US economy giving mixed signals
11 August 2009
Early August saw some glimmers of hope as several U.S. economic indicators either showed slowing declines or actual growth. Given the mixed data, I thought it might be best to start with specific information from three of these indicators rather than attempt to make a broad generalization.
The Institute for Supply Management (ISM) released its July Manufacturing ISM Report on Business on Aug. 3, reporting that while economic activity in the manufacturing sector failed to grow in July for the 18th consecutive month, the overall economy did grow for the third consecutive month. Six of the 18 manufacturing industries reported growth in July including Electrical Equipment, Appliances & Components, and Transportation Equipment. Machinery and Computer & Electronic Products were in the industry groups reporting contraction in July.
According to Norbert J. Ore, CPSM, C.P.M., chair of the ISM Manufacturing Business Survey Committee, " the decline in manufacturing was slower in July when compared to June, as more leading components of the PMI—the New Orders and Production Indexes—rose significantly above 50 percent, thus setting an expectation for future growth in the sector. The Employment and Inventories Indexes are still contracting, but the rate is slowing and they are moving in the right direction. It is also worth noting that the New Export Orders Index shows growth following nine consecutive months of decline, suggesting that the global economy is recovering. Overall, it would be difficult to convince many manufacturers that we are on the brink of recovery, but the data suggests we will see growth in the third quarter if the trends continue."
The Reuters/University of Michigan Surveys noted that consumer confidence slipped in July as consumers anticipated that their personal finances would improve more slowly than they had anticipated several months ago.
"While consumers believe the economic free-fall is now over, consumers see little reason to believe that the economic stimulus package will improve their finances anytime soon," according to Richard Curtin, the Director of the Reuters/University of Michigan Surveys of Consumers. Financial reversals were reported with equal frequency across all income subgroups, as was the expectation that joblessness would continue to increase. "It is difficult to determine whether the recent loss in confidence simple reflects the impatience of consumers or the sprouting of changed assessments of the effectiveness of the stimulus policies," noted Curtin. In either event, "economic apprehensions can be expected to increase along with rising unemployment and stagnant incomes during the months ahead," according to Curtin. The report added that although consumer spending will improve during the balance of 2009, total personal consumption expenditures will post a lackluster increase of 1.5% during 2010.
The Index of Consumer Sentiment was 66.0 in the July 2009 survey, between the 70.8 in June and the 61.2 recorded in last year’s July survey. The July 2009 reading was the fourth positive year-to-year change since mid 2007. The Index of Consumer Expectations, a closely watched component of the Index of Leading Economic Indicators, was 63.2 in July, down from 69.2 in June but well above last July’s 53.5. The Current Economic Conditions Index also fell in July to 70.5 from 73.2 in June but remained below last July’s 73.1. Recent income gains were reported by the fewest consumers in the more than sixty-year history of the survey.
The survey also indicated a worsening financial situation was reported by the majority of consumers contacted, and these financial reversals were as common among upper as lower income households. Financial prospects for the year ahead were equally gloomy across all income groups. Expected income gains were barely positive, with the expected annual income increase barely above zero—just two-tenths of a percentage point.
Anecdotally, I’m seeing small signs of recovery in my electronics manufacturing services (EMS) customer base in terms of employee hiring and some quarter-to-quarter improvement in sales, but in virtually all cases year-to-year sales remain down. On the OEM side there appears to be a fair amount of supply base rationalization activity across multiple industry segments. In short, OEMs are beginning to shop and in many cases valuing lowest total cost over a rush to perceived rock-bottom labor cost markets.
Is the end of the recession at hand? I believe it is too soon to tell. While all U.S. manufacturers appear to have felt the recession, particularly during the banking crisis, the amount of sales decline has varied by industry. It appears that recovery will also vary by industry, and in many cases geography.
Consumer confidence and the actual ability of consumers to spend will remain a concern. Credit card companies have raised interest rates to get ahead of mandated consumer-friendly caps on rate increases. Job loss continues, length of unemployment is growing and the percentage of houses that are worth less than their mortgages (what we in the U.S. call being underwater) is also growing. Many Americans are waking up to the fact that their career earnings have peaked and their next job will not pay as well as the last one. Plus, the American stimulus package has a number of short-term fixes that address consumer needs for extended unemployment compensation and housing loan modifications for a couple of quarters, but doesn’t have a solution if those issues continue longer term. So, the possibility of a double dip recession remains, potentially triggered by either the end of certain forms of stimulus or an increase in credit defaults driven by higher credit card interest rates, continued housing value deflation or growth in the percentage of the permanently unemployed and underemployed. On the bright side, the stock markets are continuing to improve which may help boost the confidence of consumers who have jobs but lost much of the value of their retirement savings when the markets declined in 2008.
In short, the free fall has stopped and there appears some movement in the direction of global economic recovery, but there is still work to be done in the U.S. before we can start singing, "Happy Days are Here Again." I’m cautiously optimistic but watching measures of consumer confidence carefully.
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