Monday, September 14, 2009

Sunday Night Economic Assessment

The US Industrial economy continued to push ahead last week (if pipeline scheduling is correct), consumer spending softened, and the US Administration made a major tactical blunder in the area of international trade.

The Production Index (In terms of its 28-day moving average of gas-flow scheduling into US industrial facilities) collected its 14th advance in 15 weeks, and now stands higher than at any time since January 5th (It bottomed May 28th), and at levels suggesting it has made up better than 50% of it's recessionary deficit. In its dailies (as evidenced by the "Part 7" industrial daily posts on the IV-CWEI site) the week looked strong all the way through and closed out above the prior week... which was remarkable as the most recent week had one less work-day due to the Labor-Day holiday.

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 tripled (up 255%) since its worst month ever (June).

The early-September strength continues to be very broad based, including the paper, chemical, refining, mining, and metals sectors. The auto sector, which also started the month strong, is again back-peddling (an early-month-strength-late-month-weakness pattern that has repeated itself in recent months).

The Paperboard-based Consumption Index conversely gave up a little more ground last week. Though slightly below year-ago levels (which benefited from a bit of political-convention euphoria), the Consumption Index remains well above the Production Index... supporting the recent momentum of recovery at least for the time being... though they are getting close on the dailies.

The Inventories measure (the cumulative weekly difference between the Production Index and the Consumption Index) remains well-below pre-recession levels, adding inventory-rebuilding as another support-mechanism near-term to the economy.

Of great concern, however, is a major blunder of the US Administration in bypassing the World Trade Organization in its recent decision to pursue tariffs against China against imported tires. This was an unbelievable lapse of judgment, and China immediately retaliated (another error on their part) against US autos and poultry... spooking the international markets even as I type this up (Sunday Night).

With China's massive trade surplus with the US, with China's massive US dollar holdings, and China's historic dollar-pegging, a large monetary & trade bubble is in place, and if this bubble pops suddenly (as opposed to relieved slowly) shock waves could circle the globe.

Should the US dollar suddenly dive against China, it could cause severe recession in China by way of sudden loss of export-related trade, a burst of inflation expectations in the US, an intrinsic loss of perhaps a trillion dollars (or more) in Chinese currency holdings, renewed recession in the US by way of consumer pessimism crimping off consumer spending (reigniting recession and perhaps depression)... all through global market turmoil.

Both the US and China would do well to step back from all of this (QUICKLY... LIKE MONDAY MORNING BEFORE US MARKETS OPEN) and defer all this properly to the WTO. Otherwise we will have to hope the markets choose to look the other way.

It will be an interesting day... Monday...