Industrial production rose 0.6% in June on May, manufacturing rose 0.4%, mining has risen for two consecutive months, machinery rose 1.1% (up 3.8% over the last 3 months) and motor vehicles and parts rose 5.9% (after a 4.3% fall in May).
The frame should dominate analysis of new order fundamentals: long term weakness dominates.
The new order bounce back in March/April was led by the transportation sector (MVPs in particular), but the bounce back should be set against the depth of the declines.
Outside transportation the trend is very weak.
Consumer durable goods orders on a smoothed 6 monthly basis have weakened noticeably since the start of the year.
Commentators are increasingly concerned about the risk of a recession in the US Economy. Recessions are typically short term step backs/retracements within expanding frames whereas we are in a rather complicated contracting one the one hand (developed economies) and transitioning frame (developing economies moving from investment dependence to consumption/service sector dependence) on the other characterised by excessive debt levels, unconventional monetary policy and increasing income inequality to name but a few fundamental issues.
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!
And from Markit’s own PMI release:
“The survey data indicate that factory output fell in May at its fastest rate since 2009, suggesting that manufacturing is acting as a severe drag on the Page 2 of 3 © Markit economy in the second quarter. Payroll numbers are under pressure as factories worry about slower order book growth, in part linked to falling export demand but also as a result of growing uncertainty surrounding the presidential election
We are clearly in a period of weak global growth as shown by the 6 monthly rates of change in export volumes. What makes the current weakness of note is that it is the second such decline in the last year and the most pronounced outside of 2001 and 2008/2009:
And a closer look:
If we look at smoothed data which adjusts for monthly extremes we find further confirmation of weakness both at the annual and the six monthly:
And a closer look at the annual rate:
We can also look at the data from a high water mark perspective:
Again at both the monthly and six monthly data we see significant weakness from early 2015 followed by a late year recovery, followed by further weakness.
But the CPB World Trade Monitor is always a couple of months behind which is why current flash PMI data from the various Markit Surveys suggests that weakness has continued across global markets:
Markit Flash US Manufacturing PMI :crept closer to stagnation in May….overall business conditions…weakest since the current upturn started in October 2009….renewed fall in production…softer new order growth…further cuts to stocks of inputs….U.S. manufacturers signalled the first reduction in output since September 2009 in May….uncertainty…caused clients to delay spending decisions…reduced foreign client demand had underpinned slower growth in overall new orders…outstanding work at U.S. manufacturers falling for the fourth successive month in May….
Markit Flash Eurozone PMI – rate manufacturing output growth…second-weakest since February 2015. Growth of new orders received by factories also eased. Producers reported that domestic market conditions remained tough and softer international trade flows led to the smallest rise in new export business for 16 months.
Nikkei Flash Japan Manufacturing PMI™ – “Manufacturing conditions deteriorated at a faster rate mid-way through the second quarter of 2016…Both production and new orders declined sharply and at the quickest rates in 25 and 41 months respectively….a marked contraction in foreign demand, which saw the sharpest fall in over three years….
Unlike retail sales, industrial production, new orders or a number of other economic data, the employment report comes with a lot of extra filler. You need to dig down into the ingredients to figure what is and what is not good. On the surface we have seen a recent deceleration, but nothing which looks out of the ordinary post 2009.
But what do we see when we dig?
Productivity growth at post war lows! Employment data is producing less and less and becoming in GDP, asset price support and income growth terms, increasingly diluted.
Health care and social assistance has been key to recent employment growth but the growth rate is falling off. Looking after an aging society may not produce the growth needed to sustain the liabilities attached to the economic frame. Indeed, many of these liabilities may not be adequately accounted for within asset valuations.
If we exclude health care and social assistance from employment date, employment levels only returned to growth on an annual basis in October 2014, making the current employment growth cycle a short one to date.
Add food service and drinking places employment (to health care and social assistance) and we have the sum total of jobs created since the recession started. But even food services and drinking places employment growth has shown a recent declining trend. Again, the income/productivity dynamics of this type of employment is unsupportive of the current asset/liability frame.
Retail trade employment growth was especially strong during the latter part of 2015 (dominated by motor vehicles and parts dealers), although we have seen weakening of late. Watch out for MVP employment (which means an eye on consumer credit) and buildings and materials (which means an eye on construction). There has been weakness on the retail side that is obscured by recent April data.
The weakness in the goods producing industries, construction excepted, and trade and transport is noteworthy in the light of weakness in output, new orders and exports. These are all key industries in terms of the economy’s ability to provide generate long term GDP, income and productivity growth. Manufacturing and trade are important cogs in the economic machine.
The one relatively strong point in the data remains the professional and technical sub sector of professional services. Relative to service sector (and hence all employment) it has continued to rise in importance, but the growth rate of this dynamic has slowed in the current cycle. This may not be a positive for income flows if it represents a movement towards rationalisation of processes (reduced employment at the front end and a small increase at the operational core), reflective of cost reduction and other operational rationalisation.
Long term dynamics – employment growth rates/part time versus full time/self employment versus employed – are all weakening or stuck in a post recession rut. A lot of recent employment gains look like they are due to a rise in part time employment (which may be a positive if it signals increasing willingness to hire) so growth fundamentals are still very weak and possibly weakening.
What makes employment growth and the make up of employment growth so important is that it impacts productivity and earnings growth, two key factors that require vigour if we are to accommodate high debt levels and high asset prices. Other relevant relationships include capital investment (historically weak), income inequality and a slowdown in population growth as well as a shift in its demographics. Finally, with weak global trade dynamics we have considerable pressure on areas of the economy that have traditionally been important to productivity and earnings growth.
There is nothing wrong in a declining population and declining growth rates of employment as long as the relationship between asset values (debt/equity) and consumption/investment dynamics are in keeping. I very much doubt whether it is and this is why employment growth today is a much more important indicator of financial health than it is fundamental economic health. There are so many straws in the wind!
And the graphics:
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;
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:
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.“