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?
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Happy New Year. Now go to Human Resources and pick up your pink slip. Security will escort you out to your car.
Nobody is really talking about the Xmas sales figures. The credit card companies claim sales were up over 7%, but I think that is just because most people use a debit card to pay for most things. I spent more than last year during the shopping season, but I was taking advantage of sales to buy items I needed anyway. I spent less on Xmas gifts than the previous year and that wasn’t a lot either.
Twice I went to the big box electronic store near me to buy items and they had no stock. I had to travel to other areas to find items and was lucky to find even one item in stock. I didn’t get the impression inventories were low because they were selling out. Instead I think inventories were extremely limited which means their sales were also limited. I expect to hear this chain will be closing stores.
I see that too. Sears was deserted on Christmas eve, in our town in NM.
Almost no clerks working. Ross shows very spaced inventory, and about 35% less product. It’s already happening as Jim Willie predicted. The shortages will come. Less choice, more expensive items. My town is full of consignment stores, people downsizing and selling stuff.
I specifically spent time going to local “big box” stores.. to see just exactly what kind of crowds were there, for the holiday shopping season. There were plenty of parking spots at all of them! Further, I gathered info from people who are in the retail industry and the story from them matched my parking lot observation and analysis. Sales in store were horrible!
Meh, pension crisis. Its part of the “pretend the government is bankrupt” game. And each higher sub-entity within the government shrugs to the one beneath it, pulls its pockets out, shows nothing but lint in there, and says: “Shucks guys! We don’t have any money anymore!”
Sure, sure. The EU also didn’t have money for Greece.
Its such a shell game. Even the existence of taxes makes people believe in the wildest absurdities, such as that there is some government entity patiently waiting for your tax money, which only *then* spends what it can gather, because its budgets have to balance, right?
I can’t throw rocks, because I used to believe in this stuff as well. Where there is will and fiscal sovereignty, there is also literally endless money. Didn’t the world wars teach us that? Oh no, we should have stopped in 1943, because expenditures were getting too large! haha. Somehow we can afford this massive 4 trillion dollar army pretty good though, right? And what about its black budget wing, whose expenses are a mystery even to the people auditing it? Boy, those guys never seem to run out of money…
Abba Lerner, cited by Steve Keen, said as much when he said (my paraphrase): after a crisis passes, people gradually lose the courage to (deficit) spend such as they had in the crisis, until fear overtakes them and they gradually lose the will to spend at all to support the public good. A heuristic of saving, which is a macroeconomic death-knell, sets in. Save your money, everybody!! Especially the government and the banks, they should save more! Higher capital requirements!!
They can save more *specifically* by ceasing to invest in your local business.. and that will be good on a large scale, right? Man, everything we think we know is wrong!
Ah yes MMT (Magical Money Trees) – at least is sounds like it. Didn’t work for Germany in the 20’s did it?
I recently saw the movie “The Big Short”, which I recommend, because it reminded me of how little has been done to change the system that created the financial crisis.
Dodd Frank was suppose to be the fix for all the excesses that occurred, but it only ensures that the derivative holders are protected. Not only are derivatives protected, but they are paid off using bail-in’s, our savings.
If you were a cynical person, you might come to the conclusion, that now they have an incentive to write really bad derivative contracts. Not only would you be paid off, but you can make money on the side bets as well, thru the cds market. Wall St. loves a sure thing, and they now have it.
As uncomfortable as I am with the thought of actually “learning” anything realistic from a Hollywood movie, you have a point.
In fact, it might be even scarier than you realize. In 2008, the top 10-15 bank’s had 50% of USA banking assets. now it’s the top 4 banks (JPM, BoA, USB, WFB).
You rightly single out derivatives – currently there are about (no one knows for sure, which is part of the problem) $240 T ($240,000,000,000,000) of derivatives and $15T of USA bank assets. And, oh by the way, derivatives are not traded on an exchange where they can be inventoried & regulated – just like in 2008 (eg: nothing much changed here except the problem got bigger).
How did this happen? Well, to politicians, the 2 top money makers (campaign contributions, bribes, etc) are tax and banking law changes.
Petunia,I believe the US is now run by a shadow gov.Bent on the collapse of the US, to usher in N W O.These criminals want our right to bear arms,and no sovereignty real bad .Notice they are also afraid of The Donald.Latest is EU said to ban him.
So what were WWII war bonds about? If your logic is correct, why didn’t uncle sam just run the printing presses to conquer the axis?
Honostly, I don’t know the answer either.
And what happened to all the dollars produced via deficit spending after the war?
I would like to see a book comparing contrasting what happened in America vs Germany. I know a little about the nazi’s and their MEFO bills.
John K. Galbraith was a US govt economist and spent time analyzing US and German economics during the war. The summary is that even though US military spending was high, the wages were saved due to the lack of goods. This money was what unleashed the prosperity of the 50’s when it was eventually spent.
…and the gov wisely chose to sop up the extra purchasing power by bond sales, instead of taxing. Big boost for demand after the war, as you point out. Also, the tax system was different then too, progressive taxation meant that working people had a greater share of the economic surplus. We weren’t going back to the depression, after the war.
After WWI Germany was trashed and the allies decided that Germany should pay the allies back for our war costs. There was no way for Germany to do this other than printing money, which in an odd way led to WWII.
The US was more than the big winner of WWII because most of Europe and Japan were destroyed and our infrastructure was in tacked. So the US invented the Marshal Plan that used US workers and US industry to rebuild both Europe and Japan. At that time we were the rulers of the world.
Wealth is generated by value added productive enterprise and paying off bonds or anything when you have so much production and exporting going on was easy. Our great middle class developed during this period. It was a great time for the USA.
But as all good thing come to an end, our lifestyles and our borrowing against the future at that time created an inflationary spiral. Then the Arab Oil embargo, OPEC put an end to our great expansion. Reagan blamed the unions and high taxes. Got to blame some thing simple when the answers are complex.
There is really no way to actually compare the US to Germany directly. Their unions were much more receptive to changes than our unions. They built a great ever changing and expanding manufacturing society and we shipped our manufacturing off shore because of our intransigent unions.
Even the CBs had different agendas. Ours supported M/A and stock buybacks and globalization of our industries and their supported the Mediterranean governments so that there were people to buy all the goods and services that Germany made. Maybe their CB supporting the Mediterranean countries was like ours funding NINJA and subprime loans. The big difference ends up with the consequences. There CB funded zombie countries and our funded massive over investment in resource extraction and zombie corporations.
“Why didnt uncle sam just run the printing presses?”
I’m not sure either. Probably because the facade of solvency plays a big role in the mythos we have about government. Greek debt-to-GDP was only 20% greater than Italy’s at the outbreak of the Greek crisis in 2009 (see https://goo.gl/szXlBT). But you don’t hear about an Italian crisis, do you? The Greeks lost the facade of solvency. If any major investors cashed in a large portion of Italian/Portuguese bonds, I’d wager we’d have a Italian or Portuguese crisis right now. All this to say: governments having more in the assets column than liabilities column is good PR.
According to this video (https://goo.gl/u2FaZ9) the one time the US gov ran the largest sustained surplus, was in the years 1921 to 1931, right up to the Great Depression.
I think that deficit spending can serve public purpose in ways that free markets cant or wont. I think if we hadn’t had World War I and World War II, industrialization both in the west and east would have taken ~50 years longer. The government and the ‘market’ (a.k.a. the unregulated decisions of the aristocrats, monopolists and rentiers who make markets) would be content to let us peter around in horse-drawn carriages forever, if having a Modern Industrial State wasn’t synonymous with national survival from 1914-1960. They got their ass in gear because of external threats, of which there are none today that are really credible, or that require anything be provided for the common person (except security checks and surveillance).
If we had a similar situation (not that I want one, or that its even possible) today, we would see within 10 years everyone driving electric cars (See “who killed the electric car?”); tariffs and basic income used to reconstitute home-base production and industries (a manufacturing renaissance funded through UBI and tariffs); clean or alternative energy sources massively subsidized; breakthrough tech massively subsidized; startups and research projects massively subsidized (a la the Manhattan project, project Philadelphia, and many other lesser known US Gov research projects); universal healthcare made workable in a few short years; full employment in semi-meaningful public works projects.
We won’t get this because the psychology of the age required existential threat to spread the bounty of investment and serve the public good. Absent this threat, we are left to the financial war of all against all, because our toothless sense of public purpose is no match for the oligarchs who control every level of political decision.
And I’m at peace with all this, its all good. That’s how we chose to run things. But please don’t insinuate that somehow, this is the only thing thats even theoretically possible given 320 million people and a tremendous share of the world’s wealth. Much, much more is possible than what we are currently experiencing.
The strong usd Is just stating to really show its ability to damage the economy. More lay offs cannot be far behind.
Latest and greatest?
The Dupont/Dow merger with 1,700 pink slips being issued by Dupont in Delaware alone! Just the start. Catarpiller is now into +3 years of negative global retail sales. Just the tip of the iceberg. Stay tuned.
2015 has been a tough year, normally i’m pretty busy all year and will have 3-4 slow periods where i’m almost out of work.
this year I’ve had 3-4 busy periods and the rest of the time nada, the only good thing is my tax bill will be lower…..not that i can even afford that though.
in January it was if somebody turned off a switch and the work disappeared.
economicminor, “Intransigent American labor unions” is just another elitist talking point. The Germans were more “receptive to change” because they simply had less capacity to work with after we bombed the hell out of them, so they had to adapt by right sizing. What’s really been going on since the 70s in America is strategies like M/A and management fads to squeeze every last drop of productivity and profit out of existing labor practice. That’s why there’s so much slack in the labor market. American Businesses simply have run out of ideas.
“Strong Dollar” they say…. the most indebted nation in the history of the world, a minimum wage that fails to adequately support people who earn it, and tax rates overall lower than 20 years ago?
We make WAR, not computers, electronics, or much of the things we ‘consumers’ buy every day. Trade deficit numbers tell us nothing.
A totally dysfunctional government, with the same leading lights (idiots) constantly re-elected to further feather their nests, not yours.
Does anybody seem something ‘wrong’ with those observations?
We merely think we are the greatest, until we look at the numbers.