The US Industrial economy retreated again last week (if pipeline scheduling is correct) as industrial production backtracked, while consumer spending turned and worked higher.The Production Index (In terms of its 28-day moving average of gas-flow scheduling into US industrial facilities) dropped for its third straight week, declining to 115.5 (from last weeks 116.8). In its dailies the index was soft throughout the week. Automotive-related flows re-weakened last week (strongly bucking seasonals), an indication that the automotive sector is out in front of the recent industrial weakness. Also weak are the Chemical/Fertilize/Steel and Cement groups. I am also suspicious that commercial real estate construction is getting killed this month, judging by divergences in steel, automotive, cement, brick, and asphault groups.
California, however, appears to be rebounding (perhaps thanks to a weakening dollar).
The paperboard-based Consumption Index bucked its 1-week downtrend and advanced to 128.0 (from last weeks 126.8), its highest level since May 22nd. In its dailies the measure started flat then firmed midweek...
The Inventories measure (the cumulative weekly difference between the Production Index and the Consumption Index) continued its pattern of re-accelerating decline.
On balance, the US economy looks to be underpinned (for the moment) by a cushion excess of consumption over industrial production, and by recent gains in consumption. Deep divisions of optimism between the consumptive and productive ends of US society also remain evident in the disconnect between the gaining consumption index vs the declining production index.
But what of that seemingly never-ending decline in the inventories measure? (We are now into the speculative part of this weeks post). Three theories come to mind... 1) the models could be in error, possibly under-estimating urban industrial declines and/or over-estimating rural paperboard advances... 2) the models are reflecting extreme business-owner pessimism, keeping businesses afraid to hire on the chance a hostile government hands their heads to them in the months and years ahead... or more frighteningly... 3) the models are reflecting attrition, as investors are too afraid to start new businesses (and therefore acquire startup inventories) even while tens of thousands of older businesses close (and liquidate inventories) due to retirement of owners or bankruptcy.
Of those three possibilities, the first is a real stretch (though the inventories measure is the weakest of the three statistically) given the sharpness, steadiness and persistence of its decline.
The remaining two would be supported by the resistance of the unemployment rate to go down in the stiff gains of the industrial production index, and gains in profitability of existing industry and businesses (more consumer dollars into less hands = higher margins.
The last (attrition) would be supported by the presently-climbing high mall vacancy rates and declining commercial real-estate values, as well as the indications of extreme weakness in commercial construction (as noted above).
All-in-all, number three (attrition) followed by number two (pessimism) are the more likely and reasonable, but on the weight of the evidences, attrition seems the best logical fit, and (assuming I am right) makes employment gains very likely if at all possible, and (given the declines of the production index) I suspect unemployment will start ti surprise and tick higher in coming weeks should these present trends not reverse quickly.
As noted previously, we had a very close call on the economy three weeks ago as consumption had fallen (at that time) very close to production, risking a crossing which would have opened the door to a disastrous resumption of recession. That door appears thankfully to have re-closed in the short-term, thanks to the recent slight gains in implied consumption, but that door (in this present environment) must not, at all costs, be allowed to reopen. I suspect if it does, we go immediately into depression, not recession.
Politically, the gas-flow near-debacle three weeks ago seemed very closely aligned (in the gas-flows) with a Republican attempt to block unemployment extension (scaring the heck out of consumers- employed and unemployed alike), causing consumers to momentarily cut back "just in case", risking a collapse that would certainly fed upon itself and been nearly unstoppable. If Republicans had succeeded, we likely would be collapsing into depression right now.
Not to worry, though, as the Democrats are firmly in control of this blunder-bus of a government that continues to drunkenly weave its way down the road. Perhaps we need a new Coffee Party to go along with our new Tea Party so we can rid ourselves of our old Chardonnay and Beer parties!
-Robry825
