Further Signs of the Recession's Return

by: Markos Kaminis

The latest signs from manufacturing, housing and the labor market all point to the return of economic recession. This report focuses on the dimming of the economy's only shining star, manufacturing. Yesterday offered an ominous ISM Manufacturing Report, and we think you should note the change the report illustrates.

The daily barrage of data piles on the double-dip economic recession reality, beating down hopeful strategists and forecasters with truth. It's an ugly truth, unfortunately, but it's what we must deal with. This latest day's dumping included more signs of slowing in manufacturing and housing, and ongoing labor woes. You cannot fool the market with rhetoric for long; she is efficient at processing data, however policy makers, corporate leaders and investment professionals may try to sway her. Eventually, each and every one of them must bow to the truth. We remain an independent voice, seeing both opportunities and warning signs, and offering both long and short ideas without any bias.

ISM Manufacturing Report

The Institute for Supply Management (ISM) reported on manufacturing activity for the month of June Thursday. ISM's survey of manufacturing purchasing managers showed continued expansion for the manufacturing sector and implies more growth for the economy. The Purchasing Managers Index, at 56.2%, marked the 11th month of expansion, and the reading implies economic expansion of 14 straight months. And that's where the good news ends...

You see, the truth is that while 56.2 represents expansion (>50%), it also marks a decrease in pace from May's 59.7% reading. Furthermore, it is the lowest reading since December 2009. We argue that it is also supportive of the case we've been making for double-dip recession. That's the economic contraction most market gurus can't forecast because they mostly just extend trend lines (plus they have their jobs to play it safe for). The evidence is in the missed economists' consensus forecast, which is still sitting all alone up at 59.0%. Simple logic says that before you shift into reverse, you are likely to slow down, and for the behemoth US economy that's usually the case as well. We expect an increasing number of the gurus you see on TV to get their grunts working on changes to economic models soon enough. Until then, you'll find the truth here.

The truth is that we will be mired in it for some time, because we have 9.5% unemployment to contend with and 16-17% underemployment. With that many people out of work, or out of enough work, overall spending simply cannot keep growing. Economists will tell you that employment is a lagging indicator. That may be the case in a typical economic cycle, but not in the likes of this last catastrophe. The difficulty of climbing out of this laboring labor hole should prove historic, and the unemployed a weight against recovery.

And now that it looks as if overseas drivers of demand will not hold up either, well then it's not a far stretch to forecast a slippage back into economic contraction here in the US. This is especially likely given the depth the economy fell and the walking wounded around the real estate realm. This is not to mention that inventory restocking looks complete, and dips from this point are normal. Housing and consumption, the two most important factors in US economic expansion are dead men walking these days. Bare bone shelves are restocked. Now tell me where the buying will come from.

The Chair of the ISM said: "...expectations have been that the second half of the year will not be as strong in terms of the rate of growth, and June appears to validate that forecast." That's right mister, now pass the pistol. ISM reported: Thirteen of the 18 manufacturing industries are reporting growth in June, in the following order: Plastics & Rubber Products; Transportation Equipment; Printing & Related Support Activities; Computer & Electronic Products; Electrical Equipment, Appliances & Components; Paper Products; Fabricated Metal Products; Food, Beverage & Tobacco Products; Furniture & Related Products; Petroleum & Coal Products; Nonmetallic Mineral Products; Miscellaneous Manufacturing; and Chemical Products. The industries reporting contraction in June are: Apparel, Leather & Allied Products; Wood Products; and Machinery. Looks pretty positive from that vantage point, but so does the beach before the hurricane strikes. Some of the respondent comments showed concern about the BP (NYSE:BP) oil spill, and others noted recent demand seems to be fading.

What should be most concerning to you is that the New Orders Index dropped 7.2%, to 58.5. Customer's inventories are up, but if end demand is slacking, then inventory will not be rising further anytime soon. Furthermore, if manufacturing is ready to stall now, then the one bright spot in our economic slop will have been beaten.

Investors will note that domestic motor vehicle sales were also reported lower Thursday, which further perpetuates our concerns. At an annual rate of 8.4 million vehicle sales in June, Ford (NYSE:F), Toyota (NYSE:TM), Honda (NYSE:HMC) and others will be getting that bad taste in their mouths again. Sales were down from May's 8.9 million rate, and they also missed economists expectations for the same. With the Pending Home Sales Index dropping 30% for May, and with Weekly Jobless Claims jumping back up to 472K, we see no reason to party, let alone buy stocks now.

Disclosure: No Positions