Felix Salmon

Counterparties: The global manufacturing slowdown

July 2, 2012

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It’s a holiday week, which means that you should be doing relatively little. Unfortunately, the world economy seems to be doing exactly the same.

In the US, today’s data from the ISM showed “contraction in the manufacturing sector for the first time since July 2009″. (As usual, Reuters’ Scotty Barber has the charts.) There were two particularly troubling data points. No one seemed very interested in buying things – new orders fell at the fastest pace in a decade; and people paid less for those things – prices paid fell at the fastest rate since just after 9/11. This is, as one analyst put it to the WSJ, a bad omen: “It is only a matter of time before the service sector mirrors the real goods slowdown and overall employment gains moves from sluggish to worse.”

In its own manufacturing index released today, Markit Economics suggested the US manufacturing industry is slowing, but not quite in contraction. But like the ISM report, Markit’s data also showed that new orders fell. And the company’s own economist acknowledged that “the ISM suggests something drastic happened in June”.

Then there’s Asia, where South Korea and Japan are in full manufacturing contraction territory. China’s manufacturing sector also shrank in June, and, as Kate Mackenzie notes, “the components of the index suggest the companies surveyed were busily producing without necessarily having any customers lined up”. Zero Hedge has BofA’s compilation of all of the grim global details: 17 of 24 major economies’ manufacturing sectors are now shrinking. Add all this up, and it explains why, globally, the manufacturing sector is technically in contraction.

Thank God US fiscal policy is going to help out. Oh… wait. – Ryan McCarthy

On to today’s links:

Buy your rubber-stamp hedge fund director in the Cayman Islands – DealBook

China’s OMG moment – FT Alphaville

Barclays chairman quits over LIBOR scandal – Reuters

How I manipulated LIBOR – Telegraph

New Normal
Midlevel Wall Street jobs increasingly not on Wall Street – NYT
For IPOs, Shenzen is the new Hong Kong (which was formerly the new New York) – Reuters

Must Read
How Chief Justice John Roberts switched his vote on Obama – CBS News
When the Supreme Court leaks – Felix

Toobin: Roberts’s tax argument was a port in a “constitutional storm” – New Yorker

Tax Arcana
Obamacare is the biggest tax increase in history…if you ignore history – The Incidental Economist
Reddit’s fantastic, in-depth Obamacare explainer – Reddit
The second-largest natural-gas producer in the US has paid almost no income taxes on its profits in two decades – Bloomberg
Obama, the Supreme Court and “the bipartisan allergy to taxes” – Economist

Emerging Markets
Africa is an economic dynamo – Nicholas Kristof

Long Reads
Money may actually make you act less human, studies suggest – NYMag

Old Normal
David Frum: It’s time to start saying no to the elderly – The Daily Beast

Busyness as an “existential reassurance” – NYT

Money market funds basically want to be unregulated banks – NYT


18 comments so far | RSS Comments RSS

Re Frum: Yet another person who just knows that we are wasting resources on the elderly (disclosure: I’m not there yet, but can maybe, possibly see it from where I’m standing).

This debate needs to occur, but shame on McCarthy et al for continuing to present only one side of it. You’re not even pretending to be fair and balanced. And I won’t even bother pointing out everything that’s wrong with yet another TDB op-ed presented as fact (such as equating real problems with the elderly driving to expenditures, but there is much, much more here that is simply bad analysis).

Posted by Curmudgeon | Report as abusive

Curmudgeon, if we’re going to debate spending on the elderly, can we also debate spending on the obese? And cigarette smokers? And alcoholics? I’m leaving out drug abusers, as they don’t last very long, anyway.

As for the headline topic, I’d like to see if there is correlation between a decline in manufacturing/consumption and the increase in concentration of income distribution. The more that income is distributed in a narrow slice of society, the less money will be available for the wider segment for buying things that factories want to build. My guess is yes, there is a correlation.

Posted by KenG_CA | Report as abusive

Ken, you can’t seiously suggest lumping in the elderly with the groups you name. And as I suggested the last time Counterparties decided to promote cutting off the elderly, I merely think that it remains a good question for our society to determine whether to support those who have contributed, or those who will contribute.

My own inclination is for resources to go more to the young, but it remains a reasonable question to ask, especially as society’s traditional family-based support for the elderly has more or less been turned on its head. But Counterparties (and you) seem to already have made up your minds on that score.

Posted by Curmudgeon | Report as abusive

Why are we talking about the elderly? This article’s leader text is almost exclusively about the world manufacturing slowdown.

Posted by FifthDecade | Report as abusive

Um, Fifth, my apologies, I mistakenly thought that this was a vehicle to comment on any of the posts noted in Counterparties.

Posted by Curmudgeon | Report as abusive

Curmudgeon, I haven’t made up my mind. I only asked a question, just like you. It’s just that while the elderly consume a disproportionate share of the nation’s health care expenditures, so do the obese. Obesity causes a myriad of health problems, and unless people commit to losing weight, those problems don’t go away. So why pay for that health care, and not for the elderly, who are just as doomed?

As long as we have a system where insurance company profits are driven by minimizing claims and maximizing premiums, and not by maximizing their clients’ health, we will have a completely inefficient and ineffective but expensive system. If the insurers decide to minimize claims by excluding the elderly from coverage, the next step after that would be to go after the next largest block of people who submit claims – and I would suggest that it is the obese, since there are so many of them in this country. And then the smokers, as smoking leads to so many kinds of expensive illnesses.

Posted by KenG_CA | Report as abusive

Boomers and older are responsible for all the distress that is visited on us, aren’t they? Who more deserves to bear the pain of it than they? The super-rich among them have the assets to buy our way out of this problem. Time’s a wastin’.

About this -

“Thank God US fiscal policy is going to help out. Oh… wait. – Ryan McCarthy”

‘Et tu’, Ryan?

Posted by MrRFox | Report as abusive

@MrRFox, that’s the problem…

As a generation, the Boomers plundered our national finances. Over the last twenty years, they repeatedly voted to expand government services and cut taxes.

But as individuals, their generation has the greatest wealth inequity that we’ve ever seen. Many Boomers have multi-million dollar investment portfolios. Many are destitute, having spent their entire income keeping up with the Joneses.

They don’t need further wealth transfer from the younger generations. (If they try, it will ultimately lead to literal revolution.) But wealth transfer WITHIN their generation would suffice.

Posted by TFF | Report as abusive

TFF, I generally dislike painting with such a broad brush, but that’s an intriguing conclusion, however you got there. I don’t have a lot of sympathy with people who spent what they had and didn’t plan for the future, but there are still plenty who lost much of their savings in the housing crash, the lack of market advances, and the pitiful fixed income returns.

I’d also like to consider changing support structures. My parents and grandparents had defined benefit pensions, and the young tended to take in their parents and care for them a couple of generations ago. Both are much less common today. Should society pick up some of that slack?

At the same time, because of a largely brain-dead education establishment, we have young starting out their lives hopelessly in debt. I would prefer forcing changes to education so that that happens much less frequently, but we are effectively wasting the talents of those currently in that situation.

Posted by Curmudgeon | Report as abusive

@Curmudgeon, the Boomers’ investment prospects have been generally very strong. The 20 year return on the S&P500 is 6.3%, with dividends improving that further. Inflation has been tame. Real estate has also done well over that time frame. Fixed income has beaten all of the above, as steadily falling rates have rewarded bond investors. The problems can’t be blamed on the markets! But…

(1) Those returns are front-loaded. A Boomer born in 1950, who began saving steadily in 1980 (at the age of 30), had plenty of assets in place to take advantage of the booming economy in the 90s. A boomer born in 1960, who put off savings until 1995 (at the age of 35), missed most of the boom times and bore the full brunt of the busts.

(2) Partly because the returns were front-loaded, many Boomers grew complacent. That 1950s Boomer who SHOULD be in great shape may have relaxed in 2000 as the 401k was showing a million dollar balance. Retire early? Stop savings? Buy a vacation home? There is no amount of money that can’t be piddled away through mismanagement.

(3) The financial leeches have sucked an incredible amount of wealth out of the system. Those 6%-8% returns may shrink to as little as 4%-5% after paying all the managers involved. After fees, investment returns over the last decade haven’t even kept up with inflation. (Dealing a double pounding to those who thought they were in great shape in 2000.)

My father, at the leading edge of the Boomer generation, has saved steadily throughout his career, with the money passively invested through TIAA-CREF. He’ll have plenty, partly because he recognizes that he is financially unsophisticated — and so has never made a transaction in his retirement accounts (aside from steady contributions). Those who tried to beat the system are the most likely to have gotten creamed.

Yet my unsophisticated father pointed out to me back in the 90s that people couldn’t possibly be as wealthy as they thought they were — because there isn’t enough wealth to fulfill all the promises. So perhaps the fool turned out to be the wise man after all?

As for the support structures, multi-generational living has been on the rise since the 80s. It makes perfect sense, enriching the life of the retirees (boredom is an occupational hazard), saving on the expense of multiple households, and helping to raise the younger generation (better they be raised by grandparents than by today’s pop culture). This isn’t an option for everybody (not all of the Boomers *have* children/grandchildren), but it should definitely be encouraged.

In my opinion, the furor over student loans is overblown. The average student loan debt is around $25k, NOT a crushing burden by any stretch of the imagination. There are some abuses, but there is nobody who NEEDS to borrow six figures to get a college education. Eliminate bankruptcy protection for private student loans and the abuses will stop. Then we might consider further investment in PUBLIC education so that nobody will feel pressured to spend too much for too little. This is a philosophically safer approach than attempting to directly interfere with private and for-profit colleges.

Posted by TFF | Report as abusive

TFF, I think that’s a great analysis, but I would challenge one thing: “Those 6%-8% returns may shrink to as little as 4%-5% after paying all the managers involved.” It seems more like 4-5% before the managers are paid these days.

Your father was right – a lot of the alleged wealth out there is imaginary. Unfortunately, economists and politicians use mathematics as a weapon of mass confusion to sell that illusion, and that everyone can be wealthy if they just work harder. Since wealth is relative, everyone can’t get wealthier, no matter how hard they work. He is no fool.

I don’t think eliminating bankruptcy protection for student loans will stop the abuses. That feedback path is delayed too long to be effective; students taking out ill-advised loans aren’t thinking, oh well, I’ll just declare bankruptcy if the private school education doesn’t pay off. Maybe just a cap on the amount that people can borrow for an education is a better way to address that problem.

Posted by KenG_CA | Report as abusive

TFF, I’ll second what Ken said about your analysis. I see less rather than more evidence of multi-generational living, but I have no data to say one way or the other. I’m slightly past the midpoint of the boomer generation, and my investment horizon as you define it started around 1990. The first decade was pretty good, but it’s been stagnant since 2000.

Posted by Curmudgeon | Report as abusive

@KenG, that 6%-8% is an estimate based on the stock/bond markets from 1992-2012. The bond market, in particular, has been very strong over that stretch. But you are absolutely correct that the returns over the final decade are weaker than that — and are likely to continue to be weak for a while longer.

For a single-deposit-single-withdrawal investment, the timing of the investment returns is mathematically irrelevant. The product of the growth factors is commutative. But for periodic-deposit-periodic-withdrawal investments, this period of malaise is (predictably?) centered around the worst possible interval of time for the Boomers. The ten years before retirement and the five years after, when the accumulations are the largest.

So the effective reality may be between those two intervals? Would need a more careful analysis (don’t forget real estate) to figure it out.

“Since wealth is relative, everyone can’t get wealthier, no matter how hard they work.”

Wealth isn’t relative. If there are more goods/services produced and shared, then everybody would be wealthier. But we’ve skimped on investment for a while now (since the 80s?), and are reaping the rewards today.

“Maybe just a cap on the amount that people can borrow for an education is a better way to address that problem.”

There is already a (reasonable) cap on the federally subsidized loans, and I’m not sure how you would enforce a cap on private loans. I’m even less sure you SHOULD enforce such a cap. There may be occasional students where borrowing six figures makes sense (e.g. medical school?). Is some government bureaucrat supposed to determine how much each professional can afford to repay?

Better to eliminate the intervention entirely. If you don’t protect student loans from bankruptcy, then banks will be suddenly hesitant to loan the money. I suppose they could still protect themselves by asking parents to co-sign, but even if you were to block those loans, what would stop people from taking out mortgages for the same purpose? Or raiding their 401k? If people really want to spend their life’s savings on their kid’s education, they will find a way to do so. We just need to be careful not to encourage it.

@Curmudgeon, every statistic I’ve seen indicates that multi-generational living is on the rise. E.g. this report:
http://www.pewsocialtrends.org/2010/03/1 8/the-return-of-the-multi-generational-f amily-household/

There appears to be a strong ethnic/cultural component, however. White America is the most likely to disdain multigenerational living. Young people who live with parents or relatives after graduation are popularly thought to be immature failures. Older people who live with their children are dismissed as impoverished failures.

But the African American, Hispanic, and Asian (Chinese/Indian) cultures all embrace multigenerational living, even when they could afford to live independently. It makes obvious economic sense — so the only reason NOT to choose it is if your culture values independence and isolation over community and mutual support.

Posted by TFF | Report as abusive

TFF, I meant the returns today, and for the foreseeable future, will be more like 4-5% before fees, unless inflation does happen.

Wealth (as measured in dollars) is absolutely relative. If everyone was making $1M a year, then nobody would be wealthy. You can only be wealthy as compared to somebody else. You can make the case that poor people today have a better standard of living and there fore are wealthier than the rich of 100 years ago, but that’s not the same thing. I would define wealthy as significantly more assets than the average, and if everyone is average than nobody has significantly more than average.

I don’t want to give any private loan making entity immunity from the bankruptcy shield. I just want to limit the government’s exposure to the loans they guarantee. As for banks not making loans because they don’t have protection from bankruptcies – too bad. They’re running out of places to loan money, so let them figure out how to earn their keep. If interest rates stay around zero, they’re going to start to shrink anyway.

Posted by KenG_CA | Report as abusive

@KenG, perhaps this has devolved into semantics?

My definition of “wealth” is closer to what you are calling “standard of living”. And yes, by my definition your typical mother-of-two on welfare is wealthier than a medieval lord.

“I don’t want to give any private loan making entity immunity from the bankruptcy shield”

Unless I’m mistaken, we currently do that. We need to stop protecting private creditors in this way (and that will kill much of the private market). This market SHOULD be choked off, as it is abusive, and serves only to push tuition rates ever higher.

“I just want to limit the government’s exposure to the loans they guarantee.”

Unless I’m mistaken, the governmental guarantees are already strictly limited. One of us is confused, maybe? Or perhaps you misunderstood what I was saying?

Posted by TFF | Report as abusive

TFF, I don’t know that student loans are exempt from bankruptcy, I was only voicing my opinion that they should not be – they should get wiped out or written down by bankruptcy, just like all other loans.

I could be confused, I don’t know the current policies, and was just trying to come up with a simple description of what I would like to see in the student loan program, without effectively ending it. I don’t want it open-ended, but there has to be limits, and like you, I don’t want to make it easy for students to accumulate a lot of debt to attend expensive private schools.

Posted by KenG_CA | Report as abusive

Agreed, KenG. I would like to see:

(1) Federally subsidized and guaranteed student loans with a reasonable cap and a student-friendly interest rate. Give those protection against bankruptcy, perhaps, but consider reforms to ensure that they aren’t abused. Perhaps prohibit their use at institutions that don’t meet minimal graduation/employment guidelines?

(2) No federal protection or subsidy (except deductibility of interest) for the private loan market. Craft simple disclosure statements that will make it abundantly clear to students how much they will end up owing. Beyond that, you just have to trust people to make the right decisions.

Posted by TFF | Report as abusive

ok, TFF, I’ll vote for that. :-)

Posted by KenG_CA | Report as abusive

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