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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: mishedlo who wrote (66794)7/25/2006 2:48:24 AM
From: bond_bubble  Read Replies (1) of 110194
 
Great Article on PPI greater than CPI theory causing job losses and recession (from Austrian perspective) and why consumer spending is not as big as intermediate stages of production. Also, he points out manufacturing recession is a leading indicator than consumer spending for the recession:
safehaven.com

The importance of the above is vital if we are to understand what is happening at the moment (not just in the US but also in Australia) and why danger signals are overlooked. Despite evidence in 2000 that the capital goods industries in the US were cutting back, many commentators ignored this trend because consumer spending and retail sales were still holding up. So long as spending in these area was maintained or even increased, so it was reasoned, the economy was in no danger of sliding into recession.

But as I have explained before, credit expansion stimulates the capital goods industries into expanding output beyond the point that is economically justified. By the time this has been discovered these companies find themselves squeezed between rising costs and falling demand. The result is that production has be cut and labour laid off. According to this line of reasoning falling production means that expenditure on intermediary goods must drop. In other words, business spending is falling.

Now an initial fall in business spending need not register in GDP figures if consumer spending offsets it. This happens in two ways: 1. The factor payments that these companies have made are still working their way into consumer spending. 2. Consumer credit -- underpinned by credit expansion -- continues to sustain consumption. With consumer spending still growing, it's possible that employment in the consumer industries will still grow. This is what happened during the Clinton recession. Although production dropped consumer spending raced ahead.
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