So let us look at US manufacturing new order data, at first in terms of the frame, which bounced back on a monthly basis in April:
We can see from the following chart that annualised real growth rates over rolling 10 year time frames (using new order data adjusted for PPI and smoothed) have been heading downwards since the start of the decade. The real annualised rate of growth over rolling 10 year time frames shows that the current cycle is much weaker than the pre 2008 cycle.
We can see the step down in growth more easily if we just view the high water mark dynamics (which ignores the current index level if it remains below the HWM).
In reality given the declines in flows since 2014, new orders for manufacturing adjusted for the PPI stand below levels reached at the end of the 1990s, and yet, here we are all worried about the risk of recession when the risk of something far greater has already occurred. Tied into the frame is the key dynamic of global rebalancing: cheap labour in emerging/developing economies had offshored a significant amount of manufacturing output from the late 1990s onwards (the weak order data partly reflects this) and the expected maturing of developing economies consumers and rising wage costs was anticipated by many to create a rebalancing of global economies. This is presently at risk a) due to the time frame of transition being longer than many expect and b) given that technology is driving out labour in key industries.
And in the next chart we see nominal annualised rates for new orders over rolling 10 year time frames: clearly the structure and balance and dynamics of the US economy and the attendant global economic dynamics are unable to support the type of growth the economy had experienced in post WWII years. The primary issue we are facing today is not one of a prospective recession but of a weakening frame:
The US ISM Manufacturing PMI ticked up marginally today indicating slightly stronger manufacturing activity. The change was small from 50.8 to 51.3. While output and new order indicators fell, employment remained the same and inventories declined slightly, supplier deliveries slowed at the fastest pace for some time. The month on month change in supplier deliveries was 10.2%, only bettered on 5 occasions over the last 35 years.
But supplier deliveries tend to lag new orders and we also know that new manufacturing orders fell significantly in late 2015 and have since bounced back (data in the chart below is to March 2016).
The bounce in supplier deliveries look to be related to the bounce back in PMI new order indicator starting in late 2015 and we can see this lag here:
The bounce in new order data was also the strongest since the recession ended and is usually associated with cyclical turning points.
But, with the continued slowdown in global manufacturing PMIs and weakness in the ISM’s other PMI components as well as weakness in readings from Markit’s own indicator I would not be too upbeat about any possible signal. We appear to be stuck in a slowing growth trend market by downs and gradually weakening ups!
US durable goods order data out yesterday suggested a strong rebound in new orders in April led principally by transportation orders. But I am not going to talk about the new data (at least until I get the full manufacturing new order data set due shortly), I want to talk about the difference between the new and the old order data:
Data to March 2016 had been revised down by some 2% for manufacturing orders and the rate of revision was similar for both durable and non durable goods.
However the wider picture shows that transportation, in particular motor vehicles and parts orders showed significant upward revisions:
On the other side of the variance we see non defence capital goods excluding aircraft, computers and electronic goods and primary metals heavily negatively revised:
The picture confirms the relative strength we have seen in auto led consumer credit growth on the one hand and weakness in exports and capital expenditure on the other.
Nominal retail sales data is typical of a recessionary environment, but much of this is due to declining gas prices. Manufacturing output and new order data is also typical of recessionary conditions. Motor vehicles and parts sales/new orders/output are still strong data points albeit showing signs of weakening, especially in the auto components. Cycle to cycle we see retail sales, orders and output all failing to establish a clear positive post crisis fundamental growth trajectory. That said there does not appear to any abrupt collapse in the data which is not necessarily a positive.
There are some interesting patterns and trends in US data: so I do ask myself, are we at the peak of the current cycle, are we as far as debt and low interest rates can take us?
US income growth has long been acknowledged to have weakened considerably yet recent data shows that the trend has indeed been weaker than first thought. Note the following chart showing pre and post revisions to chained per capita personal disposable income:
After a strong mid 2014 new orders had fallen heavily with nominal order data especially hard hit. After an initial slide the trend seems to be levelling out, but levelling out is not what the economy needs.
Long term, the order profile is flat if we adjust for prices – note I have adjusted for producer prices not order prices, although over time I expect little difference.
Annual growth rates have taken a punch to the gut, but if we adjust for monthly variance and producer prices we find that the downturn is less marked, although not necessarily insignificant:
What I do find interesting, and which backs up my thoughts re last summer’s surge in activity, is the fact that the rise in activity towards the middle of last year is more or less reflected in the downturn in the early part of this year. This pattern comes about after adjusting for PPI and basing % changes on rolling 6 month average data to arrive at a better fix of actual capacity and order flow:
Motor vehicles and parts seems to be the notable exception, but I do have concerns over debt financing and weak income growth.
Yep the employment numbers looked reasonable but we are going to have to see better wage growth going forward and much less reliance on consumer credit if we are to believe that the economy is no longer skating on thin ice:
Motor vehicles and parts new orders have kept on rising:
But non revolving debt is growing at its hottest pace since 2000/2001
And as a % of disposable income, much higher:
And relative to income growth, well, historically high levels again:
I just do not feel comfortable with these kinds of fundamentals underpinning growth expectations.
The latest batch of Markit PMIs as noted show a 14 month low in global expansion. This contrasts with some confidence in a number of quarters with respect to US economic momentum in the light of “strong” Q3 GDP and recent gains in employment. I have commented on the GDP and employment frames in earlier posts which suggests that less focus should be placed on monthly data and more on structural imbalances and trends.
That said recent manufacturing order data may be suggestive of a slowdown from the elevated figures seen earlier in the summer. While this may not signal a downturn it does raise questions over the underlying strength of growth going forward:
The US economy lies somewhere between boom and bust as shown by the following graphical representation of real GDP growth. Nevertheless, there are aspects of US economic growth that have boom type characteristics/risks; these are found primarily in the significant increases in auto focussed consumer credit and automotive production/capacity
Short term data has varied wildly of late; such can often obscure the underlying trend: what if we adjust for inventories and changes in consumer credit? Well we see less noise for one, but we also see a slower underlying growth profile – yes, credit creation is part and parcel of growing expenditure but I still feel we are in a high debt/deleveraging and weak income growth dynamic that needs to be especially sensitive to growth in credit/debt.
Total new manufacturing orders rose 1.56% in February following declines in January (1.03%) and December (2%). Orders are 0.6% below February 2013 levels. The bigger picture is of the course the more worrying:
And the bigger picture is that historically declines in orders have always been accompanied by declines in the Federal Funds Rate. I will not need to go too far into the fact that rates have not risen as they usually do. So why is the Fed tapering? Well, while asset prices have risen fine and dandy, underlying economic growth has not similarly responded.
And we see the same picture with respect to producer price inflation:
If QE has not worked and interest rates are as low as they can go and sovereign debt is as high as it can go, where do we go from here?