U.S. Manufacturing in Freefall

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.

click to enlarge images

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.

Related posts

• The Economy's Four Horsemen
• US industrial production is very weak

Source

• October 2008 Manufacturing ISM Report On Business® - ISM

Comments

[vbierschwale:]

when you send 3.4 million, or more jobs offshore and they bring in an average salary of 75,000 per year, that is a lot of money that can no longer be used to purchase homes, cars, electronics or even toys so your manufacturers and retailers are now BEGINNING to see the extent of our foolishness.

It will get worse until we bring our jobs home because an estimated 30% of the above amount which is around 56 BILLION dollars is also necessary to run our country and this amount is very close to 25% of the 2.568 TRILLION dollars neccessary to run our country.

My suspicion is that just as our government started this mess via the fannie mae and freddie mac problems and now they are adding to it by rewarding failure, that we will continue to be short sighted and we won't wake up to the fact that when you buy 70 % of the oil that is necessary to run your country from other nations that have the ability to stop supplying us and when you send 25 % of the money that is necessary to run your country, well its just a very bad situation that is waiting to explode and if it ever does, we have sent the majority of our capability to respond with our steel mills and our peoples job and basically demoralized a good bit of our nation's people which is why you're seeing this lack of confidence in our citizens.

Virgil
www.KeepAmericaAtWork....

2008 Nov 04 07:04 AM

[dc1:]

Informative post, Edward. Keep them coming.

2008 Nov 04 09:57 AM

[blisterchicken:]

Yes Virgil is absolutely right!

So was Ross Perot. This makes it easier to sleep at night knowing I voted for him.

The sad truth is that Americans are so apathetic they don't even remember Perot's clarion call warning before this mess started. Does anyone remember the extensive speaking tour and TV appearances of Perot? Does anyone remember what he said?

He said once NAFTA is passed you will hear a big sucking sound, and that sound will be the loss of Jobs in the USA. Wow! And he wasn't even aware of PFTA with China. That has made it worse.

We need to ask what sovereignty is supposed to be. My feelings are that we will loose most of it in an American Union Sham. We may have our Bill of Right suspended as early as 2010 under this new “Union”.

And gee how convenient that our economy will be so screwed by then that the Sheeple masses will go along with it.

Change? Yeah you bet!

I just have a strong feeling their not going to get away with this one.

2008 Nov 04 10:05 AM

[Jason Rines...:]

Well Blisterchicken, I doubt they will attempt any form of tri union process anytime soon. But the citizens of this country may take matters into there own hands in later on as desperation sets in and the giant middle class starts asking for heads on pikes. You would likely see a revolt if say for example the liberal dominated government attempts to repeal portions of the 2nd ammendment for example. That is more of a likey scenerio then being worried about a North American Union.

2008 Nov 04 10:19 AM

[Jonathan Ch...:]

The following forces are in effect:
1. Declining growth due to retiring of Baby Boom generation
2. Declining home purchases by Baby Boom generation
3. Overspending on housing due to Democratic encouraging loans to unsuitable buyers.
4. Under-regulation of bankers due to Republican and Democratic actions
5 Destruction of capital in Telecommunications, Energy, Transportation and Manufacturing due to techonological advances.
6. Irrational Depression by investors.
7. A quickly expanding money supply.

Until we address all these factors via government and the free market, we will have little or no growth, and a spread in Deflationary forces. We could, if we are not careful, end up with an "Inflationary Deflation" where rising numbers of dollars and dropping real prices BOTH occur, wreaking real devastation as inflation follows deflation sequentially. Individuals and families will be whipsawed by dropping home prices and increasing energy and food costs. Companies will be whipsawed by the declining value of their invested capital, and the rising cost of the technologically relevant replacements. Local governments will be squeezed by declining property taxes as operating costs rise.

2008 Nov 04 10:21 AM

[Jason Rines...:]

Unfortunately, that is precisely the scenerio I predicted in July of 2007 and have seen unfolding. Deflation of assets, inflation occured this year. This will happen again once or twice more before we are through with the crisis.


On Nov 04 10:21 AM Jonathan Christopher wrote:

> The following forces are in effect:
> 1. Declining growth due to retiring of Baby Boom generation
> 2. Declining home purchases by Baby Boom generation
> 3. Overspending on housing due to Democratic encouraging loans to
> unsuitable buyers.
> 4. Under-regulation of bankers due to Republican and Democratic actions
>
> 5 Destruction of capital in Telecommunications, Energy, Transportation
> and Manufacturing due to techonological advances.
> 6. Irrational Depression by investors.
> 7. A quickly expanding money supply.
>
> Until we address all these factors via government and the free market,
> we will have little or no growth, and a spread in Deflationary forces.
> We could, if we are not careful, end up with an "Inflationary Deflation"
> where rising numbers of dollars and dropping real prices BOTH occur,
> wreaking real devastation as inflation follows deflation sequentially.
> Individuals and families will be whipsawed by dropping home prices
> and increasing energy and food costs. Companies will be whipsawed
> by the declining value of their invested capital, and the rising
> cost of the technologically relevant replacements. Local governments
> will be squeezed by declining property taxes as operating costs rise.
>

2008 Nov 04 12:50 PM