Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Manufacturing is the key factor to the US Economy Avoiding Recession, Not the Sub-prime Mortgage Market Meltdown

Economics / US Economy Sep 04, 2007 - 12:12 AM GMT

By: Gerard_Jackson

Economics It would be an understatement to call the current thinking of the economic commentariat confused. For this lot consumer spending drives the economy. Therefore it follows that the subprime mortgage crisis will hit consumer spending and then spread to manufacturing resulting in a full-blown recession. (This is not good news — unless your name is Nancy Pelosi or Harry Reid). Fortunately the subprime fiasco is not a threat to the US economy. It is nothing more than a symptom of the Fed’s loose monetary policy. Without credit expansion these loans would never have been made.


This situation brings to mind 1929 when corporations found themselves awash in cash — thanks to the previous monetary injections — which they then lent to the stock market, thereby further fuelling the boom in shares. (Benjamin M. Anderson Economics and the Public Welfare , LibertyPress, 1979, pp. 337-79). The Fed’s monetary policy also triggered an estate boom which started in Florida and led to an almighty crash in 1926. Oddly enough this crash did not send the economy diving into recession. And it certainly did not cripple consumer spending.

What the above demonstrates is that current economic commentary contains very little economics and certainly no historical perspective. Come to think of it, this lot don’t seem to have any perspective at all. Only about 14 per cent of mortgages are subprime, of these less than 2 per cent are in trouble. Scarcely what one could call a crash. The first quarter of this year saw about a $7 billion increase in foreclosures. This has to be seen in the context of a $13 trillion economy. If we take into account total spending then we would be looking at something like $28 trillion. It’s absurd to think that subprime foreclosures would sink the economy. Just think Florida 1926.

As always, our economic soothsayers, psychics, seers, etc., are looking at the wrong end of the economy. Because they think GDP measures economic activity they conclude that consumer spending is what drives the economy. Furthermore, because investment is seen as derived from consumer demand then consumption must drive investment. Presto! The greater the amount of consumption the greater the amount of investment spending. This is truly horrible thinking that does not deserve to be called economic.

During the last recession consumer spending kept on increasing even as manufacturing kept on sinking. It still has not dawned on the economic commentariat that this fact discredits their view that consumption is the real engine of economic growth. And right now manufacturing is still booming.

The increase in manufacturing output during the last 3 months gave an annual growth figure of about 3 per cent, with all sectors still expanding. This has led some commentators to opine that manufacturing has probably never been stronger and will continue to grow. This view seems to be supported by manufacturing’s record output, profits and sales. An interesting little fact that might have some significance is that 55 per cent of imports consisted of producer goods, including components

Figures from the Institute for Supply Management’s manufacturing index, which reflects the opinions of purchasing managers at factories, plants and utilities paints a somewhat different picture. The index stood at 56.0 in June but fell to 53.8 in July. (Anything above 50 indicates expansion). This 2.2 drop is nothing to panic about and only represents one month.

However, to deduce from any of these figures that manufacturing is just dandy would be a grave mistake. The same thing could have been said — and probably was — about US manufacturing in August 1928. In other words, statistics need to be interpreted. Let us take a look at the imports of capital goods. One cannot tell whether this is good or bad. For instance, in the absence of loose monetary policies that change the pattern of international trade by distorting prices the composition of these imports might have been very different. Moreover, there might very well have been fewer such imports with the difference being made up by domestic production. This is a thought that has completely eluded the economic commentariat.

The possibility that an overvalued dollar leading to massive imports may very well have helped stimulate US manufacturing and delay its contraction is another thought that finds itself in the wilderness. Take Japan, for example. The Fed prints dollars that are then exchanged for Japanese capital goods (producer goods). The Japanese exporters then use the dollars to buy US assets. In plain language, US assets are exchanged for Japanese savings.

This is what one might call the upside. The downside is that an overvalued dollar distorts the structure of international prices. What this means is that though the US is importing producer goods (foreign savings) its monetary policy is still distorting its capital structure, leading to the possibility that despite imports of producer goods (including components) the capital structure is not only smaller than it would otherwise be it has also taken an unsustainable shape. This results in what used to be “disproportionalities”. Only a recession can restore the structure to a shape that corresponds to the true state of demand for capital goods and consumer goods.

In the meantime, the US economy will continue its present course. The rest is really up to the Fed’s monetary policy.

Gerard Jackson
BrookesNews.Com

Gerard Jackson is Brookes economics editor.

Gerard Jackson Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in