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US Metalworking Business Index Trends Point to Economic Contraction

Economics / UK Economy Jul 04, 2008 - 11:15 AM GMT

By: Mike_Shedlock

Economics

Steve Kline who produces the Metalworking Business Index survey, shared an email with me from a correspondent who wanted to raise capital to expand, but could not get the loan. Let's take a look.
Steve,


An emerging trend this year is the sudden scarcity of capital from banks & machine tool finance companies. We planned to purchase two new machine tools this year. It now appears that we can obtain financing for just one, in spite of a spotless corporate credit record and continued sales growth. The lenders seem to be over-tightening because of the recent credit crisis. As I told my banker, “You guys seem frightened of your own shadows!”

MBI Sub-Indices



New orders are up from May but still in contraction. The increase from May is led by an increase in exports. Prices received are still rising, but not as material prices.

The statement “You guys seem frightened of your own shadows!” is an interesting thought. However, it misses the big picture. Banks are not lending because they are too cash strapped to lend. Many banks are technically insolent and can't lend.

As for the would be borrower, things have been going so well for so long that he must think the odds of a sustained contraction are low. I believe he is wrong. In effect he is saying "It's different here", missing the inevitable slowdown in virtually everything.

Auto Sales Are Dismal At GM, Toyota, Ford, Chrysler , and they are going to remain dismal. The US is in recession. Eurozone Manufacturing Is Contracting . The U.K. is on the verge of collapse. U.K. Manufacturing Has Contracted Most Since 2001 . Indeed, Deflationary Hurricanes Will Hit U.S. and U.K.

The table shows Future Business Expectations to be expanding in the face of contracting orders, contracting production, contracting employment, and contracting backlog. Finally, China, India, and Vietnam are all overheating and will have to slow. Ramping up capacity in face of the above factors is quite a dangerous thing to do.

Future Business Expectations optimism is unwarranted.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2008 Mike Shedlock, All Rights Reserved

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