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The purchasing manager's index of manufacturing activity has improved dramatically this year. As this chart suggests, it is now very close to the level which is consistent with a flat economy (i.e., the recession is all but over). Another undeniable green shoot. The prices paid index has risen to 50 (which means half of those reporting are seeing rising prices and half are seeing falling prices), and I think that reflects not only the widespread rise in commodity prices, but also the fact that conditions are not so weak that they are leading to destructive or widespread price-cutting. When the prices paid index rises to 50 that has typically signalled an economy in recovery mode.
4 comments:
Public Library said...
The new "Investment Outlook" from Mr Gross speaks volumes to the reality of human behavior and the lack of human characteristics in econometric models. Historic models do not capture the shift that occurs when people first react to markets and then react to each other. It has a long lasting effect. Savings are headed north, consumption is heading south and US and Global growth will be subpar for many years.
Commonsense makes more sense right now than economic models that fail to understand the human condition.
"I was impressed this weekend by an article in the Op-Ed section of The New York Times by staff writer Bob Herbert. “No Recovery in Sight” was the heading and his opening sentence asked, “How do you put together a consumer economy that works when the consumers are out of work?” That is really all one needs to ask when divining our economy’s future fortune. Unless an optimist can prescribe how to put Humpty Dumpty back together again and shuffle him/her back to work then there can be no return to an “old normal.” As unemployment approaches 10%, what is less well publicized is that the number of “underutilized” workers in the U.S. has increased dramatically from 15 to 30 million. Those without jobs, as well as those individuals who only work part-time and have become discouraged and stopped looking, total 30 MILLION people. The number is staggering. Commonsensically, one has to know that many or most of these are untrained for the demands of a green-oriented, goods-producing future economy. Imagine a welding rod in the hands of an investment banker or mortgage broker and you’ll understand the implications quicker than any economist using an econometric model."
Full article: http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2009/Investment+Outlook+July+2009+Gross+Appetit.htm
There have been some interesting happenings in the market for equities lately. Volume keeps heading south, prices north, while programmed trading dominates the activity...
Gross is a demand-side analyst, I am a supply-sider. He also exaggerates. Consider that 95.8% of the people who were working at the peak of the business cycle in early 2008 are still working today. Sure, that means the economy is weaker, but we're not talking about economic devastation. Real personal income is still higher today than it was at the peak.
The way the economy gets back on its feet is by making adjustments: firing people, shutting down the businesses that aren't producing what the economy needs, turning the assets of failed companies over to new owners who can use them profitably since they buy them for lower prices, etc.
All those changes happen on the margin, and they are very hard to see. But there is an incredible amount of activity and change going on nevertheless, and it is already producing results (e.g., the undeniable green shoots I've been pointing out).
The human condition is indeed critical. The vast majority of people want to work and make money, and those who have lost their jobs and their businesses are hard at work trying to get back in the game.
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