Economic Slowdown: Perhaps It's Just a Soft Patch

by: Tertiary Finance

The economic mood has turned decidedly ugly in the past few weeks. Decreases in confidence, payroll data, and manufacturing numbers have all turned down resulting in decreased confidence in our economy, falling equity markets, and an unprecedented use of the term "soft patch" in our media1. It is widely believed that this slowdown is the first indication of our coming "double dip" recession, another terms whose frequency has rebounded within the popular lexicon.2

click to enlarge images

ISM Index

The ISM Data Series, pictured above, is considered to be fairly predictive of future economic, and market activity. Both causal observation and regression analyses have borne this out. The recent dip in this data series, based on production levels and new orders to name a few, is disconcerting.

However, much of the street maintains that the soft patch (that word again) is in large part caused by the disruption following the tragic events in Japan in March. The disruptions caused by this rippled throughout the world economy as companies ranging from Apple (NASDAQ:AAPL) to Toyota (NYSE:TM) came to grips with disrupted supply chains. The earthquake, and subsequent Tsunami, aside from the tremendous damage and loss of life also succeeded in forestalling a great deal of Japanese industrial activity. It is believed that Japan will experience reduced electrical output, and thus reduced industrial output, for years to come. One of the challenges of globalization is that what happens in Japan, or Greece, can have profound effects throughout the world.

But many believe these disruptions are moderating down and our economy will again pick up. JP Morgan went so far as to deem this "The Summer of Cyclicals" in a recent strategy piece and advocated increased equity exposure. I make my living by not buying what Wall Street would like to sell me but on this occasion the street may be right.

Data out yesterday from Japan would appear to validate the cadre of optimistic strategists and economists on Wall Street: our economy - while far from vibrant - may have hit a temporary soft patch. Japanese Vehicle Production, plunging to a multi year low including the Great Recession after the quake, is rebounding.

Japan Auto Production

Additionally, Toyota claims it will be at full production in November or December while Volkswagen recently announced increased 3Q production and increased shifts during the traditional European summer holiday.

Perhaps it is a soft patch.


[1] Soft Patch, Google Trends.

[2] Double Dip, Google Trends.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.