Slowing Down

We ought to reflect, however briefly, on the implications of today’s Institute for Supply Management’s survey of manufacturing activity. Yes, I know it sounds dull. But it is a closely watched index, published monthly, and gives us an approximate indication of industrial activity, and just as importantly, industry expectations.

Here’s the bad news: the manufacturing index dropped from 53.5% in May to 49.7% in June. This is the first time the index has dropped below the magic 50% line since the middle of 2009, and is much worse than anyone expected. The new orders component of the index recorded its worst decline since 2001 – it fell 12.3 points in a single month, matching the decline we experienced in the immediate aftermath of 9/11. Only this time there is no terrorist attack as a cause. Simply rotten economy policies here and in Europe.

The news set off a flurry of attempts to explain it in the best light. After all Wall Street analysts want to sell stocks. Clearly a decline in industry suggests stocks are not a good buy, at least not yet, so there is pressure to find a silver lining in even the worst news.

I am not so inclined. Any reading under that magic 50% line suggests that more businesses are facing shrinking demand than are facing expanding demand. Obviously the further below 50% we go the worse the situation is becoming. So the point is not to get into finely parsing of the numbers – I have read one analyst telling us that everything is OK since we have not yet sunk below 47% which in his mind is the dividing line between growth and recession. Rather the point is to be aware of the direction. And the direction is negative.

Things are getting worse again. The economy is showing signs of slowing down.

Since GDP was already limping along early this year – GDP grew a paltry 1.9% in the first quarter – any further slippage, as the ISM index appears to be indicating, would push us closer to the edge of an outright downturn. The bond markets’ immediate reaction was telling: rates on US bonds dropped again. The bond market is now shifting its attitude and signaling lower growth ahead. Perhaps even recession.

I am still not sure we will see actual decline. More likely we will limp along at very low growth. The crisis in Europe is clearly sapping confidence and activity. Our own lack of leadership and poisoned politics is contributing its share of pessimism. Political failure seems now to be endemic. Economic policies are almost universally the opposite of those needed. We are collectively willing ourselves into deeper trouble.

And please recall that this is almost the same as the experience of the Great Depression. During the 1930’s there were years of growth sprinkled in amongst those more renowned years of contraction. This is what a depression feels like.

Inept politicians in the thrall of toxic economic theory have real world consequences. Big, and harmful, real world consequences.