Sunday, June 20, 2010

Sunday Night Economic Assessment

The US Industrial economy (after a very good month of May) appeared to continue its June softness (if pipeline scheduling is correct), as industrial production and consumer spending both backtracked.

The Production Index (In terms of its 28-day moving average of gas-flow scheduling into US industrial facilities) eased for its third week in a row, slipping to 117.8 (from last weeks 118.8). In its dailies the week started soft but firmed up as the week progressed.

The paperboard-based Consumption Index also slipped, dropping to 124.1 (from last weeks 127.5). In its dailies the measure looked soft all week.

The Inventories measure (the cumulative weekly difference between the Production Index and the Consumption Index) continued to show signs of slowing the momentum of its long-term decline.

The economy still retains its appearance of being supported by consumer spending (with the deficit of the Production Index to the Consumption Index), though that support continues to be chipped away at the level of consumption. Stress within the investor/business sector of US society continues to be suggested in the ongoing lag of production to consumption and the decline of the inventories measure.

I continue to worry that strong foreign demand for dollars right now that is draining money out of the US (not to mention the ongoing trade deficits draining money out of the US) is a grave risk to the US economy. I suspect the Federal Reserve would do very well with another round of quantitative easing (purchasing of treasury debt). US dollar looks too strong for the good of the US economy.

Absent that, should the markets not find a way to reverse the dollar, and consumption decides to undercut production, we could see a catch-22 style contraction (as we had last fall) should businesses choose not to let inventory build and start laying off instead... scaring consumers to spend less... scaring businesses to scale back and lay off... scaring consumers to spend less... scaring businesses to scale back and lay off... and on and on into a deflationary spiral.