It is not a surprise to me that the economy is stagnating, but apparently to everyone else it is. In almost every data report coming in are the words “unexpected” or “surprising.” One wonders why most economists didn’t see it coming. Actually I don’t wonder about it: I know. It is all about economic philosophy. One would think if the data didn’t fit the theory, economists might check their premises, but no, they do not. That is because as conformists they shut their minds to heterodoxy.
What I see is economists focusing on the wrong things. They tend to believe that what I see as “good” things are bad. And conversely, what I see as “bad” are seen as good things. Housing and quantitative easing are the most obvious examples of this phenomenon.
Housing is in bad shape, but falling home prices are a normal and logical response to overproduction. In fact it is necessary for economic recovery. One may wonder why this recession/depression has had such a prolonged duration. The government has done everything they can to stop the decline in prices, all to no effect. Cash For Cracker-boxes were a cruel hoax for those buyers who are now finding their homes worth less than the benefits from the tax credits.
Why do such efforts prolong a crisis?
Because real estate loans have destroyed banks’ balance sheets. This ties up valuable capital in nonproductive assets; it is capital that should be redirected to profitable activities. The sooner housing prices reach a point where there is sufficient demand to absorb this oversupply, the sooner banks will repair their balance sheets and capital will be put to more productive uses. This applies especially to commercial real estate (CRE) which loans are clogging the balance sheets of those banks which service SMEs.
Most economists would have you believe that housing prices need to be propped up to prevent falling asset values, thus boosting consumer net worth and thus stimulate spending. This is another myth. If spending were the key to wealth, then we should all become shopaholics. Instead we should be savers in order to provide the necessary capital for future economic growth. Production is the key to recovery, not spending.
Now we are reaping the direct result of mainstream economics as we see industrial production fall. Every index of production and manufacturing is falling, yet most economists didn’t see it coming. I think most economists would agree with me that this is bad. But I knew this would be the outcome.
April’s industrial production report shows production has been falling since May of 2010:
Today’s ISM Manufacturing report confirms the decline:
This was a 6.9 point drop in the Index. The report also showed that new orders were dropping substantially (10.7) points, and inventories dropped to 48.7 in May from 53.6 in April.
Factory orders fell 1.2 percent in April as a price-fueled 0.6 percent rise for new orders of non-durable goods failed to offset a steep 3.6 percent retreat on the durable side where the monthly declines are wide and deep. Factory shipments fell 0.2 percent to end a recovery-long string of gains. And suddenly the build underway in inventories doesn’t look so great, hinting at unwanted inventory that’s building, not due to anticipation of future demand, but due to lack of current demand. Inventories rose 1.3 percent in the month, right in line with the builds of the prior two months.
Every industrial report from the Federal Reserve regions has dropped.
The latest Chicago Purchasing Managers Index (PMI) dropped 11 points in May. They reported:
New orders fell nearly 13 points to 53.5, still over 50 to indicate an increase compared to April but the weakest reading since September 2009. Growth in backlog orders almost entirely evaporated while inventories surged which may suddenly may indicate an unwanted build tied to slowing activity. Delays in deliveries shortened, which is also consistent with general slowing, while production, at 56.0, is still strong but well down from a run of 70 readings. Prices for raw material inputs, at 78.6 and in contrast to most of the readings, did not slow very much.
It does not surprise me that as demand for raw materials dropped, raw materials prices didn’t drop, which to me is an indication of underlying price inflation. (See, “The Economy Is Sliding Into A Stagflationary Spiral.”)
The Administration is ignoring the data and lying to us about the economy:
Ron Bloom, Mr. Obama’s adviser on manufacturing policy, said the slowdown is largely due to “external factors,” such as disruptions in supply chains caused by the disaster in Japan and the recent run-up in gas prices. “The long-term trend on manufacturing since the bottom of the recession is quite positive, and I think we remain optimistic that manufacturing has a good future,” Mr. Bloom said.
That’s called smiling through your tears as the 2012 it’s-the-economy-stupid election cycle starts up soon. “External factors?” How does he explain the fact that industrial production has been falling for 14 months?
The employment reports are coming in negative in the sense that job growth has declined from “expectations” of economists. Friday will be the day of the “Employment Situation” report from the BLS. The average of the survey of economists by Dow Jones is that unemployment will go down to 8.9%. I’ll bet that it won’t.