More on the economy-Inventories from the dismal economist site--
CAPS ARE JUST TO SHOW MY THOUGHTS VERSUS WHAT DISMAL ECONOMIST
ARTICAL
CONLUSIONS:
1) WE ARE HAVING AN INVENTORY CORRECTION, IT "COULD" LEAD TO A SERIOUS
EARLY 1980'S STYLE RECESSION, AND WE PROBABLY COULD HAVE SLIGHTLY
NEGATIVE GROWTH THIS Q1 (-0.7%). I PRESUME A SOFT LANDING IN 4TH Q AT 1.4%,
ONE HARD BUMP LIKE YOU GET WITH SOUTHWEST AIRLINES IN Q1 9-.07%), Q2 BOTH WHEELS
HIT THE RUNWAY AGAIN, AND AVERAGE Q3,Q4, NICE 2002.
2) CAN THE RECENT LOOSENING OF MONETARY POLICY BY THE FED COUNTERACT
THE RAPID SLOWING OF THE ECONOMY QUICKLY ENOUGH TO PREVENT SAID FULL
BLOWN RECESSION? TIME WILL TELL , BUT IN ALL LIKELIHOOD THE ANSWER IS YES.
3) EXCEPT FOR AN ENERGY CRISIS IN CALIFORNIA AND A REGIONAL
MANUFACTURING SLUMP IN DETROIT, THE IMBALANCES IN THE ECONOMY
ARE PROBABLY NOT BAD ENOUGH TO HAVE AN EARLY 8O'S RECESSION.
(COME-ON LAYOFFS IN TECH ARE MINIMAL COMPARED TO WHAT WE HAD
IN THE EARLY 80'S OR EVEN IN THE ENERGY BUSINESS ALONE SINCE 1986.
ALL OF THESE LAYOFFS ARE 10% OR LESS AND ARE WORLDWIDE--NOT CENTERED
IN THE US. MOTOROLA'S 4,000 MEANS ONLY 1,200 IN THE U.S. )
ITS REALLY IRONIC THAT SOMEONE HAS A SITE TO TRACK ALL THE SMALL
LAYOFFS IN TECH......NO ONE EVEN GAVE A DAMN WHEN THIS WAS
ENERGY SECTOR RELATED AND IT WAS MASSIVE COMPARED TO THESE
PUNY TECH LAYOFFS. (THE ONLY ONE I SAW I THOUGHT WAS HUGE
WAS GE'S 75,000-AND THAT'S HONEYWELL MERGER RELATED AND STAGED
OVER TWO YEARS- MONKEY WARDS IF YOU WANT TO COUNT IT.)
dismal economist:
The current situation is reminiscent of the old shell game. Not many
months ago, we were looking under the proverbial shells finding a
coin with nearly every economic release. How times change. It now
seems that our luck has turned dramatically, with nary a coin to be
found. Between the bad economic news, job layoffs and the decline
in stock values, it's no wonder consumer confidence is falling
dramatically.
Amidst the chorus of recent below expectation economic reports, the
manufacturing industry has been weakening at an alarming rate. All
three of the major manufacturing indices are now registering a major
recession in manufacturing activity. The Philadelphia Fed's Business
Outlook Survey is the lowest it has been since 1990, and the
Chicago Purchasing Managers Index and the NAPM survey are now
both suggesting that the manufacturing industry is in the midst of a
recession, the likes of which has not been seen since the early
1980s.
Not only do the levels of the indices suggest a major decline in
manufacturing activity, but the rate of the decrease has been
accelerating over the past two months. Most importantly, the NAPM
index, which is the best broad indicator of manufacturing activity at
the national level, fell to 41.2% in January. This is consistent with
annualized quarter-to-quarter GDP growth of -0.7%. Now, one month of negative GDP growth does not a recession make. This situation would need to persist until June to fulfill the classic definition of a recession, two quarters of negative growth. Bear in mind though, with the new orders component of the NAPM index at its lowest level in 18 years, this outcome is not entirely unlikely.
So, if negative growth is here, the question now becomes, can the
recent loosening of monetary policy by the Fed counteract the rapid
slowing of the economy quickly enough to prevent a full blown
recession? Time will tell, but in all likelihood the answer is yes. The
broad economy is still in generally good shape with few of the
imbalances that have been present before previous recessions.
Commercial real estate markets are not overbuilt, inventories are
lean, and liquidity still exists in the market. The lack of imbalances
should allow the economy to recover quickly.
The largest concern is that businesses and consumers may be
overspent. The rise in debt burdens over the past decade and the
recent upturn in bankruptcies are evidence of this potential problem. If
this is the case, consumer and business spending will be slow to
react to the monetary stimulus of the Fed, and the economy will
achieve the status of an official recession. With apologies to Winston
Churchill, the storm is gathering, but there is still a chance that it will
blow itself out to sea.
THE STORM IS GATHERING AND BIG AL IS HUFFING AND PUFFING FROM
SEA TO SHINING SEA.
TRUTH
The deceleration of the U.S. economy, as evidenced by plunging consumer confidence and rising layoff announcements, has generated a number of imbalances. Foremost among these is the looming threat of overbuilt inventories, which holds negative implications for the economy's current performance and near-term growth outlook. Nonetheless, while inventory adjustments will certainly hinder GDP growth in the first
quarter of this year, it is likely that the threat will subside soon thereafter.
Inventory overhang is clearly evidenced in the rise of the inventory-to-sales ratio for total business. Indeed, after remaining stable for the first half of 2000, the ratio has risen four basis points in the past six months. The divergence of sales and inventory patterns
is due to the rapid deceleration of consumer demand and the inability of producers in several industries to adjust appropriately. Excess inventory is generally undesirable as it translates directly to higher overhead expenses.
Overbuilt inventories are not merely a side effect of the economy's slowdown however, but can also exacerbate the situation and further hinder economic activity in the near-term outlook. The need for producers to draw down inventory levels translates into less
immediate demand for new goods. This condition has already become evident, as seen in the large drop in industrial production in December. The 0.6% plunge in overall production is the largest decline experienced in more than two years. Both capacity utilization rates and overall production activity declined noticeably, largely response to overbuilt inventories.
Thus, the inventory cycle is a primary contributor to the current poor condition of the manufacturing industry. The connection between production cuts and the attempts to absorb inventories can be observed clearly in those industries with the greatest risk of excess inventories: auto production and computers and electrical components. The inventory-to-sales ratios for each of these goods have risen rapidly in recent months at all stages of the supply chain, from manufacturers to wholesalers and retailers.
The inventory problems in IT and electronic component firms have been well publicized, as many leading firms such as Lucent, Cisco, and Nortel Networks have seen their stocks punished in reaction to unplanned inventory buildups and subsequent poor earnings. Auto manufacturers have also taken high profile steps to counter growing product stockpiles. The first tactic taken by carmakers, steep price cuts and rebates, has met with little success, and thus carmakers are now enacting layoffs and production cuts to thin their bulging inventories. The efforts of these and other producers to reduce inventories will
subsequently have a negative impact on GDP growth as inventory accumulation decelerates. This trend can already be seen in the Census Bureau's wholesale trade report, which revealed no change in inventories from November to December. Nevertheless, it is also probable that the inventory cycle will be short in duration, and not a factor hindering the economy in the second half of the year.
Several factors provide support for this projection.
First, the actual magnitude of the inventory overhang is small in a
historic context. Though inventory-to-sales ratios have risen, they
remain on par with the levels experienced in early 1999 and well
below historic averages. Also, the true risk of overbuilt inventories is
constrained to only a few industries. The large-scale ongoing efforts
of these industries to counter unnecessary product stockpiles
suggests that inventory levels could return to acceptable levels in the
first half of this year.
Thus, overbuilt inventories remain a risk to the macro economy and
will surely impact gross product growth throughout the current
quarter, but strong production cutbacks among manufacturers now
will ease inventory concerns in the near-term outlook if continued. |
