Pater Tenebrarum

About the Author Pater Tenebrarum

I'm an independent analyst and have been involved with financial markets for 31 years. I write economic and market analyses for independent research organizations and a European hedge fund consultancy. I'm the main author of the blog 'Acting Man', which presents articles on the markets and the economy, a mixture of commentary on current events as well as economic theory and history from an Austrian school of economics viewpoint.

Is the US Recovery Getting Better or Worse?

An Update in Light of Recent Data Releases

Since our last updates on the manufacturing sector of the US economy (in chronological order: “Is the US Economy Close to a Bust?” and “More Ominous Data Points”), new data have been released and our friend Michael Pollaro has mailed us updated versions of his charts, so we decided to provide another update. So far, there is no sign that the emerging downtrend in manufacturing activity is stopping or reversing. The recent manufacturing ISM has barely clung on to the 50 level, but this masks quite a bit of underlying deterioration.

In light of this, it is also noteworthy that the trend in business sales and orders is diverging ever more strongly from the stock market’s trend. The deterioration in economic activity is evindently masked by the inflationary policies instituted all over the world. Experience suggests that this divergence will end and that these trends will eventually become synchronized again. Given the growing gap, the eventual reassessment could be unpleasantly violent (we did get another warning shot this summer). This is however not completely independent of central bank actions. The cries for even more lunatic money printing exercises are becoming ever louder, which we plan to discuss in a separate article. In the meantime on to the charts. The first three charts are the updates Michael sent us:

1-ISM new orders vs, Dollar value core factory ordersISM new manufacturing orders vs. the y/y percentage change in new orders for all manufacturing and new orders for durable goods, lagged by 6 months – click to enlarge.

2-ISM new orders vs. IPISM new orders vs. Industrial production index for manufacturing (lagged by 6 months) – click to enlarge.

The “money chart” – both figuratively and literally – is the one depicting the growth in the actual dollar value of factory orders and unfilled orders for non-defense capital goods (ex aircraft).

3-Dollar value factory orders and unfilled ordersAnnual change rate in the dollar value of factory orders and unfilled orders for non-defense capital goods ex aircraft (plus change in inventories, gray area) – click to enlarge.

The difference between this chart and various index charts (industrial production indexes are calculated by means of a method developed by Irving Fisher) and diffusion indexes like the ISM, is that this shows us if more or less money is actually crossing the palms of producers. It clearly is less than it used to be – and the trend continues to point down.

Speaking of Fisherian production indexes, here is the total industrial production index and its y/y rate of change. The latter barely clings to positive territory and is likewise trending down. This has been a hallmark of emerging recessions in the past:

4-Industrial productionIndustrial production index: its growth rate is close to turning negative – click to enlarge.

The Stock Market vs. Production – A Growing Gap

Total business sales are falling. A negative growth rate in total business sales has as a rule not occurred outside of recessions either. Maybe this time is different, but we wouldn’t bet on it. Some people may think that the stock market is indicating better times ahead, but this is a misconception of what the stock market actually reflects in an era of fiat money characterized by suppressed interest rates and vigorous money supply growth.

The vast bulk of its performance is essentially a mirror of monetary debasement. This is why the stock markets of Venezuela and Argentina have long been the world’s best-performing in local currency terms. Moreover, as we have previously discussed, the stock market has long ago ceased to be a leading indicator of the economy. Most of the time it is actually a coincident and sometimes even a lagging indicator. In short, market participants occasionally don’t seem to know very much. They can certainly be right for long stretches of time (often for the wrong reasons), but near turning points there obviously has to be a large crowd that is prone to misapprehending the situation.

The next chart shows growth in total business sales vs. the Wilshire 5000 Index (the broadest available stock market index). Historically, the trend in business sales growth and the stock market trend tend to be in sync, but there are frequently leads and lags (it is worth noting that the y/y decline in business sales is already more than half-way to the nadir seen during the 2001 recession):

5-business sales vs. WilshireAnnual rate of change in total business sales vs. the Wilshire 5000 Index (log) and the federal funds rate – click to enlarge.

The next chart compares the growth rate in the value of capital goods orders to the Wilshire Index:

6-Capital Goods vs. WilshireThe Wilshire 5000 vs. the annual growth in the value of non-defense capital goods orders – click to enlarge.

Lastly, here is a version of the so-called “Buffet Indicator”, comparing the market cap of non-financial equities to GDP:

7-market cap to GDPNon-financial equities market cap vs. GDP: not as crazy as in 2000 just yet, but sort of 1929ish – click to enlarge.

The point of this last chart is of course to stress that even while the sector producing the largest percentage of economic output is evidently struggling, stocks are so overvalued that the only time periods that are historically comparable encompass the two craziest stock market manias ever. Assuming that Western central banks will refrain from “going Weimar” on us (at least in the short term this is probably a fair assumption, although we wouldn’t vouch for the long term), such a valuation is highly questionable.

Credit Conditions

Here is a brief look at credit conditions as they pertain to the business sector. Growth in industrial and commercial loans is still brisk, but it has begun to stall out after putting in a secondary lower peak. Our guess would be that it will weaken from here, given the deterioration in economic activity shown above.

Said deterioration is mainly due to the still gathering bust in the oil patch and everything connected to it. Normally this sector is not all that important, but in the weakish recovery since 2009 it has been responsible for the bulk of the growth in capital spending and employment – and it has obviously seen a lot of malinvestment (based on misguided economic calculation).

8-industrial and commercial loansIndustrial and commercial loan growth – still brisk, but stalling out – click to enlarge.

Here is a chart we have shown last time already in this context – it shows that the sum of charge-offs and delinquencies on business loans has begun to rise even before the Fed has moved rates off the ZIRP floor. This is one more reason to expect the growth in business loans to weaken.

9-charge-offs vs.FF rateThe annual rate of change in charge-offs + delinquencies of commercial and industrial loans (black line) vs. the effective federal funds rate (red line) – click to enlarge.


Essentially the Fed has nothing to show for expanding the broad true money supply in the US economy by 112% since early 2008 (from $5.3 trillion to $11.22 trillion as of September) and years of zero interest rates. On the contrary, it seems that as soon as monetary pumping slows even a little, the economy tends to relapse into recession.

As a friend of ours remarked, it may be time for the brain trust running central banks to reconsider the value of its policies, but the all signs actually point to the exact opposite. Rather then admitting that what they are doing is not working, they intend to do even more of it. This is likely the main reason why stock markets are ignoring the worrisome economic backdrop, but there is also an element of naïve faith involved (“they will get it rightthis time”, i.e., market participants are clinging to hope against all logic and experience).


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