MacroScope

Not your father’s ISM survey

Manufacturing activity picked up in January, an encouraging sign for U.S. growth prospects. Right? Perhaps not as much as it used to be. The shrinking role of factory production in the U.S. economy – now just over a tenth of the nation’s output – means the Institute for Supply Management’s closely watched survey is a less sturdy predictor of broader trends.

Neil Dutta, U.S. economist at Bank of America-Merrill Lynch, explains:

The ISM Manufacturing Index improved to 54.1 in January from 53.1 in December, the highest since June 2011 and broadly in line with market expectations. A level of 54.1 on ISM is consistent with roughly 3.5 percent real GDP growth. This tells you more about the state of the manufacturing sector than the broader economy, in our view. And, we are skeptical the pick-up in the ISM manufacturing index is a harbinger of a coming acceleration in economic growth.

A 3.5 percent rate looks lofty indeed: Current expectations according to Reuters polls are for a 2 percent GDP reading in the first quarter, with a number of analysts citing downside risks to their forecasts.

Revving down

It used to be the low-end stuff like shoes, clothes and furniture that displaced American manufacturing, then cars and consumer electronics.  A new report by Alan Tonelson, a researcher at the U.S. Business and Industry Council which represents 1,500 American companies, now shows that high-end U.S. industry is facing ever tougher foreign competition in its own backyard.

Tonelson has crunched the numbers since 1997 on high-value, advanced manufacturing – the crown jewel of American industry that is capital intensive and depends on technological superiority such as turbines, pharmaceuticals and electrical engineering. He finds that imported products had captured 38 percent of the $1.63 trillion U.S. market for advanced manufactured products by 2010, up from 24.5 percent when the government started collected the data in 1997.  Only six U.S.-based advanced manufacturers have gained market share in the United States in the 13-year period.  Sectors that are more than 50 percent dominated by foreign producers have risen from eight in 1997 to 32 by 2010, he said.

The high-value core of America’s domestic manufacturing sector is suffering chronic and significant weaknesses. They strongly indicate that advanced U.S.-based manufacturing industries as a whole are failing a basic test of competitiveness – thriving in a market that is not only the world’s largest single market for such goods, but the market that they should know far better than their overseas counterparts.

Looking past schism in the ISM

U.S. manufacturing activity slowed to a crawl in October, according to the latest figures from the Institute for Supply Management. Still, a measure of new orders picked up steam, suggesting some prospect for an improvement in demand.

Which signal to trust? Rather than put too much weight on one month’s number, better to pick up on the trend. Here, the story is largely unchanged: growth does not appear on the verge of stalling, but nor is it fast enough to help the economy dig out of the unemployment hole caused by the Great Recession.

Paul Dales, senior U.S. economist at Capital Economics, writes:

Economic conditions seem just about strong enough to avoid a recession, but not strong enough to generate any meaningful growth. We expect much of the same next year, with GDP growth slowing from just above 2% this year to around 1.5%.

GDP: Lagging indicator of itself

Excluding the monthly employment report, gross domestic product is the Big Kahuna of economic indicators. For better or worse — and to the chagrin of its creator Simon Kuznets — GDP has become  the scorecard of a country’s economic performance.

Yet for financial markets seeking to anticipate the future, GDP always comes a little too late. Case in point: we only get the first estimate of second quarter GDP next week, almost a full month into the third quarter.

The number still has a big psychological impact. It sets the tone for forecast revisions, and the report’s composition, particularly the mix of consumer spending and business investment, offers clues about upcoming trends. GDP is projected to have risen just 1.8 percent in the second quarter, even more paltry than the first quarter’s 1.9 percent clip. The range of forecasts is pretty wide: from 0.9 percent at the low end all the way to 2.9 percent at the top.

Of beige shoots and broken branches

Ben Bernanke has taken some flack for his argument that “green shoots” of economic activity might lurk around the corner. In one such swipe, Justin Fox of Time Magazine argued that the metaphor is flawed because what we’re really talking about is a moderation of contraction, not growth.

Today’s Beige Book, a collection of anecdotal economic evidence compiled by the Fed, showed only a few very faint positive signs. On housing, the report said the “number of potential buyers” was rising — not exactly a sure sign of a bottom.

But at least the New York Fed’s regional factory data suggested that the Fed chief’s green shoots might just see the light of day. Again, it was mostly a story about lesser deterioration, but an improvement nonetheless. Apart from a much better than expected reading on the overall index (which is still, it must be noted, at -14.65), there was a huge rise in the new orders index (Also still negative, but now at -3.88, from -44.76).

Germany, Japan hit by global consumer thrift

The world’s second largest economy, Japan, and Europe’s largest, Germany, all of a sudden have a lot in common. 

 

Their most striking resemblance in recent weeks is the breathtaking speed of economic decline, with output ransacked by a collapse in world demand for high-quality manufactured goods and an overvalued currency.

 

The fundamental problem is simple and doesn’t take an economist’s model to explain. At this stage of the financial crisis, who wants to replace a fully-functional Audi they bought a few years ago? What’s wrong with the 2007-vintage Sony PlayStation connected to the two-year-old Bravia or Grundig flat-screen TV? And who in their right mind would want to import the stuff in bulk when the euro and the yen are so expensive?