Usually I have many more topics for economic blog posts
than I have time to write, but not this time.
As I scan the economic and industry news, it is difficult to find any
new trends or significant changes that I have not already covered.
Back in May I warned that the “air was leaving the balloon.” This prediction turned out to be true, but I
never thought about what it might look like now. It’s like the end of the birthday party when
the balloons have deflated, all the cake is gone, and the pony’s been hauled
away. The kids are all standing around
wondering what happens next.
It’s quiet, too quiet, eerily quiet. It’s never supposed to be this quiet. Is this like a horror movie? You know when it
gets this quiet, something incredibly awful is just about to happen, but you
have no idea what that might be. Sure,
Janet Yellen could jump out of a closet screaming “Interest Rate Hike,” but
beyond that, what could be lurking?
The economy has been subdued for at least nine months
now. Some economists are claiming this
is due to a “classic inventory buildup” and that things should get much better
soon. Inventory buildups are caused by
businesses over-producing and over-ordering, because they anticipated sales to
be better than they actually were. They
expected the demand trend to continue, but it fell short.
There are two issues to be concerned with here. First, the economy wasn’t growing that great
to begin with. So why did it slowdown, and why was this inventory buildup so pronounced?
Is there a bigger problem with demand than we know? Second, when you have a healthy economy, the
inventory buildup is less of a problem because a typical return to a stronger
sales environment eliminates it quickly, and a noticeable improvement in GDP
soon follows. I sense that our current
inventory bloat is going to take longer than anticipated to burn off, because sales
still are not at higher levels.
It appears the economy went into a gigantic holding pattern
around March. Some indicators flattened
out at that time, and there was also a drop off in the Class 8 and commercial
trailer orders and production beginning in April. There were anecdotal reports of trucking
fleets becoming much more cautious about future business conditions, due to
declining freight demand and lower operating profits.
Analysts were encouraged when the Manufacturing PMI
(purchasing manager’s index) finally got above 50 (the growth line) in March,
after six months being under or equal to that value. Unfortunately, there has
been only sluggish growth since then, with a “highpoint” of 53.2 in June. The Non-Manufacturing PMI has been better,
but inconsistent. The non-manufacturing sectors have been credited with keeping
our heads above the recession waters.
Retail sales have been shaky except for solid months in April and
June. The chart below shows the three
factors, I subtracted 50 from the PMI values to make it easy to see the “negative”
values. The retail sales values are the
reported percentage changes. The August
numbers do not indicate a “bounce back” from the inventory correction.
Of course the uncertainty of the presidential election is
largely responsible for the economic quietness.
The candidates are polarizing and their economic programs vastly different. Let’s assume the economy is a difficult
jig-saw puzzle, the current player found the puzzle too perplexing and, at some
point, gave up trying to finish it, but told us the picture on the table was pretty. One of the potential new players will look at
the current unfinished puzzle from new angles and try to fit new pieces to
complete the task, but the strategy, and maybe the results, won’t change too
much. The other player would throw the
current puzzle out the window, and then introduce a brand new puzzle.
But then in this stillness, comes a ray of hope. Consumer confidence in September jumped to
its highest level in nine years! Nine years!
And then it is casually mentioned that it is the “strongest reading
since August 2007, four months before the start of the Great Recession.” Oh no, the consumer never sees it coming. Do
not open that door, please do not open that door!
