The Federal Reserve Bank of Philadelphia is out with a widely followed Business Outlook Survey for June.  The numbers are very good.

Declines in the region’s manufacturing sector were much less in evidence in June, according to results for this month’s Business Outlook Survey. Indexes for general activity, new orders, and shipments showed notable improvement, suggesting recent declines have lessened dramatically. Indicative of ongoing weakness, however, firms reported sustained declines in employment and work hours this month. Most of the survey’s broad indicators of future activity showed continued improvement, suggesting that the region’s manufacturing executives are becoming more optimistic that a recovery in business will occur over the next six months.

Current Indicators Reflect Near Steady Levels of Activity

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from -22.6 in May to -2.2 this month, its highest reading since September 2008 when the index was positive for one month (the index has been negative for 18 of the past 19 months, a span that corresponds to the current recession; see Chart).

Source
June 2009 Business Outlook Survey – Philadelphia Fed website

Related posts:

• Philly Fed survey points to manufacturing rebound
• Will Goldman’s Jim O’Neill change his bullish outlook?
• ISM: U.S. manufacturing contracting slower
• ISM Manufacturing Index has hit bottom
• U.S. ISM manufacturing survey hits 28-year low

With more and more major economists predicting recovery sometime later this year, many have forgotten that downside risks remain.  Berner, Roubini, Volcker, Krugman and Bernanke have all come out essentially saying they would not be surprised to see a ‘technical’ recovery at some point later this year.  Robert Gordon has gone as far as to suggest we could be in recovery already – at least in the United States. I too have called for a Q4 or Q1 recovery.  So, is it off to the races?

Hardly.  I don’t have to convince many readers at Credit Writedowns or Naked Capitalism that there is a darker scenario which threatens recovery.  Many of you see this according to preliminary results from a recent poll I conducted. Nevertheless, let me use this post as a reminder of that downside scenario with some commentary from economists.  David Rosenberg is not the only major bearish economist that sees a very troubling economic outlook.

First, a post by Wolfgang Munchau in the FT reveals that much of the economic data of late has actually been disappointing despite the rally in shares and corporate bonds.

Last week, the green shoots shrivelled. In South Korea, China and Germany, exports were declining once again. In the US, the Federal Reserve’s Beige Book said “economic conditions remained weak or deteriorated further during the period from mid-April through May”.

The March signs of revival turned out to be little more than a technical inventory correction, with no change in the underlying trend. The world economy is still contracting, though perhaps not quite as fast as at the start of the year.

As an analysis by economists Barry Eichengreen and Kevin O’Rourke* shows, global industrial output is still on the same trajectory as it was during 1930. The only question is whether we can avoid 1931 and 1932.

Munchau argues we can avoid a 1931 and 1932 scenario only if we see a marked change in the present policy response in major economies.  But, Munchau’s analysis makes one wonder why he finds the situation so dire for the global economy.  Why does Wolfgang Munchau think 2009 is tracking 1930?  The answer comes in the Eichengreen – O’Rourke data he references.  It is truly stunning: when one looks at statistics like industrial production, this downturn is looking as bad as the Great Depression. Here is how it is summarized at the economic site Vox.

The 6 April 2009 Vox column by Barry Eichengreen and Kevin O’Rourke shattered all Vox readership records, with 30,000 views in less than 48 hours and over 100,000 within the week. The authors will update the charts as new data emerges; this updated column is the first, presenting monthly data up to April 2009. (The updates and much more will eventually appear in a paper the authors are writing a paper for Economic Policy.)

New findings:

• World industrial production continues to track closely the 1930s fall, with no clear signs of ‘green shoots’.
• World stock markets have rebounded a bit since March, and world trade has stabilised, but these are still following paths far below the ones they followed in the Great Depression.
• There are new charts for individual nations’ industrial output. The big-4 EU nations divide north-south; today’s German and British industrial output are closely tracking their rate of fall in the 1930s, while Italy and France are doing much worse.
• The North Americans (US & Canada) continue to see their industrial output fall approximately in line with what happened in the 1929 crisis, with no clear signs of a turn around.
• Japan’s industrial output in February was 25 percentage points lower than at the equivalent stage in the Great Depression. There was however a sharp rebound in March.

Now I happened to listen to Barry Eichengreen make his case on Tom Keene’s show at Bloomberg Radio this past Thursday.  The interview makes for interesting listening and it gives you greater granularity on his view for the global economy. I have provided the podcast clip below.  (By the way, if you don’t already subscribe to Keene’s podcast, Bloomberg on the Economy, do it.  They have great guests.  Here is the link.)

I recommend you read the Eichengreen – O’Rourke article (the graphs are amazing). With that as background, the Munchau piece will be more powerful.  Afterwards, have a go and  listen to the Bloomberg podcast.  The combination will leave you with a very good understanding of the downside risk for the global economy.

Enjoy.

Sources
A Tale of Two Depressions – Vox
Optimism is not enough for a global recovery – Wolfgang Munchau, FT
Depression Dynamic Ensues as Markets Revisit 1930s – Eichengreen (March), Bloomberg

Related posts:

• Some tidbits about stimulus, recovery, and the Great Depression
• The Great Depression II meme
• Worse than the Great Depression
• IMF Head Strauss-Kahn uses the D-word Depression
• Weakest employment market since the Great Depression

The Institute for Supply Management released its monthly manufacturing index.  The data shows that the manufacturing sector is still contracting with the headline number rising to 42.8 in May, up from 40.1 in April. This number was ahead of analyst expectations of 42 flat.  50 represents the dividing line between a contracting manufacturing sector and an expanding one.

The key to the ‘beat’ was new orders, which rose from 47.2 in April to 51.1. That says that new orders in the manufacturing sector are growing for the first time in 18 months.  You should also notice that customers’ inventories are moving in a big way as well, with that number registering too low and the contraction of inventories actually accelerating.  Translation: the much fabled de-stocking of inventories is gathering pace, setting the stage for inventories to make a positive contribution to GDP by Q3.  You should see these two trends as leading indicators for a recovery because they are the first two sub-indices to switch direction in this incipient bottoming process.  You should also notice that the overall economy is also now growing according to this index.

The market sees this as very bullish and has rallied despite what I see as a less positive personal income report.  In essence, June has started off with generally positive data surprises which is supportive of equities.

I recently said you should see industrials as a canary in the coalmine for recovery as these are cyclical stocks and industries, so the ISM Index is really one to watch going forward.

Compare the above chart to the one from December 2008 to see how New Orders have rallied and how customers’ inventories have contracted.

Update: See the video below where the ISM’s Norbert Ore gives his take on this.

Source
Manufacturing ISM Report On Business® – ISM

Related posts:

• Services sector still contracting, but shows more new orders
• ISM Manufacturing Index has hit bottom
• ISM: U.S. Manufacturing sector growing again
• ISM: September manufacturing data disappoint; market sells off
• ISM shows manufacturing sector close to recovery

Last month I noted that the ISM Manufacturing index indicated that the manufacturing sector was still contracting, albeit at a slower pace.  The latest data from the month of April show the same phenomenon.  likely, the index has already hit bottom.

Here’s what the Institute for Supply Management says in its release:

WHAT RESPONDENTS ARE SAYING …

• “International customers are having trouble getting cash for new orders, even though they need/want the equipment.” (Computer & Electronic Products)
• “Starting to see some signs of increased production and demand from some automotive customers.” (Fabricated Metal Products)
• “Business conditions continue to be soft, but agriculture-related products are still quite bullish.” (Machinery)
• “We are optimistic that things will change for the better in 3Q.” (Chemical Products)
• “Starting to hear of slight upticks in orders from some sectors of our business but not all.” (Electrical Equipment, Appliances & Components)

The chart below, also in the release, should give you a feel for how broad-based the improvement in the sector is.  Note the purging of customer inventories.  It might even suggest that the purge has gone too far.  That is extremely bullish for Q3 GDP, if not Q2.

Now compare this to a chart from December when things were the worst.

My conclusion is that we have hit bottom in manufacturing. Apparently, Goldman’s Jim O’Neill is right.

Source
Manufacturing ISM Report On Business® – ISM

Related posts:

• ISM: U.S. manufacturing contracting slower
• ISM shows manufacturing sector close to recovery
• ISM Manufacturing Index: New orders growing
• Philly Fed survey points to manufacturing rebound
• Philly Fed: Business outlook shows ‘notable improvement’

The March 2009 Manufacturing ISM Report on Business is out.  The widely-followed figure of 36.3 for the purchasing manager’s index (PMI) shows a manufacturing sector contracting quickly, albeit at a slower pace.  Last month, the PMI was 35.8 and it was 35.6 in January.  So this marks the second consecutive month of gain in the figure.

Nevertheless, with 50 as the dividing line between a contracting and expanding manufacturing sector, the data demonstrates that the U.S. manufacturing sector continues to have difficulty.

Just yesterday, I mentioned that the PMI and the Philly Fed Survey for February both indicated that manufacturing is still contracting and that calls for an imminent rebound are premature.

WHAT RESPONDENTS ARE SAYING …

• “We remain challenged to align our capacities with demand.” (Nonmetallic Mineral Products)
• “Most of the international markets have been reducing inventory levels and they are forecasting improvements in the next 4 to 6 months.” (Chemical Products)
• “Many pockets of improvement.” (Electrical Equipment, Appliances & Components)
• “Still very slow. No stimulus package for manufacturing. Down 30 percent.” (Fabricated Metal Products)
• “What we are feeling now is that customers aren’t making their final payments on equipment that has already been shipped.” (Machinery)

Source
March 2009 Manufacturing ISM Report On Business® – ISM

Related posts:

• ISM Manufacturing Index has hit bottom
• Services sector still contracting, but shows more new orders
• Services ISM survey falls indicating no recovery
• ISM shows manufacturing sector close to recovery
• U.S. ISM manufacturing survey hits 28-year low

Back in February I posted an article called “The bullish argument for the global economy” highlighting Goldman Sachs’ Chief Economist Jim O’Neill’s bullish view for the economy. O’Neill believed in February that a economic rebound was certainly possible due to fiscal and monetary stimulus. Paul Kasriel has made similar arguments.

While I do agree that fiscal and monetary stimulus have been great and may induce a cyclical rebound, I wanted to point out that he mentioned the Philly Fed Survey and the ISM surveys as potential leading indicators of recovery.

Both surveys are out and they have not been extremely robust.

Released on March 2nd, the ISM was marginally higher last month. But, with 50 as the border to recession, a PMI reading of 35.8 is deeply recessionary.

The Philadelphia Fed’s March Business Outlook Survey came out today and this is what it said (bolding mine):

The region’s manufacturing sector continued to contract this month, according to firms polled for the March Business Outlook Survey. Indexes for general activity, new orders, shipments, and employment remained significantly negative. Employment losses were substantial again this month, with over half of the surveyed firms reporting declines. Firms continued to report declines in input prices and prices for their own manufactured goods. Most of the indicators of future activity suggest that the region’s manufacturing executives expect declines to bottom out over the next six months, but the firms’ employment forecasts suggest continued weakness.

Indicators Reflect Further Contraction

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, edged higher, from -41.3 in February to -35.0 this month. Last month’s reading was the lowest since October 1990. The index has been negative for 15 of the past 16 months, a period that corresponds to the current recession (see Chart). Continued weakness was evident in all of the broad indicators this month. The survey’s current new orders index declined nearly 10 points, to -40.7, its lowest reading since July 1980. The shipments index increased six points, but this follows a record low in February. The survey’s current inventory index declined precipitously this month, from -24.3 to -55.6, its lowest reading in the history of the survey.

Basically, the Philly Fed’s survey was big fat bust. No matter, the market is up nearly 160 points as I write this. So, is this a harbinger of good things to come or should I expect Jim O’Neill to change his tune?

Sources
February 2009 Manufacturing ISM Report On Business® - ISM
March 2009 Business Outlook Survey – Federal Reserve Bank of Philadelphia

Related posts:

• Philly Fed: Business outlook shows ‘notable improvement’
• Philly Fed survey points to manufacturing rebound
• ISM: U.S. manufacturing contracting slower
• ISM: U.S. Manufacturing sector growing again
• U.S. ISM manufacturing survey hits 28-year low

The ISM Manufacturing Survey came out. The PMI index was 35.6, up from 32.4 in December. It was bad (50 is the tipping point between recession and growth), but it was not all bad. There were two industries with growth: textiles and petroleum. Moreover, the declines in new orders, productions, backlogs, etc. were not accelerating the way they were last month. Perhaps a bottom is forming here – especially on pricing.

I see this report as a net positive. The trend is not a clear acceleration to the downside as it was in December. Note thew areas highlighted in red above.

Below is a video from Bloomberg in which you can get a feel for the differing views on what this data says about manufacturing and the economy going forward.

Sources
January 2009 Manufacturing ISM Report On Business® – ISM

Related posts:

• U.S. ISM manufacturing survey hits 28-year low
• Services ISM survey falls indicating no recovery
• ISM shows manufacturing sector close to recovery
• Does positive growth in Q2 or Q3 mean the recession is over?
• Quote of the day: Michael Douglas as Gordon Gekko

Peter Schiff is that market wizard people were laughing at just a year ago because of his extreme views. Well, things have turned out much as he has indicated they would. So, now he has a captive audience. And what is he saying? Government is a burden that we need less of. The way forward is not government stimulus but less government, less consumption and higher savings.

Well Peter, I have news for you: that game plan of yours is a recipe for deflation, depression, civil unrest and financial Armageddon. You see, Schiff is an ideologue from the small government, free markets crowd. While I agree with his broader themes about less consumption and more savings, I do not see eye-to-eye with his ideology. What America needs now is a practical solution to a real problem, not ideology from the small government crowd.

Schiff suggests stimulus is seen as a way to increase consumption in order to keep the gravy train going. I would suggest it is a way to ease America into a downturn and prevent the death spiral that would be likely if we took his approach. Private citizens can spend less and save more but having the government do the same will certainly lead to a collapse of our banking system. Witness Bank of America and Citigroup as case examples. And if you want to see what less government spending will do for an economy, take a look at what is happening in California where spending cuts are likely. I predict this will lead to economic hardship, mortgage defaults, lower home prices and on it goes.

No one is saying that government spending is going to save us — at least I am not. However, it can temporarily replace some of the collapsing private consumption until we have beaten back the worst of this downturn. (For what its worth, I am a small government, lower, flatter taxes proponent – when depression is not at our door.)

I see Schiff’s views as ideological and not practical. The ‘free market’ is not going to save us. Here’s the video. Judge for yourself.

Related posts:

• Bill Gross: This economy requires a check from the government
• Peter Schiff: they laughed at him, now he’s laughing back
• Barron’s: an interview with Peter Schiff
• A brief philosophical argument about the role of government, stimulus and recession
• We need humility

The Institute for Supply Management released its monthly manufacturing survey for the Unite States today. The data show a fall from 36.2 to 32.4 where 50 represents the divide between recession and expansion. The 32.4 figure represented the lowest figure in 28 years, while new orders were at their lowest since 1948, suggesting that future demand for manufactured products will be extremely weak.

The chart below released along with the survey demonstrates that manufacturing weakness in the U.S. extends across all measured dimensions and that the decline is accelerating. This should mean that job losses in the sector will be quite large going forward, especially because new orders are down substantially.

To assess how this downturn compares with previous ones, one should not only look at the absolute numbers but also the speed and magnitude of the change in outlook. First, as to speed, we are seeing the fastest drop-off in manufacturing since at least 1981 as measured by the year change in the index. However, when looking at the magnitude of change we have not reached the levels seen in that recession.

The chart above shows the rolling change in the 12-month average index readings. By averaging out the last twelve months one can get a better read of the duration and depth of change. As you can see, the early 1980s were much worse than what we are seeing today so far. Moreover, manufacturing was a larger percentage of the U.S. economy at that time.

So the overall message is that the manufacturing situation is weak right now. However, as with employment trends, the early 1980s and the 1973-1975 period both were more severe downturns than what we have experienced to date. Nevertheless, we should expect the negative trends to continue into 2009, eventually making this recession deeper than either of those two.

Sources
December 2008 Manufacturing ISM Report On Business® – ISM
Fresh fall in US factory output – BBC News

Related posts:

• Philly Fed survey points to manufacturing rebound
• ISM shows manufacturing sector close to recovery
• US manufacturing suffers a steep decline
• ISM Manufacturing Index has hit bottom
• ISM Manufacturing Index: New orders growing

The punderati has been especially kind to China. As the global recession takes hold, the conventional wisdom has moved from the largely debunked de-coupling of China to a story where China slows, but much less so than the west. But is that really how things will play out?

Marshall Auerback certainly thinks China faces some stiff headwinds, but he believes these are issues that can be overcome. Debt levels are extremely low and savings levels very high amongst the consuming masses there. Mark Mobius believes that the emerging markets generally are shortly due for an upswing. However, I would like to take a more pessimistic tack here.

You may recall that just yesterday I quoted from an Indian article which underlined the cratering of export demand for China. Let me add to those thoughts with the following analysis:

1. The Chinese are highly dependent on manufacturing exports to maintain growth. Most of their growth in the last two decades has come from export demand subsidized by a cheap currency and massive numbers of relatively low wage workers.
2. However, demand from the west is cratering because of the worst recession since the 1930s.  Because China’s export economy is geared to the west, this has had a devastating impact on export demand.
3. As a result, the Chinese will need to switch to a focus on domestic demand. Where is this demand going to come from? Granted they have no debt. However, people don’t just start buying stuff in the middle of the greatest downturn in 75 years. Chinese people see these and must know that caution is warranted.
4. Moreover, their residential property market has imploded as has the stock market. This too must work against the psychology of increased domestic spending as the wealth effects here are significant.
5. And the banking system was already fragile. My general thinking would be there are huge hidden losses at Chinese banks as a result. Therefore, lending capacity has to be restricted going forward. I would not be surprised if we saw a reduction in the money multiplier in China as well.
6. Ultimately, I would argue that the Chinese domestic consumer is not going to consume more.   In fact, they would need to consume a lot more given the GDP per capita of the average Chinese person in order to replace the lost demand from the West.  But, I believe they will consume less given the factors enumerated above.

I await more data from China. In the meantime, I remain skeptical but open to persuasion.

Sources
China’s industrial output growth stalls – Sydney Morning Herald
China ‘repeating US mistakes of 1930s’ – Sify.com, India
The Great Crash of China – Far Eastern Economic Review
China’s Output Growth to Drop Further, Minister Says – Bloomberg
China: Industrial Output – Bloomberg
China Industrial-Output Growth Is Weakest Since 1999 – Bloomberg

Related posts:

• China cutting overcapacity
• China can handle collapse of speculative inflows
• Marc Faber: China’s numbers are fake
• Will Asia’s downturn be worse than America’s?
• The world’s biggest bank is Chinese

Despite the plethora of data that has come out recently, one thing that has occasioned very little comment is the outlook for U.S. exports. Exports are generally not a big factor in the subset of companies involved in the ISM survey, but the plunge in export orders to 34.5 suggests that U.S. exports, hitherto a support in an otherwise collapsing economy, could be in big trouble as well.

U.S. November ISM Non-Manufacturing Index: Summary

	Nov.	Oct.	Sept.	Aug.	July	June	May	April	March	6-mo Avg
	2008	2008	2008	2008	2008	2008	2008	2008	2008
Composite Index	37.3	44.4	50.2	50.6	49.5	48.2	51.7	52	49.6	46.7
Export Orders*	34.5	50	50.5	44.5	47.5	52	54	48.5	55	46.5
Import Orders*	40	52	47.5	46	49	50.5	48	50	54.5	47.5

U.S. November ISM Non-Manufacturing Index: Summary, December 3, 2008, Bloomberg

Note that the export order index is falling faster than the import order index. The recent strength of the dollar is clearly having an impact. The combination of these two sub indices of the manufacturing ISM shows the substantial positive differential of exports over imports has disappeared. The same sub indices for the non-manufacturing ISM may be telling us once again that the whole trade improvement that was such a positive for the U.S. economy in recent quarters is about to disappear and may even reverse. This ominously echoes what happened in the wake of the Asian Financial Crisis in 1997/98, where a flight into the dollar from the Asian currencies triggered a huge deterioration in the U.S. current account and a further hollowing out of the country’s manufacturing base. With Detroit already on the verge of collapse, the decline of the Korean won from 900 to 1400 massively improves Korea’s competitiveness in the U.S. auto market. If dollar strength persists, then no bailout or no bailout, GM, Ford and Chrysler are toast.

Related posts:

• Dollar strength is an illusion
• Japanese defend dollar’s status while China tears it down
• U.S. Dollar: Cliff Diving
• The U.S. dollar plunges due to quantitative easing
• Why I am bearish on the U.S. Dollar

My very first post on this blog was in March and it was titled “The Economy Is Definitely In Recession.”  Back then, this seemed like a stretch for a lot of people, but today the National Bureau of Economic Research (NBER), which makes the official recession call for the U.S., determined that the recession began in December 2007.

The U.S. economy entered a recession a year ago this month, the panel that dates American business expansions said today.

The declaration was made by the cycle-dating committee of the National Bureau of Economic Research, a private, nonprofit group of economists based in Cambridge, Massachusetts. The last time the U.S. was in a recession was from March through November 2001, according to NBER.

“The committee determined that the decline in economic activity in 2008 met the standard for a recession,” the group said in a statement on its Web site. The 1.2 million drop in payroll employment so far this year was the biggest factor in determining that start of the contraction, the group said.

Now, the only question is how long and how deep a recession we will have. I have long held that the U.S. will remain in recession until well into 2009. Let’s hope this is still the case. Given the recent sharpness of the downturn, we may have to wait until 2010 before we see any pickup.

How will we know the economy has turned?

The sequence goes from consumers’ real hourly earnings to consumer spending to industrial production to capital spending to corporate profits. Employment and capital (business) spending are lagging indicators and are not drivers of the business cycle at all.

So, when people start earning more money and industrial production picks up, we may be about to turn the corner. But, for now, that seems a long way off.

Source
Recession in U.S. Started in December 2007, NBER Says – Bloomberg

Related posts:

• The Economy Is Definitely In Recession
• US Recession Signals
• The Economy’s Four Horsemen
• ISM Manufacturing Index plummets
• Recession while GDP is growing?

The Institute for Supply Management (ISM) released its monthly report on Manufacturing, the ISM Manufacturing Report on Business®.  It showed a reading of 36.2 down from 38.9.  Where 50 is the demarcation line between growth and recession, 36.2 says the manufacturing industry in the United States is deep into recession territory.

As with recent employment data, there is nothing positive to say about this report.  Everything is contracting from new orders to employment to prices  — and it is all doing so at a faster rate, suggesting worst is yet to come.

This is what respondents to the ISM survey had to say about business:

• “The only positive thing of late is that the U.S. dollar has strengthened significantly against other currencies. We import the majority of our materials so this will have the effect of lowering our COGS.” (Transportation Equipment)
• “Steel industry is our main customer, and they have had a real slowdown.” (Computer & Electronic Products)
• “Criteria for projects is significantly higher with very short ROI periods.” (Food, Beverage & Tobacco Products)
• “We have revised downward our top-line sales estimates for CY2009 by 8 percent due to the continued softness we see in the housing sector.” (Machinery)
• “Suppliers are trying to hold onto pricing, but petrochemical and commodity prices are dropping like a rock.” (Plastics & Rubber Products)

36.2 is the lowest reading on the ISM Manufacturing Index since May 1982’s 35.5. So, for manufacturing, this is the deepest recession in nearly three decades.

What has me worried is the potential bankruptcy of a Big Three automaker which would mean a massive loss of jobs in the U.S. and Canada. Moreover, the weakness is widespread. This is not a U.S.-centric phenomenon. Look at what Japan Economy Watch says about Japan for instance:

Japanese industrial output was down again sharply in October as manufacturers forcecast further record falls in the months to come, leading to warnings that Japan’s recession may well be much deeper and even longer than originally anticipated. This rather bleak news on Japanese factory output may also be a pointer to a longer and deeper global recession, as Japan’s main customers – the euro zone and U.S. – enter recession while growth slows sharply in China.

Industrial output fell 3.1 percent in October, significantly above the median market forecast for a 2.5 percent drop, and the outlook now is for a record 8.6 percent contraction in the fourth quarter. Industrial output has already fallen in all three quarters so far this year and, with exports and household spending now also in decline, it looks very much like the present recession can be a long and deep one, possibly the longest since Japan’s two decade low-growth/price-deflation agony started in the early 1990s.

Combine this data with what we already know and it should be readily apparent that the U.S. and global economy will be suffering for some time to come. My advice to U.S. policy-makers is that they deal with the Big Three automaker situation quickly and deftly or we could see much worse.  Another botched bankruptcy a-la Lehman Brothers is the last thing we need.

Source
November 2008 Manufacturing ISM Report On Business® – ISM
Japan Deflation Risk Grows As Industrial Output Falls Sharply – Japan Economy Watch

Related posts:

• ISM Manufacturing Index plummets
• ISM Manufacturing Index has hit bottom
• ISM: U.S. manufacturing contracting slower
• Industrial production implodes
• U.S. ISM manufacturing survey hits 28-year low

If you were not convinced about the severity of the present recession in the United States before, then the ISM Manufacturing index data for October will serve as a wake-up call. The index plunged to the deep recessionary level of 38.9 where 50 is seen as the level separating expansion from recession. Just two months ago, the index was at 50, where it has hovered since September 2007. However, since July the situation for manufacturing in the United States has deteriorated rapidly.

The index now stands at its lowest level in 26 years.

Now, what you will notice from the chart below is the massive move to the downside in prices and in exports. These two data points indicate that the economy has gone from having to worry about inflation to having to worry about deflation. Moreover, the export data means that a stronger dollar and slowing growth abroad is going to have very negative effects on U.S> growth.

Last month, I indicated that production was a key statistic for judging the strength of an economy.

The National Bureau of Economic Research (NBER) is the official arbiter of business cycles in the U.S. If you want to know when a recession occurs, it is the NBER which decides. The NBER relies on understanding four major economic data trends — the economy’s four horsemen:

• How much we spend: retail sales
• How much we earn: real earnings growth
• How much we make: industrial production
• How much we work: employment

When one looks at a composite view of what this data is telling us about the economy, production is signaling severe economic weakness. However, retail sales is signaling a similar plunge as personal consumption expenditures released last week with the GDP data showed consumers are now spending 3 percent less. On the other hand, real earnings growth is mixed, as are the employment data.

The sequence of events generally moves from a reduction in earnings (or, in this case, wealth), followed by a reduction of consumer spending, followed by a cut in production, and only then, followed by a reduction in employment.

What the data suggest is that we are in the beginning stages of a deep recession where much of the effects on employment have yet to be felt. Unfortunately, this means the economy will fall significantly from here.

Update: I forgot to add my chart of the historical numbers.

Source
October 2008 Manufacturing ISM Report On Business® – ISM

Related posts:

• US manufacturing suffers a steep decline
• ISM Manufacturing Index: Deep recession territory
• The U.S. has been in recession for one year
• The Economy Is Definitely In Recession
• Philly Fed survey points to manufacturing rebound

The U.S. industrial production numbers for September came out at 9:15ET this morning and they were very weak. However, it should be noted that the numbers were very distorted by lost production due to two hurricanes. Nevertheless, industrial production data — along with recently released jobless claims and retail sales numbers — represent further evidence of a recession in the United States.

I have crunched the numbers and provided some graphs below. The numbers to look at are the raw (non-seasonally adjusted) ones to compare them on a year-on-year basis. The trend in production in the U.S. that you see below is down. Irrespective of the one-month aberration due to the hurricanes, industrial production has been trending down since January 2008.


Now, I also tried to strip out month-to-month volatility by presenting average data for the last 12-months and compared it to the average one year back. And while this line is smoother, you can clearly see that production in the United States is trending down. In fact, if you were a business manager or an investor looking to make decisions about the future, this chart makes the trend much clearer. In predicting a slowing in the U.S. economy, the industrial production numbers show that you would have started to make your move by early 2006. The average change in industrial production peaked in Aug-Nov of 2005.

I think the obvious point here is that the data would have given someone pause as far back as early 2006. The downtrend that resulted in a housing collapse, a financial crisis and recession has been telegraphed for more than two years. The concept that this whole course of events comes as a surprise is false.

Related posts
The Economy’s Four Horsemen
Back to the real economy
Industrial production implodes
U.S. manufacturing suffers a steep decline
The panic is over

Source
Industrial Production and Capacity Utilization – Federal Reserve Statistical Release

Related posts:

• Industrial production implodes
• Chart of the day: Industrial Production
• Chart of the day: Retail Sales
• Jobless claims rise 30,000 from artificially low number
• How weak is the U.S. employment market?

Yesterday, I laid out some of my general thinking on the business cycle and the economy. Obviously, understanding the business cycle is important to economic forecasting and is, therefore, central to personal financial planning, general investing and business planning.

Over the next few weeks, I will chart out a panoply of data sets for the U.S. economy, which should give you a sense of where we are headed and how this compares to previous business cycles. But before I do, let me take this moment to give you a sense of how all of this ties in together.

The National Bureau of Economic Research (NBER) is the official arbiter of business cycles in the U.S. If you want to know when a recession occurs, it is the NBER which decides. The NBER relies on understanding four major economic data trends — the economy’s four horsemen:

• How much we spend: retail sales
• How much we earn: real earnings growth
• How much we make: industrial production
• How much we work: employment

But note, the NBER makes its analysis of these cycles to only determine when a business cycle peak has occurred and when a trough has occurred. Its recession call does not indicate when the rate of economic growth is slowing, which is the thing you want to know. Moreover, the NBER dates whether recession occurred only after the fact. That doesn’t do you much good if you are looking to act based upon where the economy is headed.

Never fear — there are ways to get to the bottom of all this. Joseph Ellis, in his book, “Ahead of the Curve,” does an amazing job of identifying cause and effect in the business cycle in a way that can be really helpful for anyone who wants to get a handle on where things are headed. Ellis was a Partner at Goldman Sachs and was ranked as the #1 industry analyst for eighteen consecutive years by Institutional Investor for the retail industry, a sector that desperately needs to know business cycle trends.

His basic findings bear repeating:

• Cause and effect relationships and the sequence in which they occur are pretty consistent throughout history.

• However, making sense of the data is complicated by two factors:
  • 1. Reliance on recession as the key measure of economic difficulty. In fact, recession is a lagging indicator which is completely useless for planning purposes because most of the damage to the economy and your portfolio is done by the time recession hits. In the future, we need to look for reliable early signs of weakening economic activity if we want to avoid getting caught in the headlights of a recession.
    2. As I indicated in my post on retail sales, the business press and most pundits have an annoying habit of focusing on month-to-month and quarter-to-quarter data. Doing so misses the underlying relationships in the data.

• Year-over-year rates of change are the critical factor. Don’t look at the absolute levels, focus in on the change — the delta, if you will.
• Consumer spending makes up two-thirds of the economy and drives the rate of economic change more than any other variable. Therefore, predicting key turning points in consumer spending patterns is going to be critical. Ellis says doing this will generally also predict turning points in the economy as a whole. The sequence goes: consumers’ real hourly earnings to consumer spending to industrial production to capital spending to corporate profits.
• Employment and business spending are lagging indicators and are not drivers of the business cycle at all. Companies cut investment in human and physical capital as a result of a slowdown in the rate of change in consumption.
• In order to forecast uptrends and downtrends in specific sectors and regions, you will need to drill down into sector- or location-specific data.

So, as we move forward and I report out on the major economic trends, keep this framework in mind, because it will give you a sense of how things are connected. I will be very focused on retail sales, real earnings growth, industrial production and employment. I also highly recommend Ellis’ book to anyone looking to make forecasts whether for personal investment or business forecasting and spending.

Related posts
Chart of the day: Retail Sales
Back to the real economy

Sources
Ahead of the Curve – Joseph Ellis

Related posts:

• US Recession Signals
• The U.S. has been in recession for one year
• ISM Manufacturing Index plummets
• Recession: How Long and How Deep?
• The Economy Is Definitely In Recession

Now that policy makers worldwide have finally stepped in to stop the bleeding, we have had a relief rally of monumental proportions. Most global indices were deep into oversold territory, meaning that there was lots of pent-up demand for a turn to the upside. A big rally to the upside was baked into the cards. However, these are purely technical factors and they have no relationship to the underlying fundamentals of the economy.

The coordinated actions this past week mark the end of the ‘acute’ phase of the credit crisis. This is now over. But, we will be left with the ‘chronic’ problems of slowing growth that include global rebalancing, increasing savings, purging excess debt and leverage and running out the clock on this recession. In this chronic phase, the question is how deep and how long the recession will be. And, I believe these questions will start to take center stage before long.

I was reading a blurb in the NY Times that reminded me of the so-called real economy that I anticipate will move center stage shortly. The article was about the home retailer Linens-n-Things, a company I see as a poster child for the deadweight loss we wish to avoid in this downturn.

The retailer, which initially struggled amid a housing slowdown and a decline in consumer discretionary spending, was finally taken down by a credit crisis that prevented possible buyers from getting the credit to fund a purchase.

“If capital markets weren’t so tight, I think this chain might possibly have survived,” Mr. Schaye told Reuters. “There’s just no financing to do these deals at all.”

The company had filed for bankruptcy protection in May and has already closed more than 100 stores. It had been under pressure from its creditors to rush closing its remaining 371 stores, according to court documents.

As of Dec. 31, the company was one of the largest purchasers of home furnishings in the United States, employed some 17,500 people and had a vendor base of about 1,000 suppliers, according to court documents. At that time, the company was operating 589 stores in 47 states and seven Canadian provinces.

But the sharp decline in the housing market and a slump in consumer discretionary spending undermined the company’s ability to pay its suppliers.

And though some investors were interested in buying the company, they were hindered by the lack of ability to borrow money, Mr. Schaye told Reuters.

“I actually thought there were going to be a couple of people who would (submit an offer) at the 11th hour, but they just didn’t get there,” he said.
-NY Times

You will notice that this is a company that could have and should have continued as going concern, even in a garden variety recession. However, excessive leverage and a credit crisis caused it to be liquidated, and now 17,500 people will be unemployed.

This scenario will be repeated in numerous places in North America, Europe, Japan, and ANZ — and will serve as notice that it is the real economy where we work and live that sustains the economy.

Undoubtedly, the United States is in recession. The likes of Paul Krugman and Paul Volcker have said so. But, I like to think of recession not as a state, but a change in state (and certainly not a state of mind as U.S. politician and McCain advisor Phil Gramm has offered).

Recession is like decelerating in your car from 100 to 40. But, it could easily be like going from 70 to 20. It is the change in economic growth that makes recession, not the absolute level of growth. When an economy slows from 7% growth to 2% growth, that is recession as much as slowing from 4% to -1%. In fact, when we talk about fast-growing emerging economies like China, we are talking about slowing down from 10% breakneck growth to a 5% amazing-for-us-but-not-for-China kind of growth. Five percent growth is a recession in China.

So, that begs the question, what clues should we be looking for to know how we’re doing going forward then? It’s the four horsemen of the economy:

1. How much we spend: retail sales
2. How much we earn: real earnings growth
3. How much we make: industrial production
4. How much we work: employment

Right now, the data for the U.S. and much of Central and Western Europe as well as for New Zealand, Singapore and Japan point to recession. However, that could always change. My analysis says that this global recession will last until at least late 2009 and this will be the deepest recession in post World War II history. Nevertheless, its depth and duration are still somewhat dependent on policy responses globally. Purging debt, increasing savings and bringing the shadow banking system to heal would all be positive developments in making this recession as quick as possible.

Now that the acute phase of the credit crisis is coming to an end, expect to see a lot of data here in the coming days and weeks on the four horsemen of the economy. The data should help us understand where things are headed.

Related posts:

• Fix the real economy first: lessons from James Montier
• Marc Faber says rate cuts won’t work
• Roubini: How to avoid the horrors of ‘stag-deflation’
• Three views of the global economy
• JPMorgan Chase: Large exposure to real economy downturn

The numbers on auto sales were unbelievably bad for September — Ford down 34%. Honda down 24%, Toyota down 32%, Nissan down 37%. Amazingly, G.M. was at the head of the pack with sales down only 16 percent. (I guess those Escalade Hybrids are selling like hot cakes).

Blame this one on the credit crunch because CNBC is saying that lack of financing was directly responsible for the drop. GM fared better due to an aggressive discounting campaign.

Major automakers reported plunging U.S. sales for September on Wednesday — led by a 34 percent slide at Ford Motor Co — as an escalating credit emergency slammed a slumping industry and raised new doubts about when the world’s largest auto market would hit bottom.

The downturn in auto sales for September coincided with a crisis on Wall Street and claimed even the auto industry’s better-performing brands.

Sales were down 24 percent at Honda Motor Co Ltd, 32 percent at Toyota Motor Corp and 37 percent at Nissan Motor Co Ltd.

U.S. industry sales leader General Motors Corp, which was more aggressive in discounting its vehicles, managed to keep its September sales decline to a relatively small 16 percent to take a larger share of a rapidly declining market.

“Consumers and businesses are in a very fragile place,” Ford sales chief Jim Farley said. “An already weak economy compounded by very tight credit conditions has created an atmosphere of caution.”

Chrysler LLC was also expected to post lower sales.

The bleak auto sales results represent an early reading on the recent economic impact of a credit crisis that has triggered a rapid consolidation in banking and ongoing government efforts at a rescue plan over the past month.

On an industry-wide basis, analysts had expected auto sales to drop to a 13.5 million annual rate in September, down from 16.2 million a year earlier and from August’s 13.7 million.

Earlier this year, a sharp rise in gasoline prices accelerated a shift in consumer demand toward more fuel-efficient cars and away from large trucks and SUVs.

But in recent months, auto industry executives and dealers have said the lack of credit for car shoppers has supplanted gas prices as a reason for lost sales.

Ford said customers were being forced to use more cash to close deals and said the credit-market uncertainty made it impossible to forecast when the industry would bottom out.

The political debate in late September in Washington over a still-pending bailout for the financial sector stopped car buyers in their tracks by injecting a new note of uncertainty, Ford’s chief sales analyst George Pipas said.

“It was tantamount to a natural disaster,” he said.

The drop in auto sales comes despite stepped-up discounting on 2008 models, including an employee-pricing offer from GM.

Sources
Auto sales plunge as credit crunch hits – Reuters
Ford Auto Sales Collapse – CNBC

Related posts:

• U.S. auto sales plummet: everyone down over 30%
• Strong May auto sales are bullish for retail sales
• Third quarter auto production to be significant boost to U.S. GDP
• Sweden: competitive auto bailouts begin with Saab and Volvo
• Chart of the day: Retail Sales

The ISM Manufacturing survey, a widely-followed gauge of manufacturing activity in the United States, plunged in September from a near-recession reading of 49.9 in August to the deep recessionary level of 43.5. This shockingly steep fall is yet another sign that the U.S. is in recession.

Last Thursday a foreshadowing of the ISM survey came in the form of the durable goods report. At the time, I said:

Economists had expected the durable goods report for August 2008 to be weak, but the report showing durable goods orders down 4.5% was much weaker than expected.

While I do believe that the United States is in recession and the durable goods report is considered a key indicator of future manufacturing activity, I do not put that much weight in one report. The durable goods report is notoriously volatile from month to month and we can expect major revisions going forward.

Nevertheless, we should be cognizant that most of the economic data being released for the third quarter points to a very weak economic environment.

Unfortunately, the ISM report only confirms the steep downward path that the U.S. economy has taken in the last few months. Retail Sales, Personal Income, Employment and Production, the four gauges of recession used by the NBER (National Bureau of Economic Research), are all pointing to recession.

However, most worrying in the ISM data are that the data points pointing to future industrial production, New Orders and Backlog of Orders, are down the most. This suggests that manufacturing activity will absolutely collapse and many layoffs in the manufacturing sector should be expected.

Unfortunately, this report has almost zero positive about it. It is truly awful. Let’s hope this is a one-month aberration because, if it is not, the U.S. economy is in deep trouble.

Related posts
Durable goods orders down 4.5%, double expectations

Source
September 2008 Manufacturing ISM Report On Business – ISM

Related posts:

• Durable goods orders down 4.5%, double expectations
• Philly Fed survey points to manufacturing rebound
• New home sales and durable goods: economic reports
• ISM shows manufacturing sector close to recovery
• U.S. ISM manufacturing survey hits 28-year low

Economists had expected the durable goods report for August 2008 to be weak, but the report showing durable goods orders down 4.5% was much weaker than expected.

While I do believe that the United States is in recession and the durable goods report is considered a key indicator of future manufacturing activity, I do not put that much weight in one report. The durable goods report is notoriously volatile from month to month and we can expect major revisions going forward.

Nevertheless, we should be cognizant that most of the economic data being released for the third quarter points to a very weak economic environment.

New Orders

New orders for manufactured durable goods in August decreased $9.9 billion or 4.5 percent to $208.5 billion, the U.S. Census Bureau announced today. This was the largest percent decrease in new orders since January 2008 and followed three consecutive monthly increases including a 0.8 percent July increase. Excluding transportation, new orders decreased 3.0 percent. Excluding defense, new orders decreased 5.0 percent.

Shipments

Shipments of manufactured durable goods in August, down following two consecutive monthly increases, decreased $7.7 billion or 3.5 percent to $210.1 billion. This was the largest percent decrease in shipments since December 2002 and followed a 2.3 percent July increase.

Unfilled Orders

Unfilled orders for manufactured durable goods in August, up thirty of the last thirty-one months, increased $3.0 billion or 0.4 percent to $827.2 billion. This was at the highest level since the series was first stated on a NAICS basis in 1992 and followed a 0.8 percent July increase.

Inventories

Inventories of manufactured durable goods in August, up thirteen of the last fourteen months, increased $2.4 billion or 0.7 percent to $338.5 billion. This was also at the highest level since the series was first stated on a NAICS basis in 1992 and followed a 0.9 percent July increase.

Capital Goods Industries

Nondefense

Nondefense new orders for capital goods in August decreased $5.6 billion or 7.5 percent to $68.9 billion.

Defense

Defense new orders for capital goods in August increased $0.9 billion or 9.4 percent to $9.9 billion.

-U.S. Census Bureau

Related posts:

• Highlights from report with Q1 U.S. GDP down 6.1%
• New home sales and durable goods: economic reports
• Third quarter GDP growth comes in at 3.5%
• US manufacturing suffers a steep decline
• GDP revised to down 5.7% for Q1 2009

The real economy in the U.S. is already in recession, even as we fight the effects of a financial market meltdown. Industrial production numbers for the United States came out and it was down a massive 1.1% for August. That means a negative number for GDP in Q3 is all but assured.

While we must be concerned about our banking system, I am also worried about the real economy.

Industrial production decreased 1.1 percent in August and was revised down in June and July to show smaller gains of 0.2 percent and 0.1 percent respectively. After little movement over the previous three months, factory output was down 1.0 percent in August, in part because of a drop of 11.9 percent in the production of motor vehicles and parts. Excluding motor vehicles and parts, the index for manufacturing decreased 0.3 percent. The output of mines declined 0.4 percent, and the output of utilities fell 3.2 percent, as temperatures in August were unseasonably mild.

Precautionary shutdowns in the Gulf of Mexico in advance of Hurricane Gustav partly curtailed refinery activity, petrochemical production, and the extraction of crude oil and natural gas; however, the estimated effect in August of disruptions due to the hurricane on total industrial production is estimated to have been less than 0.1 percentage point. At 110.3 percent of its 2002 average, total industrial production was 1.5 percent below its level of a year earlier. The capacity utilization rate for total industry fell to 78.7 percent, a level 2.3 percentage points below its average level from 1972 to 2007.
-Federal Reserve

The last sentence here is the one to be most concerned with. Capacity utilization is now at a level that indicates recession for the United States. Industrial production is now lower than one year ago, another sign of recession (in the chart below, the shaded regions represent recessions).

With consumer spending, the only factor holding up the U.S. economy, under pressure, it has to be understood that the U.S. is in for a very hard landing. And the graph above makes clear that industrial production and recession have much further to go before we hit bottom in the economy.

Related posts:

• Chart of the day: Industrial Production
• US industrial production is very weak
• Toyota to cut global capacity by up to 10%
• Durable goods orders down 4.5%, double expectations
• US Recession Signals

The FT reports:

The eurozone economy has shown fresh signs of spluttering, with German industrial production dropping unexpectedly sharply in May – the strongest monthly fall since August 1997.
-FT, 7 Jul 2008

This is the latest sign in a string of reports that point to a deepening slowdown in the heart of Europe. Just this past Friday factory orders came in below expectations (see story). Moreover, retail sales have been falling and wage conflict rising as inflation takes its toll on the German economy.

Given how buoyant Germany had been in 2007, one must conclude that the downturn in German fortunes are an outgrowth of the credit crisis and contagion from the U.S. in particular.

As the slowdown in the U.S. started, many pundits wondered allowed whether the world could de-couple from the U.S. this time, and continue to grow at or above trend. As far as Germany is concerned, we have the answer: no.

Related posts:

• Recession worries in Germany deepen
• Germany: Inflation tames retail sales
• Eurozone in recession as Germany contracts
• Germany hit by global economic slowdown
• Warren goes to Germany

The latest bit out from the U.S. is that the services sector has unexpectedly contracted.

From Bloomberg News:

U.S. service industries unexpectedly contracted in June as a gauge of prices soared to a record and employment reached an all-time low.

The Institute for Supply Management’s index of non- manufacturing businesses, which make up almost 90 percent of the economy, decreased to 48.2, the lowest level since January, from 51.7 in May. A reading of 50 is the dividing line between growth and contraction.

Rising energy costs and the prospect of slower consumer demand are making companies less optimistic and pushing them to trim their own spending on technology and payrolls. Earlier today, the government reported that the U.S. lost jobs in June for a sixth straight month.

“I don’t think there’s any way that you cannot have slowing in the service sector,” John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, said before the report. “The housing correction did spread to the rest of the economy.”

The U.S. and the U.K. both have economies that are high on debt, low on credit availability where the services and manufacturing sectors are in the doldrums and unemployment is rising. Nearly all of these factors speak to recession.

Source
U.S. Service Industries Contract, Prices Reach Record, Bloomberg News, 3 Jul 2008

Related posts:

• U.K. Services Contract
• Services sector still contracting, but shows more new orders
• Services ISM survey falls indicating no recovery
• Doubling down at AIG
• Average U.S. jobless claims top 600,000

After finding that UK and European manufacturing are in the doldrums, today we hear that UK services are also contracting. This surely must mean that the UK is in or will soon be in recession.

From Bloomberg News:

U.K. services from airlines to the finance industry contracted last month by the most since October 2001 and banks said they’ll curb lending further in the third quarter, as Britain edges closer to a recession. An index based on replies on sales and business conditions from about 700 service companies fell to 47.1 in June from 49.8 a month earlier, the Chartered Institute of Purchasing and Supply said today. A reading below 50 shows contraction. A separate Bank of England survey showed banks plan to reduce the availability of credit to consumers and businesses this quarter.

At this point, the fate of the UK is sealed, its heading into recession. The real question is how deep and how long the downturn will be. This ultimately depends on how tight credit remains and whether tight credit forces consumers to pull back substantially, precipitating another wave of business decline and layoffs. My guess at this point is that credit will remain tight for the forsseable future.

As a result, consumers will be forced to retrench, business will decline further and this will mean more people will be sacked. So, write off 2008 in the UK. Look for a second half 2009 recovery at the earliest.

Related posts:

• U.S Services contract too
• Services ISM survey falls indicating no recovery
• What is the recent increase in U.S. jobless claims telling us?
• US Recession Signals
• The U.S. has been in recession for one year

The well-deserved euphoria over the European Championship in football has brought welcome relief to Spanish consumers, weighed down by a slow economy. However, global economies have not decoupled from the U.S. slowdown. European economies are suffering, Denmark having already declared recession.

In this piece I am going to take a look at the Spanish economy and make a prediction as to where it is headed.

I want to look at several factors in Spain’s economic outlook: housing, employment, inflation, interest rates, retail sales, production, and income.

Housing
Demand for housing in Spain is way down with the number of transactions collapsing, thus denting the municipal tax base in an economy where property transaction taxes had become a major source of income. Homes sales of 157,539 units were recorded in Q1 2008, representing a whopping decrease of 31.8% compared with the same period of 2007, according to data distributed by the Spanish Ministry of Housing. Existing home sales have suffered the most in the Spanish housing crash, with sales down 46.9% year-on-year. New home sales in Q1 2008 were still down 12.9% from the same period a year ago when 89,543 units were sold.

As yet, I have no data on prices, but all indications are that prices are down considerably from last year. Mortgage defaults are expected to hit 2% by year’s end, the highest rate in the eurozone, according to forecasts by the Spanish Mortgage Association (AHE). The AHE expects default rates to continue to grow in 2009.

Employment
The housing crash has had negative effects on employment. Unemployment in June rose to 2.39 million in Spain, an increase of 1.5% over the previous month. Since June 2007, unemployment in Spain has increased by 424,555 people, taking unemployment from under 2 million to its present levels.

As would be expected because of Spain’s housing bust, the construction sector has been hardest hit, having registered 21,080 new unemployed in June 2008. Now, immigrants in Spain have an unemployment rate of 23.8%. This is worrying as xenophobia and anti-immigrant feelings are on the rise in the country.

Unfortunately, this trend should continue unabated as the OECD expects Spain to have the highest unemployment rate of OECD countries in 2009 at 10.7%. This will be the major drag on consumption going forward and all but assures a recession in Spain.

Inflation
Meanwhile, prices in Spain are rising because of higher energy and food costs, just as they are across the globe. In the eurozone as a whole the annual consumer price inflation rate was 4% for June 2008, double the ECB’s target rate. That’s the highest since 1996 according to Eurostat. In Spain itself, inflation rose to 4.7% in June, according to the Spanish National Statistics Institute (INE).

At the wholesale level prices are now rising incredibly fast. According to the Spanish National Statistics Institute (INE), the Industrial Prices Index recorded an increase of 1.2% in May compared to April and was up 7.9% over the same month last year, boosted in particular by food and energy prices. These rises have not been passed on to consumers yet because of slack consumer demand.

Obviously, inflation was a major factor in the strikes in Spain last month and continues to weigh on consumer sentiment and demand.

Interest Rates
With inflation increasing around the globe and inflation in the Eurozone already uncomfortably high, the ECB will look to raise rates. The ECB has a single mandate toward inflation; therefore they have no other policy options.

Interest rates, therefore, will not help the Spanish consumer as Euribor continues to increase. As of yesterday, Euribor had risen to 5.361%, 0.856% more than a year ago when rates were 4.505%. That’s costing the average mortgage holder in Spain another 84 Euros per month (more than 1,000 euros per year). With less money to spend because of interest rates and inflation that is going to have to take a bite out of consumer demand.

Retail sales
Consumer sentiment in Spain is being negatively impacted by the housing downturn and the employment situation, not to mention interest rates and inflation. The 2008 Eurobarometer counts the Spanish as the most pessimistic of all of the European Union.

Retail sales are suffering as a result. A recent article in ABC pointed out that the Spanish spent 15% less in the May and June sales season than they did last year.

Auto sales, in particular have plummeted, falling 17.3% in the first six months of 2008 compared with the year ago period. This is the worst fall since 1993.

Overall, consumer trends in Spain are negative.

Production
Manufacturing activity has taken it on the chin in Spain, a big producer of automobiles. The Spanish purchasing managers index sank to its lowest level since records began in 1998, falling to 40.6 in June from 43.8 in May. 50 indicates recessionary levels. In June, the General Industrial Production Index (IPI) reported that production fell for the second month running, yet another sign that manufacturing is very weak in Spain.

Clearly, the manufacturing sector in Spain is in recession.

Income
Salaries have increased 5.1% over 2007 including overtime and arrears. Base salaries in Spain increased 5% year-on-year. But, to keep up with inflation and rises in interest rates, the Spanish worker will need to see annual increases in excess of 5% going forward as well. Will these increases last? It is hard to say. But, for now, salaries are just keeping pace with inflation.

Conclusion
Looking at the data on the Spanish economy was brutal. The data point to a softening worse than in the U.S. or in the UK. Clearly, the Spanish economy will be in recession soon, if it is not already. Given the predictions regarding interest rates and the housing and construction sectors in particular, one can only assume that this will be a long and deep recession for Spain and I don’t expect a pickup until the second half of 2009 at the earliest.

Sources
España será el país de la OCDE con mayor tasa de desempleo en 2009: 10,7%, El Mundo, 2 Jul 2008
El paro aumenta por primera vez en el mes de junio al incrementarse un 1,5%, El Mundo, 2 Jul 2008
Los españoles gastarán un 15% menos en las rebajas por el efecto de la crisis económica, ABC, 1 Jul 2008
Las ventas de coches se desploman un 17,6% en el primer semestre, la mayor caída desde 1993, ABC, 1 Jul 2008
Los limones, el aceite de girasol y la harina subieron entre un 29,3% y un 63,7% en junio, ABC, 1 Jul 2008
La luz es un 16,6% más cara desde hoy para los clientes domésticos, ABC, 1 Jul 2008
El alza del IPC al 4% en la Eurozona refuerza a Trichet para subir los tipos, ABC 1 Jul 2008
El Euribor se dispara al 5,361% y hace subir las hipotecas 84 euros mensuales, ABC, 1 Jul 2008
La Bolsa cae más de un 20% en el peor primer semestre de la historia del Ibex, ABC, 1 Jul 2008
La crisis económica en España amenaza el ’sueño europeo’ de los inmigrantes, El Tiempo, 30 Jun 2008
El precio de la vivienda nueva cayó el 1,2% hasta junio, ABC, 30 Jun 2008
La venta de viviendas nuevas sube un 12,3% en abril mientras la usada continúa desplomándose, El Pais, 26 Jun 2008
La construcción española se enfrenta a una severa recesión de al menos tres años, El Pais, 26 Jun 2008
La morosidad de los hogares se duplicará al 2% en 2008, ABC, 25 Jun 2008
La venta de viviendas se derrumba en 2008 y cae un 31% entre los meses de enero y marzo, El Mundo, 24 Jun 2008
Los españoles, los más pesimistas de la UE sobre la evolución económica, El Pais, 24 Jun 2008
La venta de viviendas cae un 31,8% en el primer trimestre, El Pais, 24 Jun 2008
Moderación salarial y aumento de las indemnizaciones en el sector de la construcción, EL Mundo, 17 Jun 2008
La producción industrial cae por segundo mes consecutivo, El Pais, 6 Jun 2008
La industria modera su caída en abril, El Pais, 5 Jun 2008La producción industrial se frena en seco, El Pais, 6 May 2008

Related posts:

• Spain panicked over possible rate hikes
• Spain: Next Stop – recession
• House price declines accelerate in Spain
• Spain begs to be at upcoming G-20, Brazil says no
• Spain: consumption drop four times as much as in ‘93