CPB World Trade Monitor and Flash PMIs

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:

image

image

And a closer look:

image

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:

image

And a closer look at the annual rate:

image

We can also look at the data from a high water mark perspective:

image

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….

Thoughts on revisions to US manufacturing new order data

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:

image

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:

image

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:

image

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.

A few thoughts on “Rise of the Robots”, risks to global rebalancing and much more

Foxconn replaces ’60,000 factory workers with robots’” was a recent headline in a BBC news report, and of course many other stories.

The global rebalancing story goes as follows: developed economies offshore production of goods in cheap labour emerging markets with strong growth prospects, benefiting from cheaper labour and also entrance into consumer markets with vast potential.  Developed economies experience declines in wage growth as manufacturing declines and service sector expands in relative terms, interest rates are lowered and consumer credit growth stimulated.   Lower cost goods and low interest rates cushion the impact of lower wage growth but the economy moves out of balance, towards consumption and debt (increasingly asset focussed) and away from production and investment.  

Ultimately this story depended on developing markets maturing their own consumer stories and wage growth/currencies rising to erase or at least obfuscate wage price differentials.  This rebalancing of developing economies to consumption and away from manufacturing/investment would have created demand for goods, services and expertise of developed economies, rebalancing GDP away from consumption and towards production and investment, raising wages and reducing dependence on credit for consumption with interest rates slowly re-ascending.

The story about Foxxconn factory workers being replaced with robots takes away important marginal flows from the rebalancing equation and reemphasises emergent income distribution inequalities: less income to labour, more to capital; reduced consumer expenditure growth to rebalance growth in developing/developed areas; greater stress on high debt levels accumulated in both areas, debt levels used to finance consumption in one and infrastructure and manufacturing in the other.  And of course, all the attendant asset price issues that have arisen as a result of low interest, financial shocks, asset price support and other unconventional monetary policy actions.

Technology is a good thing and we should always be striving to produce more efficiently and effectively and part of the move to robots in these developing markets is the reallocation of labour capital across the broader economy and the need to produce ever more goods for growing demand in many of these vast economies. 

But the separation of income flows, or at least higher growth higher value income flows to labour, is a disconcerting one and especially so given the ongoing deceleration of global economic growth and asset price divergence.  This not only accentuates the trend towards increasing income inequality and therefore damages the eco system’s ability to regenerate demand (and support asset prices), increasing reliance on loan growth (and hence debt support), but it also risks prevent a more rigorous and necessary rebalancing of growth between developing and developed that would have re-established the balance of power between labour capital and financial capital that would be necessary to keep the eco system’s flows at regenerative levels. 

Within the capitalist system there are numerous subtleties.   Human beings need a reason for being and the economic dreams of home ownership, durable goods consumption and various other lifestyle goals are gradually being hammered away and left to an increasingly small percentage of the population.   The objective of a capitalist system should be productive efficiency on the one hand and the regeneration of the model’s ability to support its asset, human and of course natural frame.   Technology has not historically been a blight on humanity, but that has been because of various forces that have coincidentally expanded the frontier of consumption and production capabilities.   

Productive efficiency is only one side of the equation and it requires balancing forces on the other to maintain a healthy “equilibrium” of sorts between all factors of production.   Talk of helicopter money, the drive for increasingly perverse unconventional monetary policy all strongly suggest that the equation that drives the eco system is out of balance.

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:

image_thumb[10]

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

image_thumb[13]

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.

Continue reading

World Trade

Some charts and brief comments I forgot to post:

Growth in world trade volumes has fallen off significantly since summer 2014:

image

image

image

Interestingly US trade data shows a tail off in US auto exports and a rise in Auto imports.  Imports rose strongly in March and fell back in April (opposite for exports), although much of this has been ascribed to the impact of West Coast port strike issues.

Continue reading

A world in transition, but so many straws in the wind, some thoughts!

Everybody is asking and at times hoping to answer the question as to why world economic growth is slowing down, why is it so sub par, why has it not recovered post the turbulence of 2007 to 2009?   There are many straws in the wind, but which ones are cause, which ones are consequence and which are accommodation linking both?  In a world where diverging tiny margins can accumulate into significant distances it is hard to determine just what and which is the key.

Continue reading

Not a “Savings Glut” per se but a monetary excess amidst a period of complex global structural economic change!

If you stream through the data it is pretty clear that developed economy growth has been slowing for some time and that monetary policy has accommodated this adjustment with lower interest rates and a relaxed attitude towards money supply growth.  At about the same time these trends were moving ever closer to their sweet spot on the horizon (because we are not yet at peak of this particular movement) certain developing markets really got going, with the help of a fair amount of their own monetary stimulus but also by a reconfiguration of global supply chains and offshoring in key economies.  All factors combined to create a heady and dangerous global financial imbalance, a weak bridge cast across a widening economic divide.  No wonder it all came crashing down..but who was to blame?  The world’s central bankers who were blindsided into excessively lax monetary policy by a low inflationary world that had become obsessed with laying off and chopping and dicing of risk to those “who could best absorb and bear it”, or some of the finer strings in the mesh?  Well, some have chosen to blame excess savings in the emerging/developing part of the world, principally China, but this is all too pat.   The “savings glut” theory, if you can really call it “excess savings”, was merely a return of serve of part of the vast ocean of financial and monetary excess that barrelled through the early to mid 2000s.

Continue reading

World trade

World trade fell 1% in November according to the CPB World Trade Monitor.  The 4 months since July represent the weakest period of growth since the earlier part of the year (Feb/March).  If we look on a monthly basis the slowdown has become more narrowly synchronised.  While world trade growth does go in cycles the pattern that is emerging is of stronger global growth till mid summer and fall back since that point.

Continue reading

Q4 US GDP, some further thoughts

I will touch on some of my views regarding the significance of all this in a later post and there is a disturbing significance.

Q4 US GDP (provisional estimate) was helped by a) an increase in personal consumption expenditure that may have more to do with earlier weakness than a strengthening trend, b) a continued rise in inventories and c) a significant increase in net exports (close to 40% of the increase in GDP). 

Continue reading

Growth dynamics have changed a bit and are in between times…

Historical equity returns reflect past growth dynamics, dynamics which may be either weaker or in transition, or both – indeed, dynamics in mature economies are weaker, and combined global dynamics are in transition.  Return expectations need to be cognisant of these structural drivers of return.

The main drivers of growth are well known: a) population growth and employment participation rates, b) capital investment and c) increases in total factor productivity, or rather efficiency gains from the combination of a and b. Continue reading

“It’s time to reset your investment assumptions”..says the Globe and Mail. But is it, and should it be up or down?

Is it really time to reset your return assumptions downwards? A Rob Carrick articlein the Globe and Mail suggested that it might be so.

Revising return assumptions down after poor stock market returns is a Bete Noire of the financial services industry.  All other things being equal, and depending on your paradigm, you should be revising them up after a period of poor returns.

But you cannot revise upwards if your return assumptions were too high to start with. If you have relied on historical average returns or risk premiums to set return expectations you have also more than likely failed to adjust for cyclical and structural risks in markets and economies. Continue reading