US dips into recession

We now have both the ISM and the PMI surveys for August.  As usual, I have extreme adjusted both and added them together.  That's the green line in the chart below.  This average is now lower than it's been at any time since the GFC (Global Financial Crisis) in 2009.

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.

US PMI for September

Markit's "flash" estimate for each of the PMIs ("purchasing manager indices") for US, Europe and Japan for September were released yesterday.  The US index was up a little, the others down.  (A value above 50 means the economy is expanding, and the more it exceeds 50 the more rapidly it is expanding)

Here's what the average PMI for the US, Japan and Europe looks like:

Conclusions: the US still strong, though it may be levelling off.  The world as a whole, though, continues to slow.  And this US strength isn't permanent--it's due to the fiscal stimulus from the massive Trump tax cuts.  When it wears off, the effects of tightening monetary policy will take over, causing the US to slow.

European GDP

The volume of GDP ("real" GDP) in Europe still hasn't passed its previous peak (the chart shows the level of GDP, not its rate of change).  A triumph, really, a stunning triumph of bad and doctrinaire policy.

Soft underbelly

This graph shows the weighted average of industrial production for Greece, Italy and Spain, among the 5 or 6 European economies hardest hit by the Global Financial Crisis (GFC).  You can see the impact in 2008 of the meltdown in the US, and the slow recovery in 2009 and 2010.  Then these economies started to fall again, this time a European own-goal, as German-imposed economic and financial orthodoxy forced swingeing fiscal austerity.  The US ran massive (federal) deficits, and so its recovery, though sluggish, still actually happened.  In the grip of a malign madness, Greece, Spain, Italy, Portugal and Ireland by contrast were forced to slash spending and up taxes, and naturally, their economies plummeted.  During 2013, the fall stopped, but as you can see, there's scarcely a boom going on.

The total decline in IP and GDP, the jump in unemployment and dire poverty, all these were as bad as the Great Depression in the US.  And frankly, it could take a decade before the economies of these countries pass their previous peaks.

Shutdown

World econ resumes growth. At last!

This shows the weighted average PMI indices for the US, Europe, China and (since the beginning of the year) Japan.  Growth is accelerating.  For most of the last 2 years, these indices have been below 50%, indicating recession.

By slashing government expenditure and raising taxes, Europe manged to push its economy back into deep recession.  But that folly is now past.

My take on it is that growth will increase form here, for now.

[See also yesterday's piece, Fiscal Folly]

Fiscal folly

From an article by Joseph Stiglitz in today's The Age newspaper:

While other countries fell into the global recession, Australia maintained strong economic growth, low government debt and a triple-A credit rating. With this record, you might expect the federal election to be focused on how to convert the strength of today's economy into resilience for the future. But instead the political spotlight has fallen on the perceived problem of government debt, with alarming proposals to bring austerity ''down under''.

For an American, Australia's anxiety about deficit and debt is a little amusing. Australia's budget deficit is less than half that of the US and its net debt is less than an eighth of the country's gross domestic product.

Most countries would envy Australia's economy. During the global recession, Kevin Rudd's government implemented one of the strongest Keynesian stimulus packages in the world. That package was delivered early, with cash grants that could be spent quickly followed by longer-term investments that buoyed confidence and activity over time. In many other countries, stimulus was too small and arrived too late, after jobs and confidence were already lost.

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In Australia the stimulus helped avoid a recession and saved up to 200,000 jobs. And new research shows that stimulus may have also actually reduced government debt over time. Evidence from the crisis suggests that, when the economy is weak, the long-run tax revenue benefits of keeping businesses afloat and people in work can be greater than the short-run expenditure on stimulus measures. That means that a well-targeted fiscal stimulus might actually reduce public debt in the long run.

Australia may have successfully dodged the global crisis, but some politicians seem to have missed the lessons it taught the rest of the world. In this election, the conservative side of politics has foreshadowed substantial cuts to the government budget. This would be a grave mistake, especially now.

Recent experience around the world suggests that austerity can have devastating consequences, and especially so for fragile economies. Government cuts have helped push Britain, Spain and Greece's economies deeper into recession and led to widespread public misery.

The youth unemployment rate in Spain is above 50 per cent and the figure for Greece is above 60 per cent. Their tragic experience should be a warning to the world. But even seemingly healthy Germany was pushed into a recession from which it is just now emerging - but it is an economy that is still weaker than it was before taking the "dose" of austerity.

Proposals for substantial budget cuts seem particularly misplaced at this time given that Australia's economy is confronting new global challenges. Commodity prices are softening and growth is slowing in many key export markets. Australia is already facing declining mining investment. The slowdown in economic growth is not the result of flaws in government policy, but of an adverse external environment. It would be a crime to compound these problems with domestic policy mistakes.

Sharp cuts to public spending over the next few years will exacerbate these challenges. Withdrawing government spending as the economy weakens risks tipping Australia into recession and increasing unemployment.

Assuming standard multipliers(1), cutting public spending by $70 billion from an economy the size of Australia's over a four-year period could reduce GDP growth by around 2 per cent and cost up to 90,000 jobs.

Instead of focusing mindlessly on cuts, Australia should instead seize the opportunity afforded by low global interest rates to make prudent public investments in education, infrastructure and technology that will deliver a high rate of return, stimulate private investment and allow businesses to flourish.

Read more here.

(1) In fact the multipliers in those European countries which blindly imposed fiscal austerity have been unexpectedly large.

Read more: http://www.theage.com.au/comment/australia-you-dont-know-how-good-youve-got-it-20130901-2sytb.html#ixzz2e0mZx5AC