Manufacturing: Will This Be a V-Shaped Recovery After All? 28 comments
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I've been using this chart for the past 10-15 years, and it never ceases to amaze me how well the ISM manufacturing index tracks the growth of GDP. We've had a strong, V-shaped recovery in the ISM index, as this chart shows, and there is every reason now to expect that GDP growth in the current quarter will be 3-4%. The inventory cycle is now at work, as depleted inventories were met with firming demand. This, coupled with improving confidence, should help keep the economy growing for quite some time.
Manufacturing is turning up all over the globe, with news last night that China's manufacturing index also registered strong gains in August. All of this validates the message of rising commodity prices. I've always paid very close attention to real-time prices, since they can provide signals way in advance of the more traditional economic statistics and surveys.
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Let me tell you a secret, while the ISM was showing "growth" in '05, '06 & '07, American manufacturing companies were closing their doors and giving up to foreign "competition." Our customer base was filing bankruptcy and going to auction at record pace. ISM never even noticed. We tried warning you all that these companies were your best customers, did you listen? Nope.
Purchasing has little clue as to the "strength" of a company or future sales. These people will spend $100 of payroll to save $10 on an invoice.
The ISM has allowed for NO reconciliation between AMERICAN manufacturing & American components or using foreign components, this skews the GDP line greatly.
Now add in the fact that the ISM does not account for their own shrinking membership and members MIA. Company closed? No problem, they just pretend like they never existed to begin with.
Now throw in the FACT that China SHUT DOWN their factories last year (from July to October for the air quality for the Olympics) and the FACT that I have not viewed ONE report that reconciles this shut down, I wouldn't trust China numbers if I could count it myself.
I am in "American manfacturing" and I can tell you my customers are on the verge of bankruptcy and besides from misguided Cash for Clunkers build up and defense department emptying of the budget coffers, NOTHING is being built.
V shaped, what a joke.
Too bad these unimportant former employees and companies are your best customers. Or were. They are gone now.
Excellent post and I agree with you. I am heavily involved with small businesses from many industries. I rely on what they say over the media spin and phony corporate earnings of most major public companies. Things are very bad out there. Towns which once looked vibrant have street after street of vacant stores, etc.
The funny thing is the comments from small business owners all over the country is the same:
The only people who are not affected by this recession at all, are all the grossly over paid and over benefited government workers, civil servants, municipal workers, police departments, et al. Couple that with their "taxpayer guaranteed" pensions and I can tell you, the resentment for all this welfare entitlement nonsense is getting larger everyday.
One of two things are going to happen in the coming years: states go bankrupt and all bets are off for these workers, or taxpayers "finally" stand up and say enough is enough with welfare entitlement that is destroying this country.
Thanks for telling it like it is from the front lines. Some of us are listening.
On Sep 01 03:09 PM TeresaE wrote:
> Have you worked in an American manufacturing company or been a "purchasing"
> executive? I doubt it.
>
> Let me tell you a secret, while the ISM was showing "growth" in '05,
> '06 & '07, American manufacturing companies were closing their
> doors and giving up to foreign "competition." Our customer base
> was filing bankruptcy and going to auction at record pace. ISM never
> even noticed. We tried warning you all that these companies were
> your best customers, did you listen? Nope.
>
> Purchasing has little clue as to the "strength" of a company or future
> sales. These people will spend $100 of payroll to save $10 on an
> invoice.
>
> The ISM has allowed for NO reconciliation between AMERICAN manufacturing
> & American components or using foreign components, this skews
> the GDP line greatly.
>
> Now add in the fact that the ISM does not account for their own shrinking
> membership and members MIA. Company closed? No problem, they just
> pretend like they never existed to begin with.
>
> Now throw in the FACT that China SHUT DOWN their factories last year
> (from July to October for the air quality for the Olympics) and the
> FACT that I have not viewed ONE report that reconciles this shut
> down, I wouldn't trust China numbers if I could count it myself.
>
>
> I am in "American manfacturing" and I can tell you my customers
> are on the verge of bankruptcy and besides from misguided Cash for
> Clunkers build up and defense department emptying of the budget
> coffers, NOTHING is being built.
>
> V shaped, what a joke.
>
> Too bad these unimportant former employees and companies are your
> best customers. Or were. They are gone now.
tinyurl.com/mzcnxg
Cash for clunkers, and home purchase tax credit are responsible for the recent small rush of economic activity in autos and homes. Unfortunately, they are stealing from consumption of other goods in the present, and have stolen from auto and home purchases that would have happened in the future. With no wealth, no pay, and no credit, who's going to buy what in the quarters ahead? This seems like a major problem for a consumer economy.
Calafia Beach Pundit has been cheerleading a recovery for months and seems blinded by his own hoping and wishing. I hope everyone finds a job soon, I hope payrolls start increasing again, I hope houses regain their lost value (and all other assets for that matter). I hope lenders begin lending again, especially to small businesses who will create all the jobs that will start all the other things that are good for the economy. Unfortunately, my hoping won't make this all happen and neither will Calafia's.
There is a gloomy side beyond the one month spike in ISM. Keep hoping, Calafia, I hope it works, but in the meantime do something really good and donate generously to your local food bank. Millions of Americans need some help.
On Sep 01 04:47 PM Larry House wrote:
Either consumers will no longer be 70% of the U. S. economy, or consumers will be 70% of something a good deal smaller.
=============
Normal was about 62-65% before savings and debt was used to get us to 70%.
So, you are correct and it could be that they will not be 70% of something smaller but possibly 65% of something smaller. GDP will shrink on the non-government spending side so, with Government propping up GDP, it could even see an over correction in that ratio to high 50's or 60% of GDP.
The formula for GDP is
GDP = C + G + I + NX
where:
"C" is equal to all private consumption, or consumer spending, in a nation's economy
"G" is the sum of government spending
"I" is the sum of all the country's businesses spending on capital
"NX" is the nation's total net exports, calculated as total exports minus total imports. (NX = Exports - Imports)
As you can see, we can have negative numbers in all sectors except government spending and have that spending high enough to create an illusion of growth. However, because that is borrowed money, we are actually digging debt hole that the private sector can never get us out of.
That is one of the reasons the Gov. Accounting Office has warned Congress year after year that the fiscal policy is unsustainable and we risk "the gradual or sudden loss...of our standard of living."
Any recovery we have now is not a recovery in the real sense. Using real CPI data we have not had one full year of positive GDP in 8 years and only a couple quarters were positive. We can't grow the private sector enough to compensate for what the government spending burden is adding.
We can't tax or grow out of this but, we can delay it as long as the foreign lenders keep lending. I personally don't think that will last more than a year or two at the rate nations are making non-dollar trade agreements and pushing the IMF to use SDR's.
This is not an attack on either party as both parties use the advise they get from the Central Banking cartel through the non-partisan think tanks they created to advise governments from. That is the only source of "acceptable" advise either party gets and it has been the only advise that was accepted for decades. It is based on the use of debt to grow faster than "sound fiscal policy" would allow.
This was the "grand experiment" in a theory that promised growth through debt without the risks normally inherent in that much debt. While debt has a very acceptable role in growth, the system we used required an ever expanding use of debt instead of a balance use of debt to savings and growth and demographics and other things that take place in all societies.
It was a means to become an economic empire but, now we find that it hasn't worked and we could see it wasn't working decades ago. The more we "progressed" and grew, the more our infrastructure fell into decay, the more workers lost buying power and the more we lost jobs to other nations.
It was a type of Ponzi scheme that required more and more debt to stay ahead of the very problems debt creates. We began borrowing $1 for each $1 of GDP growth in 1968 and by the 2000's needed $5 in debt for each $1 in growth and now it is infinity because the private sector can never grow enough to catch up. Even with good growth, the burden of the debt will grow faster.
Just sayin'.
I just thought it was funny that mr. tobi mentioned he didnt believe in the numbers released by a communist regime (china). How hypocritical can we get, when we have not only shown the rest of the planet how to destabilize the entire market with the speculative bubbles we create, but also when we have sold out our manufacturing to these communists.
just a thought..
Very good post and things do seem to be turning a corner. The Fed has put the pedal to the metal and are determined not to let things fall apart, even if they have to allow for high inflation. A key issue will be to keep the banks from collapsing. Lots of bad loans (not securities, which are marked to market) festering on their books to absorb. I think that can and will be done.
Because I'm expecting a 'W' I ask myself this: For how many quarters does GDP have to be positive before I accept I'm wrong and acknowledge a V-shaped recovery?
Some of the small businesses I've worked for no longer exist, but that doesn't mean the people I worked with forgot what I offer an employer, and where to go when they want a someone who can turn problems into opportunities.
And as far as government employees - yes, their benefits are rich, but what good are guarantees from states whose pensions are grossly underfunded and are facing defaults and taxpayer revolts?
It is just like our Social Security and Medicare systems. There is no way that the government will be able to fulfill the current commitments.
Something is going to happen and I'd bet on monetization.
On Sep 01 03:19 PM Archman Investor wrote:
> TeresaE:
> Excellent post and I agree with you. I am heavily involved with small
> businesses from many industries. I rely on what they say over the
> media spin and phony corporate earnings of most major public companies.
> Things are very bad out there. Towns which once looked vibrant have
> street after street of vacant stores, etc.
>
> The funny thing is the comments from small business owners all over
> the country is the same:
> The only people who are not affected by this recession at all, are
> all the grossly over paid and over benefited government workers,
> civil servants, municipal workers, police departments, et al. Couple
> that with their "taxpayer guaranteed" pensions and I can tell you,
> the resentment for all this welfare entitlement nonsense is getting
> larger everyday.
>
> One of two things are going to happen in the coming years: states
> go bankrupt and all bets are off for these workers, or taxpayers
> "finally" stand up and say enough is enough with welfare entitlement
> that is destroying this country.
And remember, we had 18 consecutive months of decline in this indicator,which cumulates to July being the absolute nadir(so far) of manufacturing even though the pace of cumulative decline slowed steadily over the final 4-5 months, so it needs a few years of constant cumulative expansion to merely return to the prior absolute peak levels it fell from.