Tim Duy responds to the latest set of “ugly numbers”:
By Tim Duy · Nov 4, 2008: For many months, this was the recession that wasn’t, as many key cyclical indicators refused to roll over as expected. That is no longer the case, as virtually all data is headed down at an almost blinding pace. Today’s ISM release is a perfect example; the headline number made a key move well below 50 in September, and extended that decline to 38.9 in October to the lowest level since 1983.
The details were even worse.
The new order index plunged; only 13% of surveyed firms experienced an increase. Production and employment figures collapsed, the latter further evidence of what most expect – we can anticipate a series of very weak employment reports. The export machine that has sustained US manufacturing throughout the past year has also collapsed, victim of the widening global crisis. And while prices paid fell sharply again, the drop does not provide much confidence. It is a reflection in the same shift in global demand that is weighing on exports.
Changing fortunes in the auto industry no doubt contributed to the pain in manufacturing overall. Hit with a double whammy – an overextended consumer and credit crunch that walls out some of those remaining in the market – automakers reported a devastating October:
When adjusted for increases in the U.S. population, last month was “the worst month in the post-World War II era,” Michael DiGiovanni, GM’s top sales analyst, said in a conference call. “This is clearly a severe, severe recession.”
Just last week Ford announced plans to expand production of its newly designed F150 pickup. Good luck with that. This move seems like a leap of faith, but perhaps Ford sees only upside at this point, believing that pent-up demand and collapsing gas prices will save the day. I am not so confident…this year’s spike in gas prices was scary for many, and the memory of $100 fill ups will linger. (Jim Hamilton has more on auto sales).
Also today we saw more evidence that the credit crunch is extending its grip in traditional bank lending. The Fed’s Survey of Professional Loan Officers points to an ongoing tightening of lending standards for commercial and industrial loans, a key source of working capital for firms. Not surprising data, but notable in its implications for growth over the next several months.
The path of data suggests a steady stream of dovish rhetoric from Fed officials; even once arch-hawk Dallas Fed President Richard Fisher offered a sanguine outlook on Bloomberg TV:
”My forecast is I don’t see any economic growth through 2009,” Fisher said in a Bloomberg Television interview. ”The credit crisis reached up and grabbed the throat of the global economy and choked off economic growth.”
Colorful, as always – clearly willing to ease policy further, but thinks that fiscal policy will play a more important role in the months ahead. He expects the balance sheet to rise to $3 trillion by year end, and interestingly, explicitly claims the Fed is already engaged in quantitative easing. I would be wary of using this term so loosely, as the Fed has not announced specific quantitative targets for bank reserves, monetary aggregates, etc. The expansion of the balance sheet is the result of specific policy actions intended to boost liquidity, not an end in and of itself. A minor point perhaps – but I think an explicit shift to quantitative targeting represents a critical policy change that we have not yet seen. To be sure, all of the tools are in place for the Fed to move to this next level…but with the explicit use of paying interest on reserves to sterilize the expansion of the balance sheet, they are not there yet.
On the international front, we saw more reports that the Chinese economy is on the ropes. Calculated Risk delivers a link on collapsing manufacturing activity in China, while the WSJ reports that Hong Kong is slowing signs of weakness. With global activity on the ropes, we can expect plenty of official stimulus in the months ahead. See for example efforts in China and India and Pakistan to encourage more lending. Fisher also pointed to global stimulus as a reason for long-term optimism. A key question is that with their domestic economies teetering, with China and others focus on policies that support their own consumption or, via export growth, US production. The answer to that question has important implications for the long end of the yield curve, especially as the Treasury prepares to issue a record amount of debt and expectations grow of another, sizable stimulus package next year. If nothing else, it will be interesting.
Bottom Line: Incoming data are dismal, and will keep the Fed on the road to additional easing. There is room to cut rates further, at least another 25bp, and ongoing liquidity injections point to further swelling of the Fed’s balance sheet. But supporting growth in the near term is no longer within the Fed’s ability – the baton will be passed back to fiscal stimulus early next year. The ability to support that stimulus without triggering a rise in long-term interest rates is still in question. A rise in rates should serve as a warning sign to policymakers – but would they listen to the inflationary implications? Or see it as reason to move explicitly to quantitative easing to bring down long term rates?