The ISM commentary is bleak:
Comments from the panel reflect a notable decrease in business confidence. August saw the end of the PMI® expansion that spanned 35 months, with steady expansion softening over the last four months. Demand contracted, with the New Orders Index contracting, the Customers' Inventories Index recovering slightly from prior months and the Backlog of Orders Index contracting for the fourth straight month. The New Export Orders Index contracted strongly and experienced the biggest loss among the subindexes. Consumption (measured by the Production and Employment Indexes) contracted at higher levels, contributing the strongest negative numbers (a combined 5.6-percentage point decrease) to the PMI®, driven by a lack of demand. Inputs — expressed as supplier deliveries, inventories and imports — were again lower in August, due to inventory tightening for the third straight month and continued slower supplier deliveries. This resulted in a combined 1.5-percentage point decline in the Supplier Deliveries and Inventories indexes. Imports and new export orders contracted to new lows.
Respondents expressed slightly more concern about U.S.-China trade turbulence, but trade remains the most significant issue, indicated by the strong contraction in new export orders. Respondents continued to note supply chain adjustments as a result of moving manufacturing from China. Overall, sentiment this month declined and reached its lowest level in 2019.
As I've said before, my US longer-leading index (18 months to two years' lead) suggests a turn sometime in 2020, and that timing is more or less consistent with my shorter leading index (9 months to one year). That's a good six months away, and it ignores any stupid actions from Trump.
And I am concerned that there are few tools to reverse this slide. Yes, the Fed can cut rates. But they are already very low. And QE (Quantitative Easing, i.e., buying long dated bonds to drive down the yield)? They are already at 75 year lows. Fiscal stimulus? We've had our fiscal sugar hit. And though Republicans voted for a tax cut for the rich and for companies, somehow I doubt they'll vote for any more fiscal stimulus. The deficit is already substantial. A tax cut at the economic peak is always stupid. So it proved this time too.
And remember, in a world where trade flows between countries are significant, weakness in one can be transmitted around the world, especially if politics doesn't provide a circuit breaker. Look how the U economy turned down in 2012 in response to the Euro crisis. And right now politics is actually reducing confidence, worsening trade, affecting demand and investment. We have cretins in charge in the US, the UK, Brazil, and Oz. And in Europe, the German passion for budget surpluses is constraining Europe's ability to spend its way out of its recession, while the ECB already has a interest rate of zero.
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