Best of the Week
Most Popular
1.London House Prices Bubble, Debt Slavery, Crimea 2.0 - Russia Ukraine Annexation - Nadeem_Walayat
2. Gold And Silver – 2014 Coud Be A Yawner; Be Prepared For A Surprise - Michael_Noonan
3.Sheffield, Rotherham Roma Benefits Plague, Ch5 Documentary Gypsies on Benefits & Proud - Nadeem_Walayat
4.Glaring Q.E. Failure Spotted - Money Velocity Is Falling Rapidly - Jim_Willie_CB
5.Don't Miss the Boat on Big Biotech Catalysts: Keith Markey - Keith Markey
6.Gold Prices 2014: Do What Goldman Does, Not What It Says - David Zeiler
7.Bitcoin Price Strong Appreciation to Be Followed by Declines? - Mike_McAra
8.Gold Preparing to Launch as U.S. Dollar Drops to Key Support - Jason_Hamlin
9.Doctor Doom on the Fiat Money Empire Coming Financial Crisis - Andrew_McKillop
10.The Real Purpose Of QE - It’s Not Employment - Darryl_R_Schoon
Last 72 Hrs
Tesco Profits Panic! Back to Back £5 Off £40 Shop Voucher Promotions - 18th Apr 14
The Obama Game - Is Putin Being Lured Into a Trap? - 18th Apr 14
The Growing Threat to Capitalism - 18th Apr 14
Build Biotech Wealth on Solid Platforms - 18th Apr 14
Has Solar Power Finally Arrived? - 18th Apr 14
Bank Depositor Bail-Ins and Real Assets vs Liability-Based Assets - 18th Apr 14
10 Ways to Screw up Your Retirement - 17th Apr 14
One of Harry Dent’s Three Keys to Market Prediction is Cycles - 17th Apr 14
Obamacare Proof Stocks - 17th Apr 14
Gold, Silver And The Mining Sector: Prepare For A Severe Fall - 17th Apr 14
Hidden Australian Life Sciences Bio-tech Growth Stocks - 17th Apr 14
Disrupting Big Data Status Quo - 17th Apr 14
What the Stock Market Bears Have Been Waiting for... - 17th Apr 14
Copper Is Pathological and Suffers from SAD, but It Has Value - 17th Apr 14
Old World Order New World Order, Chaos And Change - 17th Apr 14
Even The US Government Will Abandon the U.S. Dollar - 17th Apr 14
Gold - Coming Super Bubble - 17th Apr 14
Glaring Q.E. Failure Spotted - Money Velocity Is Falling Rapidly - 16th Apr 14
High-Frequency Insider Trading - 16th Apr 14
Gold Prices 2014: Do What Goldman Does, Not What It Says - 16th Apr 14
These CEOs Will Make Investors Rich - 16th Apr 14
Climate Change, Central Banking And The Faustian Bargain - 16th Apr 14
Every Central Bank for Itself - 16th Apr 14
Social Security, U.S. Treasury Stealing Every Last Penny From Americans - 16th Apr 14
Ukraine Falling to Economic Warfare and Its Own Missteps - 16th Apr 14
Silver and Gold Miners Still Disappoint - 16th Apr 14
Silver, Gold, and What Could Go Wrong - 15th Apr 14
How I Intend to Survive the Meltdown of America - 15th Apr 14
France Wakes Up To The Multicultural Multi-Threat - 15th Apr 14
The Real Purpose Of QE - It’s Not Employment - 15th Apr 14
Peak Coal - 15th Apr 14
Flash Crash, Rigged Markets - What’s the Frequency Zenith? - 15th Apr 14
Forecasting U.S. GDP Growth: A Look at WSJ Economists’ Collective Crystal Ball - 15th Apr 14
Stock Market - Is Something Nasty About to Happen? - 15th Apr 14
How to Trade Your Way To Freedom - 15th Apr 14
Understanding (and Ignoring) the Media Bandwagon Against Gold - 15th Apr 14
When Stock Market Bubble Crashes, Take Refuge in Gold Stocks - 15th Apr 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Myth of the Manufacturing-Led Economic Recovery

Economics / Economic Recovery Aug 04, 2010 - 08:31 AM GMT

By: Andy_Sutton

Economics

Best Financial Markets Analysis ArticleThey still don’t get it – or perhaps they do and just won’t admit it. Either way, it doesn’t matter much as the jesters, namely Msrs. Bernanke and Greenspan, continue to chirp their assigned lines, playing good cop/bad cop with the USEconomy. Right now, Bernanke is the good cop, pointing to increasing wages and the likelihood that the consumer will once again step up and rescue us from the grips of the double dip. On the other side of the room is Greenspan, talking about how that double-dip is still possible, although extremely unlikely.


Today the mainstream press jumped on the bandwagon and trumpeted the smashing success of the ISM’s manufacturing index for June as an indicator that all is and will be well. Stocks soared, bonds shed a point, and oil jumped over $80/barrel for the first time since May.

So what gives with manufacturing anyway? For years now we’ve heard stories about the deindustrialization of America and have seen countless pictures of decaying factories and manufacturing infrastructure. Yet at the same time the economic masterminds of this nation are telling us that manufacturing is going to pull us out of this horrible recession, and in fact, prevent any and all future recessions. If ever there was a dichotomy in perception, it is now. It would appear as if suddenly everyone is realizing that we must produce in order to consume. While this is a notable departure from conventional Keynesian theory, are we seeing a true sea change or just lip service to the common sense of the matter?

Manufacturing currently accounts for about 28% of GDP at just a tad over $400 billion annually (based on final value of shipments) at our current clip, but total goods-producing employment accounts for just 13 million jobs – less than 14% of total US non-farm employment. By contrast, service sector jobs account for a whopping 85.5% of US non-farm employment and provisioning of services accounts for over 70% of GDP.

The Myth of the Manufacturing-Led Recovery

A closer look at the manufacturing activity over the past year jives with direct observation and many conversations with management level staff of several firms. The bump up has been anecdotally nothing more than a period of inventory rebuilding after inventories were run down during the recession. The biggest difference between the recession of the early 1990’s (see chart above) and the last two recessions is the wide acceptance of JIT (just-in-time) inventory management, CRM, ERP, and similar systems as firms broke away from accepting carrying costs as a cost of doing business and made an attempt to streamline operations to compete globally.

The net result of these fundamental changes in the way business is conducted is that inventories are now run down much faster than previously, and the rebuilding phase begins earlier – often while the recession is still in progress. If we had a true manufacturing economy, all else being equal, we might have a reasonable chance of being rescued to some extent by inventory building. However, ultimately, in the absence of an increase in aggregate demand, manufacturing will begin to stagnate again once the rebuild is complete. It should also be noted that the value of inventories is only marginally adjusted for changes in price, hence the increasingly higher dollar amount of goods.

Even though the ISM index made a slightly better showing than what was expected, this was clearly another case of ‘less bad’ being good. New orders continued to slump, down to 53.5 from 57, indicating very sluggish growth and contributing to the idea that the inventory rebuild is nearly complete. The 53.5 reading on the new orders index was the lowest since the same month last year according to the ISM. The backlog index fell by 2.5 points to 54.5 and that, combined with the new orders data, belied the small blip up in manufacturing unemployment and gives considerable credence to the temporary nature of such a move. Of course with the Labor Department solidly fudging the jobs numbers every month it is rather difficult to get a solid reading on anything at this point.

Overall, the composite manufacturing index put in its lowest reading of the year at 55.5. Anything over 50 signals growth with values less than 50 signaling contraction. Even the MSM is now admitting that manufacturing’s role in the continuing ‘recovery’ is becoming suspect. Small wonder.

Bernanke had quite a bit of cold water thrown on his argument as well on Wednesday as auto sales were rather tepid in July, especially when the massive incentives offered by manufacturers were thrown in. The 6% gain in sales will be almost totally wiped out in dollar terms by the slashed prices. Bernanke’s thesis took another blow just an hour later when personal income and outlays were released and neither moved an inch in July. Non-durables and services were particularly weak. Given the contribution to GDP that services represent, this is an unsettling trend.

The bottom line is that services alone will not be able to remove us from our economic and fiscal duress mainly because so many cannot be exported and therefore are of little help to the current account. A strong manufacturing presence would do wonders, however, it is very difficult to ask a struggling consumestocracy to purchase domestic goods at a steep premium to their foreign counterparts. National pride will certainly help some make the leap, but in many cases, the price gaps are just too large.

Tariffs could be used to close the gap, but widespread use could very well put an end to the Chinese (and others) vendor financing of the American economy. The same can be said for import quotas. For all the talk of energy independence, that would only be a microscopic piece of recapturing true national sovereignty. And yes, we have lost a good deal of that by virtue of being dependent on other nations to fill our shelves with everything from soap dispensers to many food items.

As for the current economic malaise? As the chart above shows, the tiny blip in manufacturing jobs represents so small a portion of our labor market that it is nearly laughable that anyone would assert that such a performance will lead this economy anywhere. Yet the spin-doctors continue to do exactly that.

By Andy Sutton
http://www.my2centsonline.com

Andy Sutton holds a MBA with Honors in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics. His firm, Sutton & Associates, LLC currently provides financial planning services to a growing book of clients using a conservative approach aimed at accumulating high quality, income producing assets while providing protection against a falling dollar. For more information visit www.suttonfinance.net

Andy Sutton Archive

© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014