broad selloff Tuesday that sent the Dow Jones Industrial Average down 185.68 points, or nearly 2%, to 9310.60. Wednesday in Tokyo, the Nikkei was down was down 2.7% early.

The positive mood about the economy could dissipate with some disappointing data. Economists estimate a report on the U.S. labor market Friday will show a rise in the unemployment rate to 9.5% in August from July’s 9.4%. Continued shedding of jobs acts as a drag on consumer spending, the largest factor in the U.S. economy and a major driver of global demand. Acknowledging the continuing high U.S. unemployment, President Obama promised not to “let up until those Americans who are looking for jobs can find them.”

One of the largest unknowns is how well the world economy can fare when the huge fiscal and monetary stimulus supplied by many governments, from the U.S. to China, wears off.

Yet conditions are better than many had anticipated. At the end of July, forecasters polled by research firm Macroeconomic Advisers estimated that the value of goods and services produced by the U.S. economy would grow at a 1.6% annual rate in the current quarter, ending Sept. 30. By last week, that GDP estimate had nearly doubled to 2.9%.

A senior International Monetary Fund economist, Jörg Decressin, said Tuesday that the agency is revising its global growth forecast to just under 3% in 2010, higher than the IMF’s July estimate of 2.5%. The new forecast will be released Oct. 1. J.P. Morgan economists expect the 16 nations that share the euro will grow at nearly a 3% annual rate in the second half of this year. In June, they were predicting just 0.5% growth.

In the U.S., the Institute for Supply Management’s index of purchasing-manager sentiment rose to 52.9 in August from 48.9 in July, crossing the 50 mark that indicates the sector is expanding. A measure tracking new orders rose sharply, with textile mills, paper products, printing-related products and apparel showing particular strength.

Although the recently ended U.S. “cash for clunkers” program boosted auto sales, that wasn’t the whole story. “There’s obviously some impact from changes in the automotive industry,” said Nobert Ore, who oversees the manufacturing survey. “I think probably the business cycle had as much to do with it.”

New economic data show an economic recovery at a faster-than-expected rate. But will it last? WSJ’s Economics Editor David Wessel reports.

International Rectifier Corp., which makes semiconductors, has seen improved demand across the industries that use its product, including computers, aviation and autos. Last week, the company reported that it turned a profit in the quarter ended June 28 after five quarterly losses. The company has noted “encouraging signs of stabilization” in North America and particularly strong demand in China and Taiwan.

At Ace Clearwater Enterprises, a Torrance, Calif., company that makes parts for the aerospace industry, orders are up 26% from the last year. The company employs about 245, almost 100 more than a year ago, and is still hiring. “We’ve been really fortunate,” said Gary Johnson, the company’s vice president. “And a lot of companies have gone out of business, frankly, that are our size.”

China has been pulling out of the global slump more decisively than any other major economy, thanks to an enormous stimulus program. A survey of purchasing managers at Chinese companies, which signaled expansion beginning in March, moved up to 54 in August from 53.3 in July.

Chinese policy makers now face the challenge of sustaining an expansion after withdrawing government support. There are some signs Chinese corporate investment is picking up. BOE Technology Group Co. and a consortium of other Chinese state-owned enterprises said last week they will spend $4.1 billion to build a new liquid-crystal-display factory in Beijing.

Yet investments from nonstate companies have lagged in China, confidence remains fragile, and the initial euphoria over the stimulus has evaporated. The Shanghai stock market fell 23% in August as investors fretted over a slowdown in the pace of bank lending.

Employees work at a Baldor Electric Co. factory in St. Louis. Reports show an upturn manufacturing activity in the U.S. and in several other nations in August, a sign the global recession is winding down.

Although China’s stimulus now seems to be more than strong enough to meet the official target of an 8% expansion for 2009, officials remain publicly cautious about the world economy, with China’s exports still down 22% from last year.

Japan reported an upturn in industrial production earlier this week. It said industrial production in July rose 2.2% from June, the best monthly gain since the global recession hit.

The euro zone’s purchasing managers’ index rose to 14-month high of 48.2 in August, up from 46.3 in July, closing in on the 50 level that would indicate activity has stopped falling. The surveys showed manufacturing in France is growing again, and has nearly steadied in Germany. But in some countries, such as Italy, Spain and Ireland, manufacturing declines continued.

As in the U.S., European businesses have cut inventories so sharply that even a modest revival of demand is likely to lead to increases in production.

Skeptics point to three weakness in Europe’s German-led recovery. Cash-for-clunkers schemes that have propped the auto sector are due to run out in Germany and elsewhere next year. Banks in the euro zone have done less than in the U.S. to write down their losses in the credit crisis, and are cutting back their lending to businesses to repair their capital ratios.

And third, unemployment in Germany, Italy and some other countries is expected to rise further this year and next. Government measures such as short-shift subsidies have delayed layoffs, but many companies are thought likely to cut jobs over the coming year. That in turn could dent consumer confidence and household spending.

In one respect, Europe is less at risk of a double dip than the U.S., say analysts. It has done less to stimulate growth through fiscal and monetary policy than the U.S., so that the withdrawal of stimulus measures will be a less-significant negative.

Britain could lag behind other regions in pulling out of the global recession, given the U.K.’s heavy debts and reliance on the financial-services industry. British consumers are among the most heavily indebted in the developed world, and their downsizing efforts may put a lid on consumer spending.

That has some U.K.-based companies concerned. Last month, drinks maker Diageo PLC, the maker of Johnnie Walker scotch and Guinness stout, said it doesn’t expect a recovery in the alcoholic-beverages industry anytime soon. It issued a lackluster forecast for fiscal year 2010.

—Paul Glader, Neil Shah and Sara Murray contributed to this article.

Write to Justin Lahart at justin.lahart@wsj.com, Andrew Batson at andrew.batson@wsj.com and Marcus Walker at marcus.walker@wsj.com

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