Thoughts on a Mixed Bag: Manufacturing and Construction
A brief update on today’s data:
- Manufacturing. The Institute for Supply Management released its monthly survey of manufacturers today. Its index of activity now stands at 55.9% up from 53.6% the prior month. Be aware that this data is a little old – the latest month reported is November – but clearly the industrial sector is headed in the right direction. This is the fifth straight month of increase and the highest reading since April 2006. Any reading over 50% is correlated with a growing economy, so today’s data supports all the other information we have been seeing: GDP is expanding. Also bear in mind that, while expansion seems to be broadly spread across the economy, some areas remain weak, and that this indicator gives us a less reliable guide to the future than it gives a ‘score keeping’ for the immediate past. With that caveat said I think we should take some comfort from the report especially with regard to the payroll figures we will be seeing on Friday.
- Construction. On the flip side the government released a gloomy construction report today. Spending on construction projects fell for the seventh straight month in November – by 0.6% – and is now off by 13.2% over the past twelve months. Non-residential construction is even worse: it has fallen by 20.6% over the last year. Making matters more depressing was the news that October’s data was revised from being flat to a decline of 0.5%. There is no way to put a rosy gloss on this information. The construction sector is shrinking fast and looks as if it will continue that way well into the current year.
Taking the two reports together makes it difficult to work up a great deal of enthusiasm for the next few months. All the signals are mixed. Some areas, such as manufacturing, are clearly improving, while others are still floundering. The net result is that we seem to be stuck in a series of cross currents making little substantive headway. Perhaps the best way to look at the near term outlook is that until we see data that is definitively supportive of growth, with a series of months of strong momentum, we cannot predict much beyond a mediocre spell of GDP numbers. And that could be for a long time.
This, of course, contrasts with the media cheering section where every step, however tentative, is seen as the beginning of a return to the glory days.
Just when those glory days were I have no idea: the entire decade of the 2000’s was a write-off for most people. Real incomes, stock prices, job growth … you name it, the 2000’s didn’t deliver anything at all. It was a decade we sincerely need to avoid replicating. Any policy enacted from 2000 through 2008 needs to be consigned to the trash, and any from last year copied only in a vastly scaled up version.
I think Krugman keeps on capturing it well: what seems to be missing in the analysis done by the cheering section is any hard thinking. All the evidence, and now there is tons of it, points to a very lethargic economy for many years to come. This lethargy results from one simple fact: our finance system is severely broken. Credit flows are weak. We are still unwinding from insanity the banks foisted on us. Asset values are still high – yes even housing is still expensive by historic standards in many areas. And far too large a portion of corporate profits flows out to managers rather than to shareholders or employees. Rent-seeking is rampant and corruption endemic.
We have deep and systemic problems, and we lack the willpower to fix them.
Let me illustrate what I mean: in Slate I read about the new record breaking passenger train being introduced in China. Following a glowing report about the technology and the benefits the high speed link would bring to the Chinese economy the reporter ended by stating, with abandoned ennui I presume, that ‘of course we could never introduce such a train here in the US’. For political and economic reasons. Our politics and economics, both of which we have lauded for decades as the model for the world to follow, now seem to be stopping us taking any bold action. Instead we are mired in petty bickering and endless culture wars. We have a Senate trapped in 1700’s posturing. We have an elite comprised of brilliant bureaucrats for whom triumph is avoidance of failure. Plus we have social sclerosis on a par with that much derided ‘Old Europe’, but with none of the benefits.
All of which apparently prevents us from carving our way through problems within the banking or health care sectors. Just look at the effort we expended to legislate a weak and borderline ineffective stimulus plan. At the very height of a national crisis no less.
I hope that Krugman turns out to be wrong. In his speech in Atlanta last week he spoke about Japan’s 1980’s experience and how we look very much as if we are emulating it. His point being that we have a model of what might be in store if we fail to be radical in our policy choices: Japan still hasn’t fully recovered from its deflation and asset price implosion of 38 years ago. He says that the Japanese evidence is why he remains more pessimistic than most about the next few years.
It may seem an odd thing to say, but if we want fewer of today’s mixed reports, if we want manufacturing and construction to drive rather than sputter forward, then we need substantial, significant, far-reaching, imaginative, and bold reform of finance. Without which we will have growth ho-hum growth and many lost opportunities. We will lose our vigor but retain a nice veneer of nearly acceptable performance. We will always be close enough to success that we cannot take aggressive action for fear of plunging downward. Yet we that same reticence will condemn us to watch opportunity pass us by.
And the chances of bold action are? Given this last twelve months?
Let’s just say I wouldn’t bet on it.
