Opinions and observations expressed on this blog reflect the authors' individual experiences and should not be construed to be financial advice. None of the members of this blog are licensed financial advisors. Please consult your own licensed financial advisor if you wish to act on any recommendations here.

Thursday, June 16, 2011

At least they had the good sense to try to head it off

So, there's this story on Bloomberg about Asian real estate markets coming in due to policy tightenings. At least they don't wait for the overshoot to be too large before trying to correct it. We could learn a thing or two about it. Sadly, they will probably blame these policies for any resulting problems and not the runaway speculation. Sigh.

Monday, June 6, 2011

Another Spring Air Pocket?

The May employment report along with a series of other indicators have formed an unmistakable picture of an economy that has hit a growth wall... just as we did at about the same point last year.

Remember the first three months or so of last year? It seemed like the economy was finally firing on all cylinders, perhaps? Then, suddenly, the bottom fell out of growth.

The monthly manufacturing surveys have uniformly turned weak again with most of them barely registering growth at all. The Kansas City Fed, for instance, has gone from a reading of 27 in march to 1 in May. Production and new orders fell off drastically, particularly in the case of new orders, falling to a reading of -15. Basically, this means that 15 percent more firms saw declining orders compared to rising orders. The ISM composite index demonstrated a similar collapse, though it is still in positive territory over 50:

 There are a couple of reasons that we may be seeing such a rapid slowdown in manufacturing. One, of course, is from the disruption of Japanese manufacturing in the wake of the devastating earthquake and subsequent tsunami that knocked out a good portion of their electrical power, crippling manufacturing production. Japan is so integral in many manufacturing supply chains as well as is a significant end market for goods itself that its severe dislocations are undoubtedly having a significant impact. We saw that in auto sales in May. The ripple effects through the auto supply chain have been severe. Electronic components have similarly been badly disrupted.

Of course, there is the oil shock, which has clearly dampened consumer demand. With short lead times, it doesn't take much time for a slowdown in consumer demand to be translated into a drop in orders and then production.

The good news is that neither of these factors need be permanent. The bad news is that neither are of the magnitude to be causing a virtual standstill in economic growth, at least not for a genuinely healthy economy. This leads us to another drag which is a decline in state and local government spending and employment. As the expenditures by governments and their employees are part of what I would term the "base load" of demand, their diminution is particularly devastating.

If I were a betting man, I would wager that the economy and, by extension, the stock market, will survive this spell just as they did last year. However, that is provided that Congress doesn't do the ultimate in stupidity and actually default or even come meaningfully close to doing so. One of the reasons that the U.S. has a AAA credit rating is not just because we have never defaulted, but also because our political leadership has never even contemplated it. Even a close call could be enough to send financial markets into quite the tizzy.