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Generational Dynamics Web Log for 2-Jun-05
Manufacturing index falls more than expected after falling for 24 months

Web Log - June, 2005

Manufacturing index falls more than expected after falling for 24 months

In another sign that the economy is slowing down, the growth in manufacturing has been declining for two years.

Purchasing Managers Index, 2003-present <font size=-2>(Source: WSJ)</font>

Purchasing Managers Index, 2003-present (Source: WSJ)

The Purchasing Manager's Index is composed of several components, including New Orders, Employment, and Prices. Combined, the overal. index indicates whether the manufacturing sector is growing or declining.

The data "indicates that the sector is losing momentum, as this month's PMI is at the lowest level since June 2003 when it registered 50.4 percent," according to the report. "The rate of growth in New Orders continues to decline.... The Employment Index failed to grow, ending 18 months of employment growth. The manufacturing sector is definitely slowing, and the question is whether a somewhat stronger dollar and the burden of high energy costs are slowly bringing this manufacturing growth cycle to end."

Global Purchasing Managers Index, 1998-present

Global Purchasing Managers Index, 1998-present

The same thing is happening globally, and manufacturing activity was the slowest in two years worldwide, according to the JP Morgan global report on manufacturing. as shown by the adjoining graph. According to the report, "The latest fall in the PMI was the result of slower growth in output and new orders, which led to a decline in employment."

And probably nothing is more dramatic than the fall of ten-year treasury bond yields worldwide. The US bonds fell sharply to about 3.9%, when it was 4.5% just a few months ago. The same things are happening to government bonds in many other countries. This decline indicates that investors are becoming increasingly risk-averse, fleeing from risky investments in hedge funds and, for that matter, in new manufacturing plants, and investing in safe government bonds. That's one of the reasons why manufacturing activity is losing momentum.

These facts are all consistent with the predictions that I've been making since 2002, when I said that we're entering a new 1930s style Great Depression, and that the stock market would fall to the DJIA 3000-4000 range by the 2006-2007 time frame.

The reports also show that manufacturer's prices are showing little sign of inflation, and that they're cutting back on employment. This should be very surprising to conventional economists because short-term interest rates have been close to zero for three years, and are still historically low today. By conventional standards, these rates should be causing massive inflation. But as we've been saying since 2002, we're in a long-term deflationary trend, and I expect prices to actually fall by 30% or so by 2010.

Wall Street Historical Price/earnings ratio for S&P 500

Wall Street Historical Price/earnings ratio for S&P 500

Price/earnings ratios for stocks have been above 20 for ten years now, and as the adjacent graph shows, the P/E ratios fall below 10 within 5-15 years whenever that happens.

The fall could happen tomorrow, next week, or next year. There's no way to give an exact time prediction. But the worldwide economic situation continues to deteriorate, as yesterday's manufacturing data shows. (2-Jun-05) Permanent Link
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Generational Dynamics Web Log for 2-Jun-05 Manufacturing index falls more than expected after falling for 24 months

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Generational Dynamics Web Log for 2-Jun-05
Manufacturing index falls more than expected after falling for 24 months