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Saturday, August 4, 2012

Mish's Global Economic Trend Analysis

Japan Services PMI Shows Sharp Decline in New Orders; Global New Export Orders Have Steepest Drop Since April 2009.

Posted: 04 Aug 2012 11:21 PM PDT

The global economy continues to weaken, but not in a straight line as China rebounded somewhat, with Japan deteriorating further.

HSBC China Services PMI™ rebounded with the first increase in manufacturing in five months.

July's survey findings showed business activity (covering manufacturing and services) in China rising at the join-fastest rate in nine months. This was signalled by the HSBC Composite Output Index posting 51.9, up from 50.6 in June. Overall growth reflected an increase in manufacturing production – the first in five months – and a stronger expansion of service sector output. The latter was highlighted by a rise in the HSBC Business Activity Index from 52.3 to 53.1.

Behind the latest rise in service sector activity was a sustained increase in new order volumes. However, the rate of new business growth remained below-trend. This, coupled with a slower rate of decline in new orders placed at goods producers, meant that overall new business rose marginally in July.

Sub-par new order growth meant that capacity was little tested in China's service sector, with backlogs of work falling for a sixth month in a row. A marginal rise in work-in-hand (but not yet completed) at goods producers was recorded by July's manufacturing survey.

Jobs growth in China's service sector also remained below trend in July, despite picking up from the month before. In contrast, the index measuring trends in manufacturing employment fell to a 40-month low, signalling a moderate rate of job shedding.

Commenting on the China Services and Composite PMI™ data, Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said:

"The modest gain in July's HSBC services and manufacturing PMIs implies that the slowdown of the Chinese economy is likely to have stabilized. That said, the pace of expansion suggested by the composite PMI remained only modest and is not sufficient to warrant a meaningful recovery. To secure growth and employment, Beijing still needs to step up policy easing and fast falling inflation allows them to do so."

Japan Services PMI™

Markit reports Japan Composite data show sharpest decline in business activity since September 2011

Key points:

Moderate declines in activity across both manufacturing and services
Total new orders fall for first time in six months
Service sector optimism the second-highest in 37 months

Japanese service sector activity decreased further in July, and at the sharpest rate in ten months. The latest decline largely reflected a fall in incoming new business, which in turn contributed to another month of backlog depletion.

Manufacturing PMI™ data showed factory output falling at the fastest rate in 15 months. Consequently, the Composite Output Index (covering manufacturing and services) dipped from 49.1 to 47.4 in July, and indicated the steepest reduction in private sector activity since September 2011.

Behind the latest reduction in service sector activity was a decline in new business – the first since January. The rate of reduction in new orders was only modest, however, and weaker than the long-run series average. This, coupled with a stronger decline in manufacturing new orders, meant that private sector new work fell to the greatest extent in 13 months.

JPMorgan Global Manufacturing & Services PMI™

Markit reports Global growth remains weak as manufacturing downturn continues

At 51.7 in July, the JPMorgan Global All-Industry Output Index – produced by JPMorgan and Markit in association with ISM and IFPSM – edged higher from June's recovery low of 50.3, to signal a modest increase in output. The rate of growth was nonetheless one of the weakest seen during the current three-year period of expansion.

The headline reading masked the contrasting performances of the manufacturing and service sectors. Growth of service sector business activity accelerated slightly, mainly due to a sharp bounce in the rate of expansion in the US. In contrast, the downturn in the global manufacturing sector gathered pace, with output falling at the fastest pace in over three years.

Economic growth in the US rebounded sharply following the steep slowdown witnessed in June. China, India, Russia and Ireland also saw all-industry activity increase during the latest survey period. The euro area contracted for the sixth straight month, with output falling across the big-four Eurozone nations of Germany, France, Italy and Spain. Meanwhile, the UK reported a reduction in output for the first time since April 2009.

The more worrying trends were seen for new orders and employment, as consumer and business confidence remained subdued. The onset of a softer phase in global demand meant that inflows of new orders stagnated in July, as a slight increase in new business at service providers was insufficient to offset the sharpest decline in manufacturing new orders for three years. International trade flows also weakened, with new export orders suffering the steepest drop since April 2009.

Once again, new orders are the key to hiring and GDP growth. In spite of the uptick in China, global new export orders had the steepest drop since April 2009.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Eurozone New Business Sinks at Fastest Rate in 3 Years; Germany Composite PMI at 37-Month Low; Ass-Backwards Eurozone Policies

Posted: 04 Aug 2012 09:30 AM PDT

With everyone watching and analyzing US jobs data on Friday, there were a number of other news reports showing steeper contractions in much of the world. Let's start off with a look at the rapidly deteriorating eurozone.

Markit Eurozone Composite PMI® – Final Data

Markit reports Eurozone downturn continues at start of Q3 2012

The Eurozone economy remained in a downturn at the start of Q3 2012. At 46.5 in July, little-changed from 46.4 in June, the Markit Eurozone PMI® Composite Output Index signalled a contraction in output for the tenth time in the past 11 months. The headline index came in slightly above the earlier flash estimate of 46.4.

Manufacturers and service providers both reported lower levels of output in July. The downturn was more severe in manufacturing, where production contracted at the fastest pace since May 2009. Service sector business activity fell for the sixth month running, though the rate of decline eased to its weakest since March.

The worst performers by far were Italy and Spain. The rate of contraction in France slowed marginally, while the downturn in Germany was the steepest for over three years.

Comment:

Chris Williamson, Chief Economist at Markit said:

"The final PMI data for July confirm the message from the earlier flash estimate that the Eurozone continued to contract at a quarterly rate of approximately 0.6% in July, suggesting the region looks set for a second consecutive quarterly decline.

"With incoming new business falling at the fastest rate for three years and service sector companies becoming the gloomiest about the outlook since early-2009, there seems little prospect of any improvement soon.

Markit/ADACI Italy Services PMI®

Markit reports Italy Service Sector New Work Drops at Fastest Rate Since March 2009

Key points:

Activity falls markedly as a result of accelerated decline in new business

12-month outlook turns negative for first time in series history

Rate of job shedding fastest for three months

Summary:

Conditions across Italy's service sector took a turn for the worse in July, as incoming new business fell at the fastest rate since March 2009. Activity and
employment both dropped as a result, and for the first time since the launch of the survey in January 1998 firms generally expected output to be lower in a year's time than current levels. Another negative development for businesses was a slight rise input price inflation from June's seven-month low.

Outstanding business at services firms was further reduced during the latest survey period, extending the current sequence of decline to 17 months. Moreover, the overall rate of depletion quickened to the fastest since September 2009. Weakness in new business inflows was the most frequently cited reason for lower backlogs.

Comment:

Phil Smith, economist at Markit and author of the Italy Services PMI® said:

"July PMI data pointed to recession in Italy's service sector deepening at the start of the third quarter. New business intakes fell at a sharp monthly rate that has been exceeded only four times over the series history, all of which occurred around the
height of the global financial crisis. Furthermore, data on expectations showed sentiment at a record low, and gave no impression of an impending recovery."

"Not only did July see a further deterioration on the demand front, but input cost inflation also picked up from June's recent low. This placed greater pressure on service providers to reduce their overheads, with a solid and accelerated decrease in employment levels one outcome. At the same time, backlogs of work were still reduced at a marked pace, suggesting yet more scope for job cuts."

Markit France Services PMI®

Markit reports Stabilisation of French service sector activity during July

Key points:

Final Markit France Services Activity Index(1) at 50.0 (47.9 in June), 4-month high.

Final Markit France Composite Output Index(2) at 47.9 (47.3 in June), 4-month high.

Summary:

French service providers reported that business activity was unchanged during July. That followed declines in each of the previous three months. New business and backlogs of work both fell at slower rates, but companies nevertheless made sharper cuts to staffing levels. Competitive pressures led to a further drop in output charges, despite another rise in input costs. Panel members signalled a weaker outlook with regards to future activity, with optimism falling to the lowest level for almost three-and-a-half years.

Manufacturers reported a steeper fall in output during July, with the rate of decline accelerating to the fastest since April 2009. Overall private sector activity was down for the fifth successive month, although the latest drop was the slowest since March.

The level of new business placed with French service providers fell for the fourth month running during July.

Manufacturers reported a further marked decrease in new orders during July, with the rate of contraction accelerating since the previous month. However, overall new business across the private sector fell at the slowest rate since March.
The rate of decline in service sector outstanding business also eased in July. The latest fall in unfinished work was the seventh in successive months, although the weakest since March.

Employment showed a deteriorating trend, with the pace of contraction accelerating to the sharpest since March 2010. Job losses were attributed by panellists to cost-saving strategies, often including decisions not to replace voluntary leavers.

With manufacturers also recording a steeper drop in staffing levels, overall employment across the French private sector fell at the fastest rate since January 2010.

Markit Germany Services PMI®

Markit reports Services activity rises slightly, despite sharpest drop in new work since June 2009

Key points:

Final Germany Services Business Activity Index(1) at 50.3 in July, up from 49.9 in June.

Final Germany Composite Output Index(2) at 47.5 in July, down from 48.1 in June.

Summary:

At 50.3 in July, up slightly from 49.9 in June, the final seasonally adjusted Markit Germany Services Business Activity Index posted back above the neutral 50.0 threshold. However, the latest reading signalled only a fractional expansion of overall business activity, and was well below the long-run survey average (53.0). July data indicated that growth was largely driven by Hotels & Restaurants and Renting & Business Activities.

July data highlighted by a marked reduction in new business intakes in the service sector. Lower volumes of new work have now been recorded for four consecutive months and the rate of contraction reached its fastest since June 2009. Five of the six broad areas of the service economy recorded a drop in new business during the latest survey period, with Hotels & Restaurants the exception.

Meanwhile, overall new business intakes across the German private sector also declined at the fastest rate since June 2009.

Markit Spain Services PMI®

Markit reports New orders decrease at fastest pace since October 2011

Key points:

Further sharp falls in activity and new orders
Sentiment lowest in 38 months
Rate of job cuts accelerates

Summary:

The Spanish service sector continued to struggle at the start of the second half of 2012 as the ongoing economic crisis in Spain impacted negatively on business conditions. Activity, new orders and employment all decreased again over the month, with the fall in new business the sharpest since last October. Furthermore, companies forecast a decline in activity over the next 12 months as sentiment dropped to the lowest in more than three years.

Activity has now fallen in 13 successive months, and the latest reduction was only marginally slower than seen in June. Hotels & Restaurants was the only sector to record activity growth, while the fastest reduction was recorded at Post & Telecommunications companies.

Respondents indicated that falling new business had been the main factor behind the drop in activity. In turn, new orders declined as clients were hesitant to embark on new projects given deteriorating economic conditions. New orders fell at a sharp pace that was the fastest since October 2011.

Companies worked through outstanding business in July as new orders decreased. Backlogs of work were depleted at a substantial pace, and the steepest in seven months.

Service providers continued to lower their staffing levels during July. Employment has now fallen in each of the past 53 months. The rate of job shedding was substantial, and faster than that recorded in June. Of the six monitored sectors, the sharpest fall in employment was posted at Renting & Business Activities companies.

Services companies expect activity to fall over the coming 12 months, the first time this has been the case since May 2009. The forthcoming rise in VAT is forecast to further reduce consumer demand, and therefore business activity.

Comment:

Commenting on the Spanish Services PMI® survey data, Andrew Harker, economist at Markit and author of the report said:

"Perhaps the most worrying aspect of the latest survey is the lowest business sentiment in more than three years, partly reflecting the negative expected impact on consumption of the forthcoming rise in VAT."

Eurozone New Orders

Eurozone GDP is going to decline rapidly and businesses will shed workers if new orders continue to decline. Let's look at the new orders, expectations, and employment components from the above reports.

Eurozone Composite: Incoming new business falling at the fastest rate for three years
Italy: Activity falls markedly as a result of accelerated decline in new business
Italy: 12-month outlook turns negative for first time in series history
Italy: Rate of job shedding fastest for three months
France: New business and backlogs of work both fell at slower rates, but companies nevertheless made sharper cuts to staffing levels.
France: The level of new business placed with French service providers fell for the fourth month running during July.
France: Overall employment across the French private sector fell at the fastest rate since January 2010.
Germany: Lower volumes of service sector new work have now been recorded for four consecutive months and the rate of contraction reached its fastest since June 2009.
Germany: Five of the six broad areas of the service economy recorded a drop in new business during the latest survey period, with Hotels & Restaurants the exception.
Germany: New business intakes across the entire German private sector declined at the fastest rate since June 2009.
Spain: Activity, new orders and employment all decreased again over the month, with the fall in new business the sharpest since last October.
Spain: Companies forecast a decline in activity over the next 12 months as sentiment dropped to the lowest in more than three years.
Spain: Employment has now fallen in each of the past 53 months. The rate of job shedding was substantial, and faster than that recorded in June.
Spain: Lowest business sentiment in more than three years
Spain: The forthcoming rise in VAT is forecast to further reduce consumer demand, and therefore business activity.

Wrong Approach

Countries struggling to meet budget targets have responded by raising taxes. The result of that stupidity can easily be predicted in advance: economic activity will contract further, causing budget target shortfalls.

Yet, Spain is hiking taxes to appease the bureaucrats in Brussels.

In France, prime minister Francois Hollande is about to Wreck France With Economically Insane Proposal: "Make Layoffs So Expensive For Companies That It's Not Worth It"

I wrote that before socialists took over both houses in French parliament. Many suggested he would not follow through. Unfortunately he has. Please consider my July 16 post Peugeot Has 51% Chance of Debt Default; Hollande Says France Will Not Let Peugeot Lay Off Workers

Hollande is also raising taxes like mad and French businesses are likely to head to the UK and other places in response. Many wealthy have fled the country.

Correct Approach

The correct approach is to reduce taxes and make it easier for businesses to fire workers. Logic dictates that if it's difficult or impossible to fire workers, businesses will not hire them in the first place.

Ass-Backwards Eurozone Policies

Most countries in Europe now have ass-backwards policies in place. The silver lining in this mess is those ass-backwards policies will accelerate the breakup of the eurozone, and that is a good thing.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Friday, August 3, 2012

Mish's Global Economic Trend Analysis

Preposterous Falsehoods From Gary North Regarding the Inflation/Deflation Debate

Posted: 03 Aug 2012 01:19 PM PDT

When it comes to the inflation deflation debate it really would help if people would stop presenting complete falsehoods as facts. Here is a case in point:

Gary North writes Why the Deflationists' Argument Is Wrong in Both Theory and Historical Fact

Aug. 3, 2012

An inflationist is someone who believes that price inflation is the result of two things: (1) monetary inflation and (2) central bank policy.

A deflationist is someone who believes that deflation is inevitable, despite (1) monetary inflation and (2) central bank policy.

No inflationist says that price inflation is inevitable. Every deflationist says that price deflation is inevitable.

Obvious Falsehoods

Gary North does not speak for any deflationist, nor does he speak for all the inflationists. He acts as if he does.

Sustained price deflation is certainly not inevitable, nor is price deflation inevitable in the short-term either.

Since I am a staunch deflationist, and since Gary North is aware of my writing, it appears he is purposely making preposterous straw-man arguments just to be able to shoot them down.

Discussion of Definitions

As I have pointed out many times, before there can be a debate at all, one has to agree to definitions.

My definition of inflation is an increase in money supply and credit with credit marked to market. Deflation is the opposite.

Prices are clearly not part of my definition, and prices can indeed rise in a credit-deflationary period.

I cannot demand that people accept my definitions, but without an agreement of definitions, the likely result is people talking past each other.

Misguided Focus on Money Supply

I have given many reasons why a focus on money supply alone is complete silliness, but the condensed version is the total credit market is $54 trillion and base money supply is about $2.7 trillion.

If people think that $54 trillion can and will be paid back, or if they think that money supply is more important than credit, they will be wrong, but they are entitled to their opinions.

Money Supply vs. Credit

Gary North's definition of inflation obviously involves money supply.

Not every inflationist would accept his definition. Some would consider credit and some would include government manipulations irrespective of money supply. So that is a third thing North is wrong about.

Ignoring Time Preferences

North says "An inflationist is someone who believes that price inflation is the result of two things: (1) monetary inflation and (2) central bank policy."

With that, Gary North is wrong for the fourth time.

Non-monetary government interference in the markets can certainly affect prices.

More importantly, prices can rise or fall by changing time-preference for money even if money supply is constant.

For example, social trends and changing demographics can affect the demand for money, and thus prices. So even if there was no Fed and no Fractional Reserve Lending it is a mistake to believe there could not be general price increases for reasonably lengthy periods of time.

Likewise, because of continual advances in productivity, there is a general downward pressure on prices over time. Thus productivity can affect prices.

North misses all of those things in his blanket statements.

Credibility Issues

People really get into serious trouble using phrases like "no inflationist" and "every deflationist" when they clearly do not speak for everyone, especially when they also need a lecture about changing attitudes and time-preference as well.

Finally, it's easy to setup a straw-man debate that you can win. It's also easy to lose credibility doing just that.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Headline Jobs +163,000, But Household Survey Shows -195,000 Jobs; Unemployment +.1 to 8.3%

Posted: 03 Aug 2012 08:23 AM PDT

ADP got the headline job number correct, I certainly didn't. However, one look beneath the surface shows this was actually an anemic jobs report.

Unemployment was up, and the household survey shows a loss of 195,000 jobs. The household numbers are even worse because part-time employment went up.

Jobs Report at a Glance

Here is an overview of today's release.

US Payrolls +163,000 - Establishment Survey
US Employment -195,000 - Household Survey
US Unemployment Rate +.01 at 8.3% - Household Survey
The Civilian Labor Force fell by 150,000. Otherwise the unemployment rate would have risen more.
Average workweek for all employees on private nonfarm payrolls steady at 34.5 hours
The average workweek for production and nonsupervisory employees on private nonfarm payrolls steady at 33.7 hours.
Average hourly earnings for all employees in the private nonfarm workers sector rose by 2 cents.
The change in total nonfarm payroll employment for May was revised from +77,000 to +87,000, and the change for June was revised from +80,000 to +64,000.

Recall that the unemployment rate varies in accordance with the Household Survey not the reported headline jobs number, and not in accordance with the weekly claims data.

Quick Notes About the Unemployment Rate

US Unemployment Rate +.1 to 8.3%
In the last year, the civilian population rose by 3,683,000. Yet the labor force only rose by 1,655,000.
This month the Civilian Labor Force fell by 150,000.
This month, those "not" in the labor force increased by 348,000 to 88,340,000, another record high. If you are not in the labor force, you are not counted as unemployed.
In the last year, those "not" in the labor force rose by 2,027,000
Over the course of the last year, the number of people employed rose by 2,770,000.
Participation Rate was steady at 63.8%;
There are 8,246,000 workers who are working part-time but want full-time work, an increase of 36,000
Long-Term unemployment (27 weeks and over) was 5.185 million a decline of 185,000.
Were it not for people dropping out of the labor force, the unemployment rate would be well over 11%.

Over the past several years people have dropped out of the labor force at an astounding, almost unbelievable rate, holding the unemployment rate artificially low. Some of this was due to major revisions last month on account of the 2010 census finally factored in. However, most of it is simply economic weakness.

June 2012 Jobs Report

Please consider the Bureau of Labor Statistics (BLS) July 2012 Employment Report.

Total nonfarm payroll employment rose by 163,000 in July, and the unemployment rate was essentially unchanged at 8.3 percent, the U.S. Bureau of Labor Statistics reported today. Employment rose in professional and business services, food services and drinking places, and manufacturing..

Click on Any Chart in this Report to See a Sharper Image

Unemployment Rate - Seasonally Adjusted

Nonfarm Employment - Payroll Survey - Annual Look - Seasonally Adjusted

Employment is above the total just prior to the 2001 recession, and about where it was in 2005.

Nonfarm Employment - Payroll Survey January 2008 through July 2012 - Seasonally Adjusted

click on any chart for sharper image

Between January 2008 and February 2010, the U.S. economy lost 8.8 million jobs.

Since the employment low in February 2010, nonfarm payrolls have expanded by about 4.3 million jobs. Of the 8.8 million jobs lost between January 2008 and February 2010, approximately 48.8% percent have been recovered (not accounting for normal demographics growth)

Statistically, 125,000+- jobs a month is enough to keep the unemployment rate flat. For a discussion, please see Question on Jobs: How Many Does It Take to Keep Up With Demographics?

Thus far in 2012, job growth has averaged 151,000 per month, about the same as the monthly average for 2011 (+153,000).

The average employment gain over the last 29 months has been 138,000, barely enough (statistically speaking) to make a dent in the unemployment rate.

Yet, the civilian unemployment rate has fallen from 9.8% to 8.3%.

Current Report Jobs

Average Weekly Hours

Average Hourly Earnings vs. CPI

BLS Birth-Death Model Black Box

The BLS Birth/Death Model is an estimation by the BLS as to how many jobs the economy created that were not picked up in the payroll survey.

The Birth-Death numbers are not seasonally adjusted, while the reported headline number is. In the black box the BLS combines the two, coming up with a total.

The Birth Death number influences the overall totals, but the math is not as simple as it appears. Moreover, the effect is nowhere near as big as it might logically appear at first glance.

Do not add or subtract the Birth-Death numbers from the reported headline totals. It does not work that way.

Birth/Death assumptions are supposedly made according to estimates of where the BLS thinks we are in the economic cycle. Theory is one thing. Practice is clearly another as noted by numerous recent revisions.

Birth Death Model Adjustments For 2011

Birth Death Model Adjustments For 2012

Birth-Death Note

Once again: Do NOT subtract the Birth-Death number from the reported headline number. That approach is statistically invalid.

Household Survey Data

click on chart for sharper image

In the last year, the civilian population rose by 3,683,000. Yet the labor force only rose by 1,655,000. Those not in the labor force rose by 2,027,000 to yet another record high 88,340,000.

That is an amazing "achievement" to say the least, and as noted above most of this is due to economic weakness not census changes.

Decline in Labor Force Factors

Discouraged workers stop looking for jobs
People retire because they cannot find jobs
People go back to school hoping it will improve their chances of getting a job
People stay in school longer because they cannot find a job

Were it not for people dropping out of the labor force, the unemployment rate would be well over 11%.

Part Time Status

click on chart for sharper image

There are 8,246,000 workers who are working part-time but want full-time work.

BLS Alternate Measures of Unemployment

click on chart for sharper image

Table A-15 is where one can find a better approximation of what the unemployment rate really is.

Notice I said "better" approximation not to be confused with "good" approximation.

The official unemployment rate is 8.3%. However, if you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

U-6 is much higher at 15.0%. Both numbers would be way higher still, were it not for millions dropping out of the labor force over the past few years.

Duration of Unemployment

Long-term unemployment remains in a disaster zone.

Grossly Distorted Statistics

Given the complete distortions of reality with respect to not counting people who allegedly dropped out of the work force, it is easy to misrepresent the headline numbers.

Digging under the surface, the drop in the unemployment rate over the past two years is nothing but a statistical mirage. Things are much worse than the reported numbers indicate.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Thursday, August 2, 2012

Mish's Global Economic Trend Analysis

China Buys U.S. Businesses at Record Pace; What are the Implications? Will Alarm Bells Ring?
US Factory Orders "Unexpectedly" Decline; US Car Sales "Unexpectedly" Decline; Expect the Unexpected
Draghi Hints at Bond Buying But Rules Out Banking License and Warns Governments Must Use EFSF/ESM, ECB Cannot Replace Governments; 10-Year Yield Back Over 7%

China Buys U.S. Businesses at Record Pace; What are the Implications? Will Alarm Bells Ring?

Posted: 02 Aug 2012 10:42 PM PDT

CNN Money reports Chinese buying of U.S. business at record pace

Chinese direct investment in the United States could hit a record high in 2012, according to a new research report released Wednesday.

Total Chinese foreign direct investment in the U.S. is on pace to reach at least $8 billion this year, according to the report from research firm Rhodium Group.

That would top the previous record of $5.7 billion reached in 2010, said Thilo Hanemann, research director with Rhodium Group, which tracks all acquisitions and investments in manufacturing facilities, warehouses, labs and offices by foreign companies in the United States valued at $1 million or higher.

In manufacturing, the biggest investments are being made by Chinese firms with products that have been slapped with hefty anti-dumping tariffs, Hanemann said.

Opening up a plant in the United States allows Chinese firms such as Golden Dragon Precise Copper Tube Group, Inc. -- which broke ground this year on a $100 million plant in Thomasville, Ala. -- to avoid these tariffs.

What are the Implications?

China buying US businesses is a necessary part of correcting global imbalances.

As a direct function of trade math, China's reserves must eventually return to the US. The only way that will not happen is if the US defaults on foreign-held treasuries.

However, don't be deceived by the words "record pace".

To put the $8 billion of direct investment in perspective, China has close to $1.75 trillion in US dollar reserves and $3.2 trillion worth of total reserves.

Will Alarm Bells Ring?

Some might be alarmed by China buying US businesses.

Actually this is a good thing, and the faster things speed up, the better off the US and China will both be. Direct investment will provide much-needed jobs in the US and it will alleviate China's dependence on an unsustainable model of fixed investment.

Unfortunately, "record pace" is nowhere close enough to matter, but all trends start somewhere. The key point is that mathematically, dollars must return home, and the sooner it happens the better off the global economy will be.

Don't expect alarmists in Congress and union sympathizers to see it that way.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

US Factory Orders "Unexpectedly" Decline; US Car Sales "Unexpectedly" Decline; Expect the Unexpected

Posted: 02 Aug 2012 11:57 AM PDT

The words for the day once again are "unexpectedly declined". I have a couple of examples.

The New York Times reports U.S. Factory Orders Fall Unexpectedly

New orders for factory goods unexpectedly fell in the United States in June, a fresh sign that the slowdown in the country's manufacturing sector will probably stretch into the second half of the year.

The Commerce Department said on Thursday that new orders for manufactured goods dropped 0.5 percent during the month. Economists in a Reuters poll had forecast a rise of 0.5 percent.

American factories appear to be one of the sectors most vulnerable to Europe's festering debt crisis. The trend in American manufacturing has appeared softer and has added to concerns the economic recovery is losing steam. The decline in new orders in June will probably mean softer output down the road, which could weigh on economic growth.

Car Sales "Somewhat Softer Than Expected"

Yesterday, Yahoo!Finance reported U.S. auto sales remain soft in July

Major automakers reported U.S. auto sales for July that were somewhat softer than expected as high U.S. unemployment and weak consumer confidence kept would-be buyers on the sidelines.

July auto sales showed the continuation of what has been a slowdown in growth since the late spring. Sales early this year shot past even the most bullish forecasts, but starting in May, the rate of improvement started to weaken.

"If we were talking in February this year and you asked me what we're going to have July, I'd say at least 14 and a half," said TrueCar.com analyst Jesse Toprak. "But we're going to barely get to 14."

GM, the largest U.S. automaker, reported on Wednesday a 6 percent drop in July U.S. sales, while Ford posted a 4 percent drop. The smallest U.S. automaker, Chrysler Group LLC, posted a 13 percent increase.

GM and Ford both pinned their declines on lower sales to fleet customers like rental car companies. GM's fleet sales fell 41 percent, in line with the company's forecast last month.

But their overall results were still lower than some estimates. Analysts had expected better financing deals, pent-up demand and increased construction spending to offset the sluggish U.S. economy.

Toyota sales were up 26 percent to 164,898 in July. A year ago, Toyota was still grappling with major vehicle shortages stemming from the March earthquake in Japan. In a release, Toyota said customers were taking advantage of long-term, low-interest financing at low lease rates.

Expect the Unexpected

Why economists could not see this coming is a mystery. Manufacturing new orders have collapsed virtually everywhere, including the US. GDP, a lagging indicator, is 1.5% annualized, well below the stall speed of 2%.

Based on new orders and anecdotal evidence from the world's largest auto parts manufacturer, I confidently predicted on July 9, Global Collapse In Auto Sales Coming Up.

On July 2, I noted US Manufacturing ISM Contracts for First Time in Three Years; New Orders and Prices Plunge; Perfect Miss: 0 of 70 Economists Polled By Bloomberg Expected Contraction

Yesterday I noted Dismal Manufacturing Numbers Worldwide; US ISM in Contraction Second Month.

Yet economists were surprised by today's "unexpected decline" in US Factory Orders and yesterday's decline in auto sales.

The surprise ought to have been that car sales and factory orders held up as well as they did.

Growing Evidence of Recession

With each economic report, it becomes more clear the US is already in recession, yet economists cannot see that yet either.

If the jobs report is miserable tomorrow, and I expect it to be, then expect economists to be surprised by that too. For Friday's job forecast ADP predicts +163,000 jobs but I'll Take the Under (Way Under).

The economic consensus for Friday is about +100,000 jobs and I will take the under on that as well. Zero to 50,000 would not surprise me in the least.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Draghi Hints at Bond Buying But Rules Out Banking License and Warns Governments Must Use EFSF/ESM, ECB Cannot Replace Governments; 10-Year Yield Back Over 7%

Posted: 02 Aug 2012 08:20 AM PDT

Today the ECB left interest rates unchanged and hinted at future bond purchases but also warned "Governments must stand ready to activate the EFSF/ESM".

The Financial Times has details in Draghi prepares for fresh bond buying

Draghi admitted to Bundesbank reservations about bond-buying and made clear that governments would first have to apply to the eurozone's rescue funds – the European Financial Stability Facility and the European Stability Mechanism – and accept "strict and effective conditionality".

"First of all governments need to go to the EFSF; the ECB cannot replace governments."

Mr Draghi also said the ECB "may consider" further non-standard measures but declined to elaborate.

Mr Dragi indicated there would be no immediate intervention. "In the coming weeks we will design the appropriate modalities for such policy measures," he said."

He said that all members of the ECB's governing council had endorsed the framework of measures "with one exception."

"It's clear and it's known that Mr Weidmann and the Bundesbank have their reservations about the programme of buying bonds," he added.

He also ruled out giving the eurozone's rescue funds a banking licence, a move that could vastly increase their firepower but which is firmly opposed by the Germany and other core eurozone members. "The current design of the ESM does not allow it to be recognised as a suitable counterparty.

Text of Draghi's Press Conference

I cannot find some of the direct quotes the Financial Times mentions, but the gist of the Financial Times' translation seems accurate.

Here are some snips from ECB President Draghi Statement to Press Conference

Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged, following the decrease of 25 basis points in July. As we said a month ago, inflation should decline further in the course of 2012 and be below 2% again in 2013.

Exceptionally high risk premia are observed in government bond prices in several countries and financial fragmentation hinders the effective working of monetary policy. Risk premia that are related to fears of the reversibility of the euro are unacceptable, and they need to be addressed in a fundamental manner. The euro is irreversible.

In order to create the fundamental conditions for such risk premia to disappear, policy-makers in the euro area need to push ahead with fiscal consolidation, structural reform and European institution-building with great determination. As implementation takes time and financial markets often only adjust once success becomes clearly visible, governments must stand ready to activate the EFSF/ESM in the bond market when exceptional financial market circumstances and risks to financial stability exist – with strict and effective conditionality in line with the established guidelines.

The adherence of governments to their commitments and the fulfilment by the EFSF/ESM of their role are necessary conditions. The Governing Council, within its mandate to maintain price stability over the medium term and in observance of its independence in determining monetary policy, may undertake outright open market operations of a size adequate to reach its objective. In this context, the concerns of private investors about seniority will be addressed. Furthermore, the Governing Council may consider undertaking further non-standard monetary policy measures according to what is required to repair monetary policy transmission. Over the coming weeks, we will design the appropriate modalities for such policy measures.

Yields Soar

Draghi's statements sent the Spain 10-year bond yield soaring back above 7%, currently 7.13, up 40 basis points.

Yield on Italy's 10-year government bond is up 30 basis points to 6.23%.

Clearly the market was expecting far more after Draghi's statements last week that the ECB would do "whatever it takes".

Mike "Mish" Shedlock
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Wednesday, August 1, 2012

Mish's Global Economic Trend Analysis

San Bernardino Files Chapter 9 Bankruptcy Petition; Pension and Medical Liabilities Impossible to Meet; Major Wave of Municipal Bankruptcies Has Begun
Problems in Spain: Revenues Collapse, State Spends Nearly Twice as Much as Revenues Collected in First Half
Dismal Manufacturing Numbers Worldwide; US ISM in Contraction Second Month; Why Another Round of QE is Pointless
ADP Estimates Nonfarm Payroll Growth at +163,0000; Why I'll Take the Under (Way Under)
Japan Manufacturing PMI Shows Output and News Orders Down at Accelerated Rate

San Bernardino Files Chapter 9 Bankruptcy Petition; Pension and Medical Liabilities Impossible to Meet; Major Wave of Municipal Bankruptcies Has Begun

Posted: 01 Aug 2012 10:24 PM PDT

Fearing action by creditors, San Bernardino, California, Files Chapter 9 Bankruptcy Petition

San Bernardino, California, after disclosing a $46 million shortfall in the city's budget, filed for municipal bankruptcy.

San Bernardino listed assets and debt of more than $1 billion in a filing yesterday with the U.S. Bankruptcy Court in Riverside, California. It's the third California city to seek court protection from creditors since June 28.

City officials sped up the timing of the filing because they were concerned that some creditors may take legal action against the city, Mayor Patrick J. Morris said yesterday in a phone interview. Under Chapter 9, all court cases and other legal actions against the city will be halted until the bankruptcy case is over.

One of the main problems is the high cost of the city's union contracts, particularly for police and fire service, City Councilman Fred Shorett said in a phone interview.

Under the city charter, which is like a constitution for municipal governments, city officials must use a specific formula for determining wages and other benefits paid to its police and fire employees, Shorett said. That formula requires the city to set compensation by comparing employee pay in San Bernardino, which has one of the highest home foreclosure rates in California, with cities in the state that are about the same size and have much more money to spend, Shorett said.

"We are set up for failure," he said.

The city has about $55.9 million in bond debt tied to the general fund. The city also has unfunded liabilities of $296 million, including $195 million related to pensions and $61 million related to medical benefits for retired city workers.

Major Wave of Municipal Bankruptcies Has Begun

A major wave of municipal bankruptcy filings is now underway. Scores of other cities nationwide will eventually do the only thing that makes sense: file for bankruptcy to escape pension promises and union salaries that cannot possibly be met.

In California, Oakland and Los Angeles are among the walking dead.

Unions would be wise to negotiate with cities in advance of bankruptcy filings to protect the most benefits for the most workers. However, the odds of that happening are close to zero.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Problems in Spain: Revenues Collapse, State Spends Nearly Twice as Much as Revenues Collected in First Half

Posted: 01 Aug 2012 06:31 PM PDT

It's hard to meet budget targets as promised to the bureaucrats in Brussels when revenues collapse and the State Spends Nearly Twice as Much as Revenues Collected in First Half.

Via Google translate (heavily modified by me) from El Confidencial:

The Spanish economy continues its adjustment process. But the results in terms of deficit reduction, remain meager. Very meager. To the extent that in the first half of the year-on-national accounts, government spending-which really is committed to spend but have not been paid, have grown by 17.6% over the same period of 2011 .

Or what is the same, the central government already has obligations amounting to 87.967 billion. The resources, however, only amounted to 44.879 billion (-4.1%), which means that during the first six months of the year the state has spent (or is obliged to spend) almost double what it has collected in revenues.

Debt service has become the second biggest problem in the budget (after unemployment benefits). In fact, interest payments of 12.239 billion euros, is already 23% more than the government pays public employees (9.953 billion euros). This does not mean, however, that the debt service is causing the budget shortfall. In fact, the primary deficit (excluding interest payments) amounted to 30.839 billion in just six months.

Rising unemployment has forced the state to make some additional contribution of 4,404 billion euros to the Public Employment Service (SPEE), while Social Security has received an additional 2.575 billion euros.

The central administration also had to make advance payments to the autonomous communities totaling 5.476 billion, and another 865 million have gone to local corporations. In total, 13.320 billion of additional costs upward bias the data deficit for the first of the year.

In any case, the underlying problem continues to be government revenue, strongly influenced by the deterioration of economic activity.

VAT receipts actually are falling at a rate of 8.6% on a comparable basis. Panelists expect the destruction of more than 300,000 jobs next year, 2% of the workforce. That is, ten times more than estimated as more likely the government.

The Spanish implosion continues and nothing can stop it.

Mike "Mish" Shedlock
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Dismal Manufacturing Numbers Worldwide; US ISM in Contraction Second Month; Why Another Round of QE is Pointless

Posted: 01 Aug 2012 10:00 AM PDT

Inquiring minds are looking into the July 2012 Manufacturing ISM Report On Business®

"The PMI registered 49.8 percent, an increase of 0.1 percentage point from June's reading of 49.7 percent, indicating contraction in the manufacturing sector for the second consecutive month, following 34 consecutive months of expansion. The New Orders Index registered 48 percent, an increase of 0.2 percentage point from June and indicating contraction in new orders for the second consecutive month, but at a slightly slower rate. Both the Production Index and the Employment Index remained in growth territory, registering 51.3 percent and 52 percent, respectively. The Prices Index for raw materials registered 39.5 percent, an increase of 2.5 percentage points from the June reading of 37 percent, indicating lower prices on average for the third consecutive month.

MANUFACTURING AT A GLANCE JULY 2012
Index	Series Index Jul	Series Index Jun	Percentage Point Change	Direction	Rate of Change	Trend* (Months)
PMI	49.8	49.7	+0.1	Contracting	Slower	2
New Orders	48.0	47.8	+0.2	Contracting	Slower	2
Production	51.3	51.0	+0.3	Growing	Faster	38
Employment	52.0	56.6	-4.6	Growing	Slower	34
Supplier Deliveries	48.7	48.9	-0.2	Faster	Faster	6
Inventories	49.0	44.0	+5.0	Contracting	Slower	4
Customers' Inventories	49.5	48.5	+1.0	Too Low	Slower	8
Prices	39.5	37.0	+2.5	Decreasing	Slower	3
Backlog of Orders	43.0	44.5	-1.5	Contracting	Faster	4
Exports	46.5	47.5	-1.0	Contracting	Faster	2
Imports	50.5	53.5	-3.0	Growing	Slower	8

OVERALL ECONOMY				Growing	Faster	38
Manufacturing Sector				Contracting	Slower	2

Dismal Manufacturing Numbers Worldwide

Reuters reports Global factories struggle as growth fears rise

U.S. and euro zone factory activity slumped again in July while Chinese manufacturing hit an eight-month low, surveys showed on Wednesday, as economies worldwide showed signs of slowing.

Economic malaise was worst in the 17-country euro zone, where output plummeted and the manufacturing sector contracted for an 11th straight month as a downturn that began in smaller countries continued to spread into core euro area economies.

The slump worsened in Italy, Spain and Greece as well as the region's two biggest economies -- Germany and France.

Europe's economic woes also depressed export orders in China and India, where manufacturing had appeared to be holding up despite the euro zone debt crisis and slowing U.S. growth.

U.S. manufacturing, meanwhile, contracted for a second consecutive month, according to the Institute for Supply Management's index of national factory activity.

A separate report from Markit showed activity barely expanding and at its slowest pace in almost three years, partly due to lower European demand for U.S. products.

"The manufacturing numbers are pretty dismal. There's really no good way to read them," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. "I think they bolster the case for more Federal Reserve action, and globally the argument is pretty much the same."

Would Another Round of QE Help?

Everyone is looking for the Fed to do something.

I have to ask what good could it possibly do? Yield on the 10-year treasury is about 1.5%. Would it make any difference to businesses if it was 1.25% or even 1%?

I suggest additional monetary stimulus would not do anything to spur job creation and it would continue to punish those on fixed incomes.

An additional round of QE could ignite a further rally in equities (already in bubble land). However, one of these QE moves by the Fed will blow sky high, and with equities priced beyond perfection, the next round of QE may be the one.

I had not seen this ISM report when I wrote ADP Estimates Nonfarm Payroll Growth at +163,0000; Why I'll Take the Under (Way Under)

This is what I said earlier today "Given the global collapse in new orders including the US, weak ISM numbers in the US, and generally bad regional manufacturing reports, I believe there is potential for a really awful jobs report either this month or next and I will go for this month."

I certainly see no reason to change that call.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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ADP Estimates Nonfarm Payroll Growth at +163,0000; Why I'll Take the Under (Way Under)

Posted: 01 Aug 2012 08:13 AM PDT

ADP job estimates have been on the high side of BLS estimates for months, and I expect that to be the case again this Friday.

Please consider some snips from the July 2012 ADP National Employment Report®

Employment in the U.S. nonfarm private business sector increased by 163,000 from June to July, on a seasonally adjusted basis. The estimated gain from May to June was revised down slightly,from the initial estimate of 176,000 to 172,000.

Employment in the private, service-providing sector expanded 148,000 in July after rising a revised 151,000 in June. The private, goods-producing sector added 15,000 jobs in July. Manufacturing employment rose 6,000 this month, following a revised increase of 9,000 in June.

Employment on large payrolls—those with 500 or more workers—increased 23,000 and employment on medium payrolls—those with 50 to 499 workers—rose 67,000 in July. Employment on small payrolls—those with up to 49 workers—rose 73,000 that same period. Of the 67,000 jobs created on medium- sized payrolls, 4,000 jobs were created by the goods-producing sector and 63,000 jobs were created by the service-providing sector.

Construction employment rose for the second consecutive month, adding 5,000 jobs. The financial services sector added 9,000 jobs from June to July, marking the twelfth consecutive monthly gain.

Here are a couple of recent regional Fed manufacturing surveys to consider.

Philly Fed Manufacturing Survey

From the Philadelphia Fed Manufacturing Report ....

Indicators Suggest Continued Decreases

The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, increased from a reading of −16.6 in June to −12.9. This marks the third consecutive negative reading for the index (see Chart). Nearly 32 percent of the firms reported declines in activity this month, exceeding the 19 percent that reported increases. Indexes for new orders and shipments remained negative but increased 12 and 8 points, respectively.

Labor market conditions at the reporting firms deteriorated this month. The current employment index decreased 10 points, to −8.4, its second negative reading in three months. The percent of firms reporting decreases in employment (18 percent) exceeded the percent reporting increases (10 percent). Firms also indicated fewer hours worked this month: The average workweek index increased 2 points but posted its fourth consecutive negative reading.

Dallas Fed Manufacturing Survey

Here are a few snips from the Dallas Fed Manufacturing Survey.

Texas factory activity continued to increase in July, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, fell from 15.5 to 12, suggesting slightly slower output growth.

Other measures of current manufacturing activity also indicated slower growth in July. The new orders index was positive for the second month in a row, although it moved down from 7.9 to 1.4. Similarly, the shipments index posted its second consecutive positive reading but edged down from 9.6 to 7.4. The capacity utilization index came in at 8.7 after rising to 13.3 last month.

Perceptions of broader economic conditions were mixed in July. The general business activity plummeted to -13.2 after climbing into positive territory in June. Nearly 30 percent of manufacturers noted a worsening in the level of business activity in July, pushing the index to its lowest reading in 10 months. The company outlook index remained positive for the third month in a row but fell from 5.5 to 1.6.

Labor market indicators reflected stronger labor demand. Employment growth continued in July, although the index edged down from 13.7 to 11.8. Twenty-one percent of firms reported hiring new workers, while 10 percent reported layoffs. The hours worked index was 4.1, up slightly from its June reading.

Price pressures were largely unchanged in July, although compensation costs rose at a faster pace. The raw materials price index held steady at 3, suggesting only slight increases in input costs this summer after strong upward pressure earlier in the year. Selling prices fell for the fifth consecutive month in July; the finished goods price index was -5.5, virtually unchanged from last month's reading. The wages and benefits index rose nearly 10 points to 22.9, largely due to a marked rise in the share of firms noting increased compensation costs. Looking ahead, 36 percent of respondents anticipate further increases in raw materials prices over the next six months, while 25 percent expect higher finished goods prices.

Expectations regarding future business conditions were less optimistic in July. The index of future general business activity slipped from 1.3 to -7.3, registering its first negative reading in 10 months. The index of future company outlook remained positive but fell from its June level, coming in at 5.3. Indexes for future manufacturing activity also decreased, although all remained in strong positive territory.

US Services ISM and Factory Orders

On July 6th, I noted Services ISM Growth Slows - Jobs, Imports, Export Orders Contract.

Also on July 6th I noted Factory Orders Fall More Than Expected; Recovery Withers on the Vine

Given the global collapse in new orders including the US, weak ISM numbers in the US, and generally bad regional manufacturing reports, I believe there is potential for a really awful jobs report either this month or next and I will go for this month.

Addendum:

July Manufacturing ISM numbers came out today. For details, please see Dismal Manufacturing Numbers Worldwide; US ISM in Contraction Second Month; Why Another Round of QE is Pointless

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Japan Manufacturing PMI Shows Output and News Orders Down at Accelerated Rate

Posted: 31 Jul 2012 11:58 PM PDT

Economic conditions in Japan continue to accelerate to the downside as PMI signals sharpest deterioration in operating conditions since April 2011

Key Points:

Output and new orders down at accelerated rates
New export business decreases at sharpest rate in 15 months
Average costs fall to greatest extent since November 2009

July data from Markit/JMMA showed manufacturing output falling at the sharpest rate in 15 months, as both new orders and new export business decreased at accelerated rates.

After adjusting for seasonal factors, the headline Markit/JMMA Purchasing Managers' Index™ (PMI™) posted 47.9 in July, down from 49.9 in June, a level indicative of a moderate deterioration in operating conditions. Moreover, the latest index reading was the lowest in 15 months. All three market groups registered a worsening of business conditions, with investment goods producers noting the steepest deterioration.

Japanese manufacturing production declined for a second successive month in July, and at an accelerated rate. The overall reduction in factory output reflected lower levels of incoming new business, according to survey respondents. The pace of reduction in new work was solid, and the steepest since April 2011. New export orders also decreased in July, for the fourth month running, with the rate of reduction the fastest in 15 months. Companies mentioned demand weakness in China, Europe and the United States.

It should be very clear now that the global economy in aggregate is back in recession, yet other than my call on July 11, 2012 Case for US and Global Recession Right Here, Right Now there has been scant attention to this possibility in media reports.

Mike "Mish" Shedlock
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