Ugly, ugly, ugly. Manufacturing and non-manufacturing.
Thank God that manufacturing is just 12% of US GDP, and that it contributes only $2.1 trillion to the economy, and that only 9% of the US workforce is directly employed by it, according to the National Association of Manufacturers. So a swoon in manufacturing isn’t by itself going to crush the US economy. That’s the meme surrounding the ugly reality that has been spreading through US manufacturing.
And the Chicago Business Barometer just added another very ugly detail to the overall image, but this indicator goes far beyond manufacturing.
Caveat: Chicago is already in trouble
OK, this is just one component of the complex and vast national economic scenery, though an important one. It’s regional, and Chicago has its own set of issues, including terrible fiscal problems. Moody’s downgraded the city to junk in May 2015, based on the costs of dealing with its unfunded liabilities, and the strain they will pose on the “city’s financial operations.” Moody’s lamented that “Chicago’s tax base is highly leveraged by the debt and unfunded pension obligations of the city, as well as those of overlapping governments.”
It’s difficult to get gloomier without evoking visions of Detroit. Among the 25 largest cities in the US, Chicago has by far the largest per-capita pension debt: at $18,596 per person, it’s nearly twice that of Puerto Rico, which is now defaulting on its bonds, and New York City, the next two biggest sinners in line, and about three times that of San Francisco and Los Angeles, neither of which is a paragon of fiscal rectitude.
This debacle too might be impacting the business sector, sapping its confidence and encouraging it to set up shop elsewhere. It’s important to keep this in perspective when extrapolating to the overall US economy. But even with all these caveats, the collapse of the Chicago Business Barometer is stunning – and with implications beyond Chicago.
Manufacturing and non-manufacturing
The Barometer, which is designed to be a “leading indicator of US economic activity,” and not just manufacturing, is based on surveys of purchasing managers at “manufacturing and non-manufacturing firms, many with global operations.”
With this diffusion indicator – a composite of Production, New Orders, Order Backlogs, Employment and Supplier Deliveries – anything below 50 is a contraction from the prior month. The more it’s below 50, the steeper the contraction.
And it plunged 5.8 points in December to 42.9, from an already lousy 48.7 in November. It was the sharpest decline since July 2009.
The report added a dose of real doom and gloom:
Order Backlogs provided a particular drag in December, registering a 17.2 point fall to 29.4. Backlogs have now been in contraction for 11 consecutive months this year and stood at the lowest since May 2009. The double digit move in Backlogs is a rare occurrence, and the depth of the decline has only been surpassed by a 17.4 drop in March 1951.
Order Backlogs – an indicator of future business – are drying up rapidly. Production fell again, for the sixth month this year. The Employment component dropped back into contraction mode. And the crucial New Orders, the first indicator of future business, ahead of Order Backlogs, “contracted at a faster pace, to the lowest level since May 2009.”
That was for December. So how bad was the year? In January, the Barometer still stood at 59.4, solidly in expansion mode. Then the bottom fell out. From the beginning of the year to the end, it plunged 16.5 points, as the report put it, “with businesses never recovering fully from a sharp plunge at the beginning of the year.”
Nevertheless, there’s always hope:
The only positive this month came from a special question with 55.1% of the panel expecting demand to be stronger in 2016 compared with 14.3% who thought it would be lower. 30.6% of respondents thought demand would be unchanged.
Perhaps the indicator was a statistical fluke, a sticky one that has refused so far to correct itself, but will bounce back any time. Perhaps the 55.1% of the panel who hope that demand would pick up in 2016 will see their hopes come true. Miracles have happened before. Exports might actually U-turn and pick up somehow, rather than deteriorate further, though no one believes that. And global demand might actually get stronger, rather than continue on its trajectory south. It might finally take a cue from all the stimulus generated by government deficit spending and central bank easy-money policies around the globe.
Good things might still happen. After all, this is the New Year, and hopes of all kinds are sprouting everywhere. But gosh, the mere sight of that barometer sure is a party-pooper.
And what’s happening at Chinese banks that causes global banks to dump their stakes in them? Read… What Secret Do Global Banks Know about Chinese Banks?