Andrew WhiteSaw an article in this mornings US print edition of the Financial Times, “Manufacturing outlook grim, says SKF chief”. What I though interesting was that the CEO, Tom Johnstone, reported its latest quarterly earnings (to June). I didn’t find the headline interesting, it was something in the details that were shared that was. Johnstone reported that parts of SKF’s business was seeing demand pick up slight, yet other parts were still declining. The parts of the business that continue to decline, that had not really declined significantly in 2008, included divisions supplying bearings to industrial businesses such as power generation, oil and gas, compressors, and pumps. Segments that had shown some sights of recovery included automotive.
This minor data point made a lot of sense to me. A major cycle working its way through the economy starts with consumer spend at retail, and ends, or reaches the midpoint around the cycle, at raw materials and energy. As consumer demand contracts, retailers sell less, and order less. Over time distributors and wholesalers see demand contract, and so they in turn order less. Manufacturing then reacts some time later. All along the chain energy providers see a mounting contraction as the dominos falls from one end to the other. We are seeing one of the latter phases of that domino affect: core industrial and energy are suffering, as they must.
New items suggest that some aspects of retail spend are recovering, though there is no clear visibility in consumer confidence, or ability to spend more money. House prices remain mostly flat or falling, and the silly idea of increasing the minimum wage will result in more people being unemployed due to the increased costs. The odd point is the increase in manufacturing that some data reports; “re-stocking” is the word which describes the behavior whereby firms consumed inventory in the last few months, in response to the drop in demand, and so cancelled replenishments – thus pushing the decline on to suppliers. As the inventory is consumed (de-stocking), eventually it reaches the level where replenishment has to re-start. This results in re-stocking. The question is now – will this create a double-dip recession? If there is no sustainable increase in confidence and employment at the consumer end of the supply chain, there will be no domino affect for recovery. The re-stocking will stop – and this demand in the manufacturing sector will again contract since no new increase in demand will be seen.
I am a consumer – thankfully one in work. But if I look around me – at the “shovel ready” projects being worked on (digging up perfectly good roads and walkways just to build new one’s) – and at the decreasing number of people with money to spend, I get the fleeing that we are headed for a double-dip. There is no quick fix – yet we assume that there ought to be. Sustainable economic growth starts with business – not putting cash in pockets of those individuals who don’t even spend their extra cash on anything other than short term perishable consumables. Keynesian economics were proven a fallacy last time around – we are just repeating the same mistake. Government money crowds out private investment and does not create sustainable growth. Only supply-side monetarism that supports rapid economic growth has worked in such environments. Look at how long the last “non-bust” cycle has lasted…
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Category: Economy Uncategorized Tags: Economy
3 responses so far ↓
1 Bob K July 16, 2009 at 12:46 pm
Ah, but the Keynesians are in control now, I’m afraid. Keynesianism has the wonderful attribute that it is not falsifiable. Stimulus didn’t work? Clearly it wasn’t big enough! Depression lasted too long? FDR didn’t stimulate enough! We’ve strangely accepted the thinking that one can borrow one’s way out of a recession caused by too much borrowing. Meanwhile, the common-sense Austrian view of governments, individuals and businesses living within their means is out of fashion. Is the Austrian view not sophisticated enough for modern times?
Regarding the bearings observation: not being in that business, I would guess that bearings are used in two scenarios: (a) production of new compressors etc. or (b) spare parts inventories. I’d expect (a) to be nonexistent at this point, and (b) is probably impacted by reduction in inventories due to shuttering of plants or reduction in workload (e.g. running on 1 kiln instead of 2), or by looking for savings by reducing inventories. Leaning up spare parts inventories is a healthy cost reduction effort, as long as not taken to extremes that jeopardize safety. So some components of the reduction in demand are just healthy slimming, while others are indicators of idled manufacturing capacity and lack of new production capacity. A more interesting statistic would be capacity utilization rate… which has declined across the board, across all segments and all months this year (http://www.federalreserve.gov/releases/g17/Current/default.htm)
2 Sreenivas (Bash) Asuri July 28, 2009 at 5:41 pm
Interesting article! I’m a firm believer in supply side economics and so have been somewhat encouraged by the recent spate of results and conference calls which indicate that businesses are seeing orders perk up again. It’s the same kind of message we are getting from our partners and clients too. But if this turns out to be simply re-stocking like you call it, the double-dip situation you predict may well happen. In any case, no recovery can be complete without jobs returning…
3 Andrew White July 29, 2009 at 8:52 am
Hi Bash, thanks for the post. Several economists are highlighting the sad fact that no government, anywhere, can sustain spending at a level that a) props up the economy long term, and at the same time, as a by product, b) crowds out the private sector. Bottom line – the re-stocking will conclude in waves, over the next 6 to 16 months (it tool 3 to 9 months to stop), and unless governments are “out” of the market by that time, private money will not get back “in” and so the double dip will take place. It sure is a big gamble – and timing is key. We can but hope.