The slowdown continues

Manufacturing is a central cog in the growth frame and declining growth rates should be a cause for concern.  Today’s Markit flash PMI’s for the US, Japan and Europe showed continued deterioration in manufacturing fundamentals:

US Manufacturing– ““US factories reported their worst month for just over six-and-a-half years in April, dashing hopes that first quarter weakness will prove temporary. “Survey measures of output and order book backlogs are down to their lowest since the height of the global financial crisis, prompting employers to cut back on their hiring. “The survey data are broadly consistent with manufacturing output falling at an annualized rate of over 2% at the start of the second quarter, and factory employment dropping at a rate of 10,000 jobs per month.”

Japan Manufacturing – Manufacturing conditions in Japan worsened at a sharper rate in April. Both production and new orders declined markedly, with total new work contracting at the fastest rate in over three years. The sharp drop in total new work was underpinned by the fastest fall in international demand since December 2012, and following the two earthquakes on the island of Kyushu (one of Japan’s key manufacturing regions), the outlook of the goods-producing sector now looks especially uncertain.

Euro Zone Composite – ““The eurozone economy remains stuck in a slow growth rut in April, with the PMI once again signalling GDP growth of just 0.3% at the start of the second quarter, broadly in line with the meagre pace of expansion seen now for a full year. “A failure of business expectations to revive following the ECB’s announcement of more aggressive stimulus in March is a major disappointment and suggests that the modest pace of growth is unlikely to accelerate in coming months. “France continues to act as a major drag on the region, with goods exports slumping to the greatest extent for over three years. Germany and the rest of the region are enjoying more robust expansions by comparison, though growth rates slowed in April. “

The US data followed on the heels of weak industrial/manufacturing production for March and a weakening Chicago Fed National Activity index.



US manufacturing remains in a long term funk: the last time we had such weakness in the US was during the depression and the post war adjustment.


Monthly rates of change in manufacturing show weakness on both a monthly and smoothed trend basis:


Motor vehicle assemblies look to have peaked and supports recent weakening in retail sales;




CPB World Trade Monitor Update

The recent CPB World Trade Monitor Update (to February): growth in world trade volumes despite a February rebound from a January decline, based on high water mark analysis, are showing significant weakness:


World export growth based on smoothed 6 monthly data has shown significant weakening:


Add in weak readings in the recent flash Markit Manufacturing PMIs for Japan, the US and Europe, the weak St Louis Fed GDP Now readings and slowdown in Q1 China growth, and we see little in the tea levels that would suggest any meaningful reversion in the above trend is underway.

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US retail sales…update

It is a trend I have been following for some time….global growth is slowing down at a time in the cycle when you would usually expect to see inflation and supply bottlenecks.  If it were not for the very high levels of asset focussed money supply growth over the last few decades and the build up of debt and asset values (dependent on this growth), I would not be ringing any bells.  But the divergence between what asset values need growth to be and what growth is turning out to be is the problem.

US retail sales (I am still waiting for the CPI update which will allow for a better assessment of retail volumes) took a further hit in March:




The biggest contributor to the recent slide has been motor vehicles and parts sales.  This component has also been the biggest contributor to retail sales growth post the 2008/2009 recession and a large contributor to significant increases in consumer credit debt loads:





The inventory picture has also darkened with the longer term inventory to sales relationship showing an unusual divergence:


Last month’s analysis

US debt/asset dynamics……the bubble the Fed appears not to see

In last week’s “Decision Making at the Federal Reserve” at the International House of New York Janet Yellen said that the US economy had made tremendous progress in recovering from the damage caused by the financial crisis, that labour markets were healing and that the economy was on a solid course.  She also said the economy was not a bubble economy, and that if you were to look for evidence of financial instability brewing you would not find it in key areas: over valued asset prices, high leverage and rapid credit growth.  She and the FRB did not see those imbalances and despite weak growth would not describe what we currently see in the US as a bubble economy.

Perhaps the question was the wrong one.   The bubble, indeed most bubbles, are financial in nature and relate to both the flow of financing and the current stock of financing.   We are always in a bubble to some extent given that one of the key facets of the monetary system is the discounting of the present value of future flows through the allocation of assets, principally of money relative to all other assets.  Today’s differential between what the economy can produce over time and the value and supply of assets that represent the future expenditure flows from our economy, are I believe, in excess of the present value of those flows.  Part of this is due to monetary stimulus designed to drive growth forward in the face of demographic change, increasing income inequality (which weakens the expenditure base of the economy) and important transitions in key emerging economies that have numerous structural relationships.

We are in a bubble and while the economic issue today is one of a deflating frame (i.e. not one with inflationary characteristic usually associated with economic overheating), the differential between the financial frame and the economic has arguably never been so wide.  Perhaps the Federal Reserve should have defined what they believed to be a bubble or rather the moderator should have been a bit cleverer! 

Some may say that excess financial leverage of households has moved back to more sensible levels:  the following chart shows that consumer debt levels have moved back to early 2004 levels but that these levels were associated with much higher longer term real GDp growth rates.  In this context debt has not really fully adjusted.


And, looking at shorter term real growth trends we see that real GDP growth has peaked at much lower levels relative not just to total debt to the rate of increase in consumer debt.  One would be forgiven for thinking that the last 5 years included a recession in the data, but it has not:

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Helicopter Money…Japan..25 charts

Japan has been at the forefront of weakening GDP/wages/growth, deteriorating demographics, elevated sovereign debt and extreme monetary policy.   Of all the major economies, given its existing debt burden and aging population, Japan is arguably the closest to Helicopter money.

Post 2012, policy (Abenomics) aimed at stimulating demand, generating wage growth and inflation has failed with respect to the specific objectives set.  But then again, what is an optimal level of consumption in a declining demographic paradigm?  Perhaps in the modern world it is one which drives growth to the point that current debt levels become manageable, or where risky assets provide returns commensurate with the consumption liabilities expected to be provided by them.   In this context, global Central Banks have been consciously attempting to manufacture growth for at least a decade.  Helicopter Money would however break this intercession, acknowledging that only more money supply and more debt relative to growth can support the expenditure/infrastructure side of the balance sheet: it is difficult to comprehend just how the asset side of the balance sheet would evolve in such circumstances.  I suspect that there would need to be an adjustment, a reset, but even that would be only half the story.  That said, on to Japan:

Japanese real GDP growth has been sliding heavily since the bursting of its own asset  bubble starting in 1990:


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Helicopter watch..PMIs

We do not need a global recession or a financial shock to precipitate a “Helicopter Money” operation, all we need is slow to anaemic growth given a heavily indebted economic and financial system challenged by demographics, productivity growth constraints, structural imbalances and increasing inequalities.  Anaemic to weak growth will itself precipitate a crisis. 

Today’s global PMI reports suggest that manufacturing growth globally remains constrained by weak/weakening export demand and that such demand growth that there is remains dependent on domestic demand conditions.  All cycles are punctuated by dips and rebounds but the relationship between the dip and the rebound and the strength of the latter provides clues as to the ultimate strength and direction of the cycle.  Today’s rebounds are lacklustre and this is cause for concern: 

PMI reports are littered with:

US Markit: “expansion remained subdued”, “weakest quarterly upturn since Q3 2012”, “stabilization in new export orders”, “generally improving global economic conditions”, “output growth remained below its post crisis trend”, “subdued client spending”, “cautious inventory policies”, “competitive pricing”;

Euro Zone: “weakest”, “ticked”, “stagnation”, “disappointing export trends”, “marginal”, “weak domestic demand”, “reduction in selling prices in response to competition”, jobs growth issues, “intensification of deflationary pressures”, “discounting”;

UK: “weakest performances”, “doldrums”, “challenging global economic conditions”, “poor levels of new orders from home and abroad”

(Russia): “worsening downturn”;

Indonesia: “output emerged from its prolonged slump”

TAIWAN: “moderate expansion of purchasing activity”, “client demand was relatively subdued”,”cautious inventory policies”, “raised staff numbers only slightly”, “renewed pressure on operating margins”, “new export work declined for the third month in a row”, “ companies continued to discount”, “Unless global economic conditions start to improve…”

Japan: “lowest for over three years”,”New orders…contraction was the sharpest in nearly two years”, “sharp drop in international demand”, “instability in the wider Asian economy”, “client negotiations and competition driving down selling prices”;

China: “fractional deterioration”, “continued to cut their staff numbers”, “relatively cautious stock policies”, “Weak foreign demand”

South Korea: “contracted for the third consecutive month in February”,”rate of decline was only marginal overall”, “slump in demand and challenging economic conditions”, “new orders stabilised….followed two months of contraction”, “increased competition and an unstable global economy”, “international demand declined for the second successive month”, “goods producers cut back on their staffing levels”, “increased competition encouraged companies to reduce their selling prices.“

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Helicopter Money…European growth

Long term Euro Area growth has been slowing and this is best illustrated by looking at annualised growth over 5 and 10 year horizons.  Could growth in the current cycle have already peaked?

image_thumb11Loan growth remains lacklustre and broad monetary aggregates ex M1 are declining.  The most recent decline in loan growth looks to be mirroring the deceleration in economic growth experienced since Q1 2015. The ECB increased its monetary stimulus push in March in response.


Employment and wage growth continue to rise but are hardly inspiring amidst considerable unemployment across the Euro Area.

The slowdown in global trade appears to be impacting key manufacturing new orders, in particular in Germany where the IFO Business Cycle Clock for the manufacturing sector shows a downturn.


German foreign capital goods orders relative to trend:

This graph shows latest results on new orders in manufacturing

Export growth is sliding…has it peaked?


Economic sentiment is in decline as is consumer confidence in the Euro Area: yet further indication that growth may have peaked.


Shorter term data, in particular the Flash Markit Composite PMI for the Euro Zone, shows a tepid March bounce back from weakness in the first two months of the year. 

“despite the rise in March, the average PMI reading for the first quarter of 53.4 was the lowest quarterly trend for a year, signalling a slight slowing in the pace of economic growth”

Slowing growth in China, what looks to be a weak plateau in the US and a still slow recovery in Europe is raising global financial/economic stability risks.  There remains considerable slack in Europe and lower energy prices appear to have helped boost consumption, but the concern remains that at low growth rates the global economy is skirting the edges of another financial crisis.  Negative rates and quantitative easing are failing, not unexpectedly, to have the desired effect.  We may be nearing the moment where interest in heavier infrastructure spending possibly financed by “Helicopter money”, given the global sovereign debt positions, could be rearing its head.  

Watch out for any further easing in growth!

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Helicopter Money…increasingly likely if growth continues to slow….

Helicopter money is essentially central bank financed government expenditure: Central Bank issues money to buy government debt, government uses money to fund, inter alia, tax breaks and/or infrastructure spending.

China is transitioning to slower growth, Japan remains mired in slow growth/demographic decline, European growth rates remain constrained as does US growth and there are problems in other key economies, notably Brazil and Russia.  As this pattern remains in situ, the risks to the financial system rise higher and so do the chances of “helicopter money”.

US real per capital GDP growth based on high water mark analysis


US Nominal GDP profile: rolling average quarterly change in GDP less inventories and Consumer Credit


Annualised real GDP growth Japan over rolling 10 year periods:


The same for Japanese household consumption:


Euro Zone real growth rates: annualised over rolling 5 and 10 year time frames: image

And the same for household consumption:


In the past, asset markets have typically reacted to late cycle interest rate rises as monetary policy looked to restrain growth in the face of increasing production/supply bottlenecks.  Asset markets would increase their preference for money relative to other assets, asset market leverage and consumption/production focussed loan growth would scale back; the economy would move into a “step back” or so called recession.  But, this retracement of markets and the stutter in monetary and economic growth was usually a short term phenomena: populations, technology, productive capital, and loans were in an expansionary phase.  Growth rates of populations, productivity and capital expenditure have fallen, to lesser/greater extent, across the world. 

At a point in the economic cycle when monetary policy would usually be rising, to hold off over heating economies, growth is not only slowing but reinforcing a long established slowing trend.  The recent US interest rates rise should not be considered as a counter cyclical rise but a “normalisation” of monetary policy.

A slowdown/well paced decline in growth should not in and of itself be a problem.  Capital depreciation is a natural way in which economies transition to lower growth/declining frame regimes.  There are two ways in which the current slowdown in growth is a much bigger risk to economic/financial system health:

1 – The first is that asset markets and asset focussed money supply growth have been juiced and expanded to stimulate growth on the assumption that weak growth was transitory/shock induced; these actions have raised the supply and value of assets (debt and equity) relative to economic growth; as growth slows, and the slower trend is established, expectations over future flows which give assets their value also decline.  In the absence of monetary policy aimed at asset values, asset values correct (equity) and/or default (bonds/loans).  This correction impacts present and future consumption as well as the financial system: bank deposits (broad money supply) are backed by assets; as assets devalue/default deposits/money supply are impaired further impacting economic stability. 

2- The distribution of national income has been increasingly skewed towards corporate profits and very small sections of the population.  Unequal distribution of income and capital impacts present and future consumption and capital expenditures associated with that profile.  These capital expenditures risk extending to core infrastructure/health/education spending.   Quality of life at so many levels risks being impacted.

US Capital expenditures


Helicopter money may be needed to support the eco system in the event of an asset price and financial system shock, as growth slows further or experiences a decline, amidst dysfunctional distribution of flows (income inequality). The time for Helicopter money may be drawing near, but it should not be considered a saviour of asset markets, rather the last gate along this particular road.  How it impacts the economic/financial system is likely to be complex and especially so given that the asset price unwind and accompanying demand shock of excess financial system debt could be fast acting.