Global Economic Growth Being Driven By Manufacturing

by: Larry Wishnick

Summary

Manufacturing turning up in major economies.

Money held by banks coming off balance sheet.

Potential for short to mid term economic growth driven by manufacturing exists.

With the U.S. Presidential election behind us and the uncertainty of that event out of the way, it looks like the world economy is beginning to turn up.

Leading the charge is manufacturing. Looking at charts of Manufacturing PMI across all three major economic areas, we can see that it is trending up. Whereas, it had been diverging over the last five years, going up in some areas and going down in others, it is now moving up in all three at once.

United States Manufacturing PMI source: tradingeconomics.com

Chinese Manufacturing PMI source: tradingeconomics.com

Euro Area PMI source: tradingeconomics.com

A Brief History

For years developed economies around the world have been throwing a tremendous amount of money in to the system. M2 has grown precipitously. The result of all this cash being injected into these economies, is for it to be horded by banks and large corporations. Consequently there has only been modest growth in the major economies.

The reason that economies have not been able to reach take off mode, is that companies have been bogged down in various rules and regulations. This includes constraints put on banks. This has hampered the amount of money that is changing hands. Therefore, banks are holding a record amount of cash on their balance sheet. A lot of the signs of economic life we have been seeing is being driven by shadow banking.

The United States recently began to withdraw some stimulus measures. The Chinese government has been stoking their economy, in recent months. The Europeans have been doing everything they can to keep their economy afloat, implementing massive stimulus measures.

A Changing Landscape

A Republican President and Congress will be in effect on January 20th, in the United States. I believe that a lot these regulations are going to be rolled back or not enforced as vigorously. Plus, with the House and Presidency in the hands of one party, more legislation will be passed. Including infrastructure projects.

So, now you have the largest economy in the world willing to loosen regulations, cut taxes and spend on infrastructure.

The potential for more growth oriented policies as well as the ones that have already been implemented can be seen in the price of industrial metals, such as copper, which have risen sharply over the last week.

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Interest rates have gone up, causing the price for United States Treasuries to go down

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This indicates that a lot of the money that was being held by institutions is being put to work. I am guessing money is beginning to move off the major banks balance sheet and into the economy, taking over for shadow banking.

It's A Boom And Bust Cycle

With all this money moving out of Treasuries and into the economy, look for a boom in economic activity, lead by manufacturing and infrastructure. The caveat being at one point there will be a bust. The massive amount of debt that is being created cannot keep these economies going for the long term.

However, since the money that was pumped into the system over the last eight years is just really beginning to be put to work, by major economies around the world, I think the trend is up for global manufacturing.

Conclusion

Manufacturing is beginning to turn up worldwide. The trend is positive in the near to mid term. Look to buy industrial metals and global manufacturing stocks.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.