Not to make too much of one data point, but one of the good things about ISM data is that unlike tomorrow’s employment report, it is final. Whatever numbers the Labor Department reports tomorrow will be revised and re-revised.
Stock traders were mildly encouraged by today’s report from the Institute for Supply Management about November manufacturing trends throughout the United States. The headline composite number was 52.7%. ISM says that 50% differentiates between growth and no growth. On reading the details of the report, it turns out this this PMI headline number is aggregated from five sub-indices: new orders, production, employment, supplier deliveries, and inventories.
What is not included is order backlog. Unfortunately, backlogs have been declining every month for six months. Here is the summary data of the PMI and all the sub-indices.
|MANUFACTURING AT A GLANCE
|Supplier Deliveries||49.9||51.3||-1.4||Faster||From Slowing||1|
|Customers’ Inventories||50.0||43.5||+6.5||Unchanged||From Too Low||1|
|Backlog of Orders||45.0||47.5||-2.5||Contracting||Faster||6|
As you can see, backlogs were reported to be contracting, and doing so faster than the prior month. In that context, note that inventories of respondents have been declining for two months. Prices have also been declining for two months. Also, suppliers are getting goods to these respondents a bit faster than the month before. (Note that there is much more raw data in the linked full report.
All these are consistent with the lead-in to recession.
Not only that, though the PMI was over 50, eight industries were identified as showing growth while nine reported contraction. The PMI and the sub-indices are diffusion measurements (therefore the percentages), so they do not measure the intensity of expansion or contraction. Thus it is possible to be net in contraction with an above-50 PMI if the contracting firms/industries are doing so with greater intensity than the expanding ones.
Some of the regional Fed surveys of manufacturing have shown similar trends, meaning lower backlogs despite order and employment growth. Something is simply not making sense. Backlogs should be up if economic activity is re-accelerating after a brief “soft patch”. At least that’s how I see it.
Exports were up per the chart above. Given the latest data out of the U.K., Europe and China, what is the chance that that trend continues, especially with the dollar having stabilized and even strengthened against a number of its trading partners?
Signs of a coordinated global economic recession are spreading more or less daily. Just today Sir Mervyn King, who heads the Bank of England, indicated that U.K. banks could be facing another credit crisis and urged them to consider building reserves and thus limiting bonuses and dividends.
Here in the U.S., I confess to being befuddled by the pervasive commentary about how strong America’s banks are. Well, relative to many European banks, probably so. But Bank of America stock is below its starting level in 2009 and is for all intents and purposes trading at a multi-decade low. Citigroup is, adjusted for its reverse split, in even weaker shape on the charts. Lordly JPM has a miserable chart as well and is trading at essentially its share price of Jan. 1, 2009. So even though the average stock has done very well since then, the TBTF banks have lagged. As I have been asserting since early 2010, the stock price weakness of the large banking companies is a canary in a coal mine. Something wicked may be this way coming, and the stock market is implying (so I infer) that many assets are not worth anything close to what the companies’ accountants are allowing the CEO to claim they are worth. In a full-fledged recession, in which direction will said already-overvalued assets move? Of course they will lose more value. And given our highly leveraged TBTFs, what good does it serve if they are merely less insanely leveraged than other banks in other parts of the world?
Looking forward, as alluded to in the lede above, indeed this ISM data will be forgotten tomorrow by the traders, but its numbers may well be more significant from a forecasting standpoint.
Industrial and general economic recessions should not mean the end of the world as we know it. Unfortunately, in a system in which “money” is generated by sale of debt, and in which it is now expected that no matter how much worse Federal finances are than Spain’s, intensified deficit spending is a given if a new recession is indeed upon us. (As always, regular readers know that I am hewing to conventional terminology and that I do not believe that the ‘Great Recession’ ever ended.)
As the central banker to the civilized world, the U.S. can get away with a form of chartalism for a long time, I suspect. But the idea that an unending stream of promises to pay can bring prosperity even if “belief” in the Federal debt as being “money good” requires a leap of faith in the wisdom of the taxing and spending habits of the government, no matter how well-intentioned, that may not be well-supported by experience.
A new recession in the U.S. and U.K. despite massively low short-term interest rates below the rate of inflation of most consumer prices may convince people that a new approach should be tried. It could be called free market capitalism.