Monday, May 11, 2009

Sunday Night Economic Assessment

For the third week in a row, the Consumption Index continued to pull away from its April-20th peak, as scheduled natural gas flows into paperboard facilities (on which the index is based) continued their post-Easter softness. On a daily basis, paperboard-gas-flows looked like they were starting to turn positive, until Tuesday of last week (May 5th flows), when they fell apart.

The Production Index set its sixth recession-low in as many weeks, as industrial natgas flow scheduling for May was cut back sharply from April. There is a propensity within the industrial flows that changes to flows seem to like to happen around the first of the month (which I assume to mean that a lot of manufacturing production is adjusted up or down on a monthly basis by management) meaning that the weeks drop could be bearish for the remainder of May in regards to industrial production.

Much of the Year-over-year weakness in industrial gas-flows continues to come from the metals group in general (nearly 75%), and steel sector group in particular (See "Part 8" post on the Investor Village CWEI Board). Weakness in the steel group brings thoughts to my mind of the "Durable-goods" type of products, most of which heavily incorporate steel (think cars, washers, dryers, etc). That big-ticket durable-goods stuff has to be taking the absolute brunt of the recession right now.

The new Inventory Index again suggested (if both the Production and Consumption Indexes are right) that industry has been using the recent spurt in consumption to clear out inventory-clogged supply channels, as opposed to increasing production. I remain, however, leery that a rising dollar combined with lowered shipping costs might also provide an alternate explanation to the recent weakness in industrial & steel gas-flows. Waves of steel-imports have decimated the US steel industry in past periods of recessions and oil-price weakness. The same could be happening today.

Overall, the recovery still appears very much intact, though still fragile. If these indexes are all correct (Consumption, Production, and Inventory) they paint a picture of continued layoffs in industry, continued nervousness of consumers to stick out their debt-laden necks toward big-ticket purchases, and continued risk of an emotional, snowball-type effect should an unexpected "event" (i.e. General Motors following Chrysler into bankruptcy, stock markets rolling over) occur.

I remain concerned that the "stimulus" that is out there right now, is more from the markets (lower gas prices, home heating prices, etc), and could brutally be removed by the markets should something trip up. I would like to see more direct, secure stimulus aimed at the pure spender (payroll-tax holiday, minimum-wage hike with offseting business credit, etc).

My political belief is that President Obama and the Democrats were elected by their constituency to represent the "little guy" more-so than the "big guy that claims to represent the little guy". Right now that is not what I think I am seeing. The day to zero in on the "big folks" will come (when demand returns to take factories up to capacity and we need expansion-dollars to produce more), but that day is not today. Demand has to first be restored. Today needs to be the day of the "Little guy"... the men and women who work hard to feed their families in the face of need.