The Phaserl


US Economy – Still on the Edge

by Pater Tenebrarum,

Are Recent Small Improvements Meaningful?

In recent weeks evidence has emerged that the weakness in the manufacturing sector has begun to spread to the services sector as well (see e.g. Mish’s summary on the Markit Services PMI as well as the worrisome state of services activity on a global basis). This is not particularly surprising: as we have frequently pointed out, economic slowdowns and busts always tend to hit the capital goods industries first.

At the same time, a few data points in manufacturing have actually slightly improved – which is to say, that the pace of the declines has slowed and was in some cases not as bad as expected.

This always seems to happen: as soon as economists adapt their previously overoptimistic expectations to a recent worsening trend, they will promptly be proven wrong again, as the pace of the trend slows.

Few things in this world are more certain than the fact that the consensus forecasts of mainstream economists are likely to be wrong. One can probably easily improve on their hit rate by merely flipping a coin. It is quite eerie actually – it is as if they were all Gartman clones.

However, the question that interests us is this: do these improvements mean anything? Our friend Michael Pollaro has provided us with updated charts on the situation, several of which we present below. As we have repeatedly said in previous updates, the probability of a recession has clearly increased – but the evidence that one has already begun or is about to begin shortly is not yet definitive. The following chart depicts the year-on-year change rate in the value of new factory orders, unfilled orders and inventories for non-defense capital goods excl. aircraft. Focus on the areas highlighted by the black circles and green rectangles.

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