Another Tale of Two Words
Our personal background expertise exposes us to the materials sector of manufacturing. We produce the tools and heavy duty machines for many industries all over the globe. In our parochial servicing of global demand, we continue to see a recession-tinged slowing of demand. Shrinking profit margins and rising employee terminations in our customer segments are signs that buyers have no room for normal capital expenditures. Our discussions with corporate leaders in other consumer-oriented fields share that sales and profitability are exceeding expectations. Taking the economic pulse can be as diverse as the health of the doctors in contrast with the patients they treat.
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Often reporters generalize, quoting statistics to fit the narrative they choose. The Job market: Very few jobs are created each month. Lately, that is true, but unemployment is low if you look at U3 (5%), although U6 is well over 9%. How about wage gains, corporate earnings, and debt? As a friend used to say: Figures lie and liars figure! That is another way of saying, we can make data say whatever we want. The truth may be in the eye of the beholder, and thus, it relates to each of us.
Take a look at the recent Durable Goods chart that measures expensive machinery and equipment lasting more than three years such as airplanes, large appliances, cars and drilling rigs. Lately Durable Goods orders have been moderately weak, depending of course on who you read. Below we will take a quick run through The Good, the Bad & the Ugly.
Consumer durable goods orders have dropped recently, yet they remain within the noise level of normal short-term volatility. No alarm bells here!
When we focus more on cars and trucks, the picture is exuberant. Overheating is the only worry here!
Fracking, ocean drilling and the mining of metals may not be the majority of our personal business, but it would be hard to hide any negative exposure to the broad basic materials sector when you see order volumes falling to 30-year lows. The speed and severity of this 2014 – 2016 collapse rivals any recession in many decades. It’s a good thing there is not an economy-wide recession of contracting GDP underway, as this would become a systemic panic globally. This chart is clearly – Bad!
The key short-term metric to watch has been and continue to be OIL. The price drop over 18 months from the 2014 peak has taken a slow growth economy to the brink of a recession recently with just 0.5% GDP growth in the first quarter. Seasonal oil price weakness before the end of the summer may cause escalating fears that are worth monitoring as energy peaks in coming weeks.
Fortunately, the years of central bank stimulus has reduced the debt service ratio to record lows and supported the much larger service sector jobs that have pushed consumer purchases of cars and appliances to high rates of consumption. To some degree, this has counterbalanced the depressing oversupply pervasive in the commoditized industrial sector. In our own niche manufacturing business, we see quote volumes rise and stable demand for consumables. Our belief is that, if commodity prices can maintain their current rebound pricing levels (or better), then the spindles will spin fast enough to turn heavy duty machine orders from a severe downtrend to a mild uptrend. Our February Exec Spec forecasted a rally in oil from the mid-20s to about $50 this summer. To return to the sluggish “new normal” of 2% GDP, we need the January 20th low at $26/barrel to avoid retesting or else a deep recession will be the topic at hand.
