Following 11 straight weeks of advance, the US Industrial economy appeared to have stalled (at least temporarily) in its advance last week (If pipeline scheduling is correct), continuing a softening pattern (in recent weeks) in its previous-rapid ascent out of recession.The Production Index (In terms of its 28-day moving average of gas-flow scheduling into US industrial facilities) eased for the first time in 12 weeks (since its May 28th bottom), though still at levels suggesting a better than 50% of it's recession-suggested deficit. In its dailies (as evidenced by the "Part 7" industrial daily posts on the IV-CWEI site) the week started off soft, but gained strength as the week progressed and closed out the week slightly stronger than the previous week, but below the first week of the featured 28-day average.
On a sector-by-sector basis (see part "8" posts on the IV-CWEI site) the steel sector (which led the other groups to the downside with a 75% drop in scheduling) continues to lead on the upside and has more than doubled since its worst month ever (June). The auto sector (which also showed a nice pop for the 1st day of August) continued to back-peddle, in spite of the much talked of "Cash for clunkers" activity. Michigan (Robrys home state) remains out of the recession-recovery game.
My thoughts on "Cash for clunkers" is it will be found (when history is written) to have been a blunder. Week gas flows to the auto sector suggest opportunistic use of the program by folks that would probably have purchased new cars anyway, with their trade-ins being removed from the "fleet" of cars on the road to be scrapped.
Net effect of "Cash for clunkers" will probably be less cars on the road (less older "clunkers"), much less after-market demand for parts ("clunkers" require far more new parts per 1000 miles driven than newer cars), layoffs in the auto after-market industry (which is significant), higher prices on used cars (Less "clunker" supply = higher pricing), and more people in the lower-income strata that won't be able to afford to replace their "clunker" when it dies because of the higher pricing (Always the little guy that takes it on the chin... Always!).
Next "blunder hurdle" for the economy will be the expiration of extended unemployment benefits in key states. In a locked-up economy (as we now have) the only way to get idle production is to get spenders to spend, then keep them spending. Unemployment compensation can help to keep them spending. Allowing it to expire in mass will send us back into recession if not depression... and fast.
Third "blunder hurdle" will be health-care reform. If consumers get a whiff of any kind of a big tax increase (or insurance-premium increase) to pay for health-care reform... they will likely cut their spending to accommodate it... again sending the economy down hard. We need smart cost-cutting reform for now, not wild-eyed reform in the midst of a wild-eyed recession.
The Paperboard-based Consumption Index also pulled off just a bit more from its all-time high of five weeks ago, though still well above year-ago levels. In its dailies, it actually appeared strong for the week, though seasonal factors pulled it down just a tad.
I remain leery (based upon Automotive gas-flow scheduling) that the Consumption index is somewhat overestimating the gains in consumption. One handicap of the Consumption Index is (because it is derived from gas-flows into cardboard-box manufacturing) is it doesn't touch merchandise that isn't packed in cardboard boxes (like Automobiles). So with gas-flows suggesting softness in the Auto-Sector (Which the model does not represent) and strength in non-auto (Which the model does represent) the non-auto strength gets imputed into the whole of US consumption by the model.
Now this is not to say that the US economy isn't advancing (the gas-flows evidence numerous signs of a rapid ramp in the economy). It is, however, to say that the Consumption Index (and the Inventory Index that makes use of it) look too fast on the consumption ramp-up. (It is also to say that Robry's models need improvement!)
The Inventory Index (given the Consumption & Production Indexes) has now given up all of its overhang, and is extending its deficit to year-ago levels... reflecting perhaps the long-term damage done to some industries (especially auto) by the length and severity of the recession, and the ineptitude of the government/feds to address it.
Overall, I continue to believe the industrial-recession ended at the May-28th Production-Index bottom, and anticipate a turning in the employment numbers in the month(s) ahead. With the implied inventory overhang now gone, and production lagging consumption by a wide margin, I believe the recovery has (to borrow a term from nuclear physics) reached its point of critical mass. As long as consumption holds at current levels, production should ramp up to meet it.
That is not to say that the economy is free of risk. There is always the risk of news events (acts of war/terrorism, natural catastrophes, political events/blunders, etc) that could cause consumers to panic, leading to a "double-dip" type recession. Momentum, however, appears (at least for the time being) on the side of recovery, and until that momentum gets broken, I see the recovery continuing.
-Robry825
