Friday, July 02, 2004

The US manufacturing sector may be hitting the the skids again. On Thursday the Financial Times reported

The US manufacturing sector slowed slightly in June but continued to expand at a brisk pace, according to figures from the Institute of Supply Management.

The ISM index of industrial activity fell from 62.8 to 61.1 over the month. . . .

Out of the 20 industries reporting 12 said orders had risen.

Nobert Ore, ISM chairman, suggested that new orders may be signaling that the headline ISM index will not be able to stay above 60 for many more months, if at all. But economists said that a moderation in the pace of growth was inevitable and would not be a negative sign.

The employment component of the index dropped back below 60 to 59.7.
It's not exactly clear to me how a 13% drop in the ISM index margin above industrial expansion (which is a value of 50) is still a sign of robustness, but then I don't write for the FT. And today news from the Labor Department shows that in June

Manufacturing employment fell by 11,000 having risen by 75,000 over the prior 4 months.
The New York Times also pulled this nugget out of the Labor report:

average wages for production workers - about 80 percent of the workforce - grew more slowly in June than they had at any previous point this year and have increased considerably less than inflation has over the last year.
This should be no surprise to anyone, of course, even though the Island of Economists is shocked and Wall Street is in a tizzy. As the General has been saying, manufacturing production in the US is indeed up, but consumption (and thus prices) is not. Today's news is simply evidence of the retrenchment that has to come in the face of manufacturing overproduction and deflation.

Note that the economic recovery begun in the second half of 2003 has been led by the revival of capital investment. Consumption never fell during the recession and has little to no room for quantitative improvement. So we get more stuff but no more sustainable income growth to consume it. Instead we rely on "toxic" forms like tax cuts, a housing-bubble wealth effect and a gravity-defying dollar.

Maybe India and Japan can move up to the front of the Global Recovery Express. The prospects for yet another US-led boom are tenuous at best.

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