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Jim Cook

 

RUNAWAY SOCIAL SYMPATHY

Every once in a while I switch the TV channel from Fox to CNBC to see what the liberals are saying.  After listening awhile I get a deep sense of hopelessness and foreboding for our country.  The most important thing for the left is giving money to people.  They are happy to see the growth of food stamps, disability payments, housing subsidies, free healthcare and all the other welfare benefits.  They utterly fail to see the damage it is doing to the recipients.  Whole cities that once flourished have deteriorated into rotting eyesores populated with shambling hulks of chemically dependent drones.  These people are no longer employable.  They have become incompetent and helpless and the liberals can’t see that it’s their doing.

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The Best of Jim Cook Archive

 
Best of Andy Sutton
August 13, 2010
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The Myth of the Manufacturing-Led Recovery

A closer look at the manufacturing activity over the past year jives with direct observation and many conversations with management level staff of several firms.  The bump up has been anecdotally nothing more than a period of inventory rebuilding after inventories were run down during the recession.   The biggest difference between the recession of the early 1990’s and the last two recessions is the wide acceptance of JIT (just-in-time) inventory management, CRM, ERP,  and similar systems as firms broke away from accepting carrying costs as a cost of doing business and made an attempt to streamline operations to compete globally.

The net result of these fundamental changes in the way business is conducted is that inventories are now run down much faster than previously, and the rebuilding phase begins earlier – often while the recession is still in progress.  If we had a true  manufacturing economy, all else being equal, we might have a reasonable chance of being rescued to some extent by inventory building.  However, ultimately, in the absence of an increase in aggregate demand, manufacturing will begin to stagnate again once the rebuild is complete.  It should also be noted that the value of inventories is only marginally adjusted for changes in price, hence the increasingly higher dollar amount of goods.

Even though the ISM index made a slightly better showing than what was expected, this was clearly another case of ‘less bad’ being good.  New orders continued to slump, down to 53.5 from 57, indicating very sluggish growth and contributing to the idea that the inventory rebuild is nearly complete.  The 53.5 reading on the new orders index was the lowest since the same month last year according to the ISM.  The backlog index fell by 2.5 points to 54.5 and that, combined with the new orders data, belied the small blip up in manufacturing unemployment and gives considerable credence to the temporary nature of such a move.  Of course with the Labor Department solidly fudging the jobs numbers every month it is rather difficult to get a solid reading on anything at this point.

Overall, the composite manufacturing index put in its lowest reading of the year at 55.5.  Anything over 50 signals growth with values less than 50 signaling contraction.  Even the MSM is now admitting that manufacturing’s role in the continuing ‘recovery’ is becoming suspect.  Small wonder.

Bernanke had quite a bit of cold water thrown on his argument as well on Wednesday as auto sales were rather tepid in July, especially when the massive incentives offered by manufacturers were thrown in.  The 6% gain in sales will be almost totally wiped out in dollar terms by the slashed prices.  Bernanke’s thesis took another blow just an hour later when personal income and outlays were released and neither moved an inch in July.  Non-durables and services were particularly weak.  Given the contribution to GDP that services represent, this is an unsettling trend.

The bottom line is that services alone will not be able to remove us from our economic and fiscal duress mainly because so many cannot be exported and therefore are of little help to the current account.  A strong manufacturing presence would do wonders, however, it is very difficult to ask a struggling consumestocracy to purchase domestic goods at a steep premium to their foreign counterparts.  National pride will certainly help some make the leap, but in many cases, the price gaps are just too large.

Tariffs could be used to close the gap, but widespread use could very well put an end to the Chinese (and others) vendor financing of the American economy.  The same can be said for import quotas.  For all the talk of energy independence, that would only be a microscopic piece of recapturing true national sovereignty.  And yes, we have lost a good deal of that by virtue of being dependent on other nations to fill our shelves with everything from soap dispensers to many food items.

As for the current economic malaise?  The tiny blip in manufacturing jobs represents so small a portion of our labor market that it is nearly laughable that anyone would assert that such a performance will lead this economy anywhere.  Yet the spin-doctors continue to do exactly that.


Andy Sutton is the Founder & Chief Strategist for Sutton Associates, a Registered Investment Advisor in the Commonwealth of Pennsylvania. For more information about the company, its products and services, or contact information, please visit www.sutton-associates.net 
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