Bill Mitchell— Leading indicators are suggesting recession

In the last two days, some major leading indicators have been released for the US and Europe, which have suggested the world is heading rather quickly for recession. It seems that the disruptions to global trade arising from the tariff war is impacting on US export orders rather significantly. The so-called ISM New Export Orders Index fell by 2.3 percentage points in September to a low of 41 per cent. The ISM reported that “The index had its lowest reading since March 2009 (39.4 percent)”. This is the third consecutive monthly fall (down from 50 per cent in June 2019). Across the Atlantic, the latest PMI for Germany reveals a deepening recession in its manufacturing sector, now recording index point outcomes as low as the readings during the GFC. Again, exports are being hit by China’s slowdown. However, while export sectors (for example, manufacturing) are in decline and will need the trade dispute settled quickly if they are to recover, the services sector in Japan, demonstrates the advantages of maintaining fiscal support for domestic demand. Japan’s service sector is growing despite its manufacturing sector declining in the face of the global downturn. The lesson is that policy makers have to abandon their reliance on monetary policy and, instead, embrace a new era of fiscal dominance. With revenue declining from exports, growth will rely more on domestic demand. If manufacturing is in decline and that downturn reverberates through the industry structure, then domestic demand will falter unless fiscal stimulus is introduced. It is not rocket science....

The US is running an unusually high deficit, indicating that fiscal flow is counteracting what would otherwise be a contractive condition. However, the expansion is dampened by the Fed's monetary policy. Adding "liquidity" to the financial system by increasing bank reserves is not stimulatory like adding spendable funds to bank accounts through fiscal policy. The latter increases demand while the latter restricts bank lending owing to Basel III requirements.

Europe on the other hand is still stuck in erroneous thinking about expansionary fiscal austerity. Mario Draghi finally warned about this as he prepares to leave his position as the head of the ECB.

Bill's point about the decline in the manufacturing sector and increase in the service sector offset each other to some degree. But manufacturing is about production and profit from production. When the profit rate falls, then so does investment in productive activity. This weakens an economy as the life-support system of the society going forward. It can also be inflationary if production falls behind fiscal injection. Moreover, it tends to increase the trade deficit as more products are imported.

Trump is concerned about the strength of the dollar and apparently believes that this is a result of Fed policy being too tight. But in a floating rate system, the policy rate does not have the same effect as in a fixed rate system. Moreover, as expectations of global recession mount worldwide, more funds flow into US Treasuries as the safest haven.

The trade war is also beginning to take its toll both as a result of expectations and also based on rising uncertainty and unsettled geopolitical conditions. The US and American economy (American consumer) were considered the anchor of the world economy. That assumption is now waning for good reasons on one hand and rising fear on the other.

We are not there yet, but the trajectory is not encouraging. Moreover, a socially and politically divisive battle is underway in the US over impeachment of the president. Banana republic stuff that further undermines confidence in the system.

Bill Mitchell – billy blog
Leading indicators are suggesting recession
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

See also

Angry Bear
Once again, two sharply contrasting reports to start the month
NewDealdemocrat

Matias Vernengo — Structural Change in China and India: External Sustainability and the Middle-Income Trap

AbstractThis paper focuses on the different development strategies of China and India, particularly regarding the role of manufacturing and services, for long-run productivity growth, external competitiveness and financial fragility. The findings appear to support the argument that productivity improvements in manufacturing drive productivity improvements in other sectors. They also substantiate previous findings that the Indian services-led growth trajectory has had limited success in transferring surplus labor from agriculture to other sectors. Furthermore, the trajectories have affected the export performances of the two countries with the Indian trade balance and current account revealing persistent deficits, compared to China's surpluses. The paper also argues that the way in which India has sought to sustain these deficits entails elements of financial fragility, and that the Chinese struggles with the internationalization of the renminbi also imply a possibility of financial instability.

Naked Keynesianism
Structural Change in China and India: External Sustainability and the Middle-Income Trap
Matias Vernengo | Associate Professor of Economics, Bucknell University

Autor, Dorn, Pisano, Shu — Competition from China reduced innovation in the US

The discussion of the decline in US manufacturing during the 2016 presidential election campaign largely focused on job losses. This column examines the effects of Chinese import competition on another metric for the health of the US manufacturing sector – innovation. Firms whose industries were exposed to a greater surge of Chinese import competition from 1991 to 2007 experienced a significant decline in their patent output as well as their R&D expenditures. While politicians’ ‘obsession’ with manufacturing is primarily due to job losses, an accompanying reduction in innovation may well affect economic growth in the longer term....

VoxEU.org

Competition from China reduced innovation in the US
Autor, Dorn, Pisano, Shu

Ha-Joon Chang — Making things matters. This is what Britain forgot

It’s being blamed on the Brexit jitters. But the that the latest figures reveal is actually a symptom of a much deeper malaise. Britain has never properly recovered from the [2008 crisis]….

At the root of this inability to stage a real recovery is the serious imbalance that has developed in the past few decades – namely, the over-development of the UK financial sector and the atrophy of manufacturing.…

This is remarkable, given that the value of sterling has fallen by around 30% since the crisis. In any other country a currency devaluation of this magnitude would have generated an export boom in manufactured goods, leading to an expansion of the sector.…

The weakness of manufacturing is at the heart of the UK’s economic problems. Reversing three and a half decades of neglect will not be easy but, unless the country provides its industrial sector with more capital, stronger public support for R&D and better-trained workers, it will not be able to build the balanced and sustainable economy that it so desperately needs.

Real-World Economics Review Blog
Making things matters. This is what Britain forgot

Ha-Joon Chang

Manufacturing is expanding again. I guess no one told the manfacturers that the deficit was too small!

Chalk this up to my "excitable comments, uber alles," I guess.

Neil Wilson — The steely view on steel

Interesting analysis of the UK, not only steel.

3spoken
The steely view on steel
Neil Wilson

Robert Oak — US ISM Survey Shows Manufacturing in Contraction for 5th Month in a Row

The February 2016 ISM Manufacturing Survey is yet another month of manufacturing malaise. Manufacturing is in a 5th month of contraction, although much less so than last month. PMI was 49.5%, 1.3 percentage points higher than January. New orders had no change in acceleration but employment and production did improve. A contracting manufacturing sector five months in a row is now due to supplier deliveries, contracting inventories and employment.…

The Economic Populist
ISM Survey Shows Manufacturing in Contraction for 5th Month in a Row
Robert Oak

Sputnik International — Weak Ruble Drives Russian Car Production Boom

Volkswagen and Hyundai representatives have announced unprecedented plans to increase the production of their cars in Russian factories, for eastern export markets

Russian manufacturers gearing up too.

Russia Insider

Weak Ruble Drives Russian Car Production Boom

Sputnik International

John Ross — 'Made in China 2025' key to China's development

I've hit the main points and omitted the data to shorten the article. China is following the highly successful South Korean development model.

"Made in China 2025," the program launched by China's government to establish the country as a global high-tech manufacturing economy, is the strategic key to China's development. An analysis of why this is the case also highlights the key overall challenges facing China's economy.

The specific aims of "Made in China 2025" are to emphasize innovation-driven, high-quality manufacturing and to raise the domestically-produced proportion of key manufacturing components to 70 percent by 2025. The program highlights 10 key manufacturing sectors for radical upgrading, including information technology, mechanized tools and robotics, aerospace, railways, power equipment, biotechnology and high-end medical products. But the program's most crucial aim of all is to create an advanced manufacturing industry to support China's overall development.

The most fundamental development issue facing China is simple. China is now either the world's second-largest economy as measured at current dollar exchange rates, or the world's largest economy as measured by purchasing power parity, or PPP. But China's per capita GDP still lags far behind that of developed economies, particularly the United States, the world's most advanced economy.…

As living standards are approximately proportional to per capita GDP, and as the latter also reflects productivity, China's key task in ensuring its prosperity is to reduce the gap in per capita GDP between itself and the world's most advanced economies.…

To summarize, the truly outstanding successes in development strategy over the past three decades have been in South Korea and China, while the development strategies of most advanced economies during this period have largely been a failure.

Turning from the data to its explanation, the feature that distinguishes China and South Korea from the world's other economies is clear: Both focused on the development of the manufacturing industry. China has become the world's largest industrial producer, overtaking the U.S., while key South Korean manufacturing companies such as Samsung and Hyundai have become major global brands. International data shows that large companies have higher productivity on average than small companies….

It is also striking that the two advanced economies that have lost the least ground relative to the U.S. (with the exception of the U.K.) are Germany and Japan, both of which are dominated by the manufacturing industry. More recently, the U.S. itself has been the only major advanced economy in which manufacturing output has exceeded levels seen before the international financial crisis.

This data clearly shows why "Made in China 2025" is the decisive strategic initiative for China. It also corrects a frequent misunderstanding of the process of global economic development. The data clearly shows that the decreasing prevalence of manufacturing and the rise of service industries in most advanced economies has been a sign of economic failure, not success.…

Globally, the two economies that have concentrated the most on developing their manufacturing industries - South Korea and China - have been the most successful in terms of relative economic development. India's recent shift toward emphasizing manufacturing with its "Make in India" campaign follows the same logic. Manufacturing is clearly key to the most successful economic development. This is the context of "Made in China 2025."

But while manufacturing will be strategically decisive for China for an entire era, the type of manufacturing which has to be undertaken needs to radically change. Numerous studies confirm economic theory's prediction that industries dependent on low wages - various types of textile or toy production, for example - or dependent solely on assembly cannot provide a strategic way forward for China at its present level of development.…

Global trends clearly show that increasingly advanced manufacturing will be the key to the overall success of China's economic development. This is why "Made in China 2025" is so crucial.

China.org.cn

'Made in China 2025' key to China's development

John Ross

Joel Kotkin and Michael Shires — America's New Industrial Boomtowns

Whether America is on the path to a sustainable industrial expansion or is just seeing a weak bounce back has been widely debated, but the recent numbers are impressive. Since 2010 the U.S. has added 647,000 manufacturing jobs. New energy finds have led to the construction and expansion of pipelines and refineries, and has sparked foreign industrial investment reflecting electricity costs that are now well below those in Europe or East Asia. Besides Houston, also ranking high on our big cities list are two other energy towns, No. 5 Oklahoma City and No. 10 Ft. Worth, Texas. Our mid-sized cities list is led by Lafayette, La., with nearby Baton Rouge in 11th place.

Evangelists of the “information economy” may think that industrial jobs are passé, as epitomized by a recent Slate article that recommended that working-class people from places like Detroit should move to areas like Silicon Valley or Boston where they can make money cutting the hair and walking the dogs of high-tech magnates. But the notion that U.S. manufacturing is doomed, and that the jobs are of lower quality than those in high-tech centers, is largely bogus; even in Silicon Valley the majority of new projected jobs are expected to pay under $50,000 annually. In contrast manufacturers pay above-average wages, in some cases due to unionization, but in many others because of the increasing sophisticated skills required by today’s factories.

Although we will likely never see a boom in factory employment on the scale experienced in the last century, the demand for blue-collar skills is projected to increase in future years. Among all professions for non-college graduates, manufacturing skills are most in demand, according to a study by Express Employment Professionals. By 2020, according to BCG and the Bureau of Labor Statistics, the nation could face a shortfall of around 875,000 machinists, welders, industrial-machinery operators, and other highly skilled manufacturing professionals.

Newgeography.com

America's New Industrial Boomtowns
Joel Kotkin and Michael Shires

Wolf Richter — Even The Ceo Of China’s Largest Appliance Manufacturer Gets Cold Feet

[Zhang Ruimin, CEO and founder of China’s largest appliance maker, Haier Group] fired a warning shot in October 2011, when he explained how he was trying to refocus Haier’s two listed subsidiaries, Qingdao Haier Co. (R&D and manufacturing) and Haier Electrics Group Co. (distribution and channel management). “I’ve been thinking how we could change the operations into a new model that ties R&D directly to the markets, while manufacturing would be taken care of via outsourcing.”

Offshoring!

“In the next 10 years, a major part of our development strategy will be the globalization of our brands and the integration of global resources,” he added. Globalization was suddenly no longer a one-way street for Chinese manufacturers. Now they’d look for the corporate greener grass – lower costs – in other countries. That was October 2011.

“China’s model, which depends on the export of lower-priced products, is coming to an end,” Zhang confessed a few days ago. It wasn’t just wages but the cost of doing business in China. “The world’s factory,” was getting too expensive. The conditions that were the impetus behind China’s phenomenal economic ascend were collapsing.

“We have production plants in 24 locations all over the world,” he said. “But production costs are currently higher only in Japan, the United States, and Italy, compared to China.” These costs would become “a major problem” for his company unless it started building plants in “Southeast Asia and elsewhere” to offshore production. As part of its growth strategy, Haier has acquired appliance makers around the world, including Sanyo Electric Co.’s appliance business in Japan.

Other Chinese manufacturers are doing the same. It shows up in the numbers, from weakening GDP figures, however dubious they may be, to lousy purchasing managers’ indices. Manufacturing, one of the engines of the Chinese economy, has stalled for structural reasons.

The Testosterone Pit
Even The Ceo Of China’s Largest Appliance Manufacturer Gets Cold Feet
Wolf Richter

Kottke — "Made in the USA" is back, baby

Cheap energy bringing jobs home? And if so, is that a good thing?

Kottke.org

"Made in the USA" is back, baby

(h/t Paul Meli via email)

circuit — Employment and productivity growth

Contrary to the microeconomic/market approach, my take is that productivity is very much a macroeconomic issue. In this regard, I side with post-Keynesian economists Nicholas Kaldor and Robert Eisner, both of whom argued that the level of employment and the degree of competition in labour markets have an incidence on productivity and overall growth. James Galbraith summarizes this point succinctly when he argues that

...full employment production foments ample competition in product markets, high rates of technical change, and declining costs, as business seek ways to save on scarce and expensive labor. In other words, productivity growth accelerates because of full employment itself. (emphasis added)

Now, it's important to recognize that employment growth irrespective of the type of employment probably won't do much to increase productivity. As highlighted in the OECD report cited above (and implied in the quote by Galbraith), the type of employment growth is a critical factor impacting on productivity.

 For this reason, it is best if policymakers seek to prioritize employment growth in the manufacturing sector, the sector that is most amenable to improvements in productivity (see here for more on why manufacturing matters for productivity growth).

Read it at Fictional Reserve Banking
Employment and productivity growth
by circuit

Chinese and US Wages Converging

From a BCG (The Boston Consulting Group) press release:

"With Chinese wages rising at about 17 percent per year and the value of the yuan continuing to increase, the gap between U.S. and Chinese wages is narrowing rapidly. Meanwhile, flexible work rules and a host of government incentives are making many states—including Mississippi, South Carolina, and Alabama—increasingly competitive as low-cost bases for supplying the U.S. market.

“'All over China, wages are climbing at 15 to 20 percent a year because of the supply-and-demand imbalance for skilled labor,' said Harold L. Sirkin, a BCG senior partner. 'We expect net labor costs for manufacturing in China and the U.S. to converge by around 2015. As a result of the changing economics, you’re going to see a lot more products ‘Made in the USA’ in the next five years.'

"After adjustments are made to account for American workers’ relatively higher productivity, wage rates in Chinese cities such as Shanghai and Tianjin are expected to be about only 30 percent cheaper than rates in low-cost U.S. states. And since wage rates account for 20 to 30 percent of a product’s total cost, manufacturing in China will be only 10 to 15 percent cheaper than in the U.S.—even before inventory and shipping costs are considered. After those costs are factored in, the total cost advantage will drop to single digits or be erased entirely, Sirkin said."

Read the full post, Press Release May 5, 2011

(h/t Zero Hedge)

The great leveling is proceeding apace as the emerging world rises and the developed world sinks to meet it.