Economic Trouble: Yellow Alert.

David Stockman, former director of the Congressional Budget Office under Reagan and successful investor, is one of my favorite economic writers. I consider Thomas Sowell to be the greatest living master of economic rhetoric, but David Stockman is definitely the greatest living master of unifying data, theory, and conclusion into readable articles. I check his blog daily. You should too.

Recently, David Stockman introduced these two charts. The first measures manufacturing output in New York state:

empirefalls

…the second measures overall US industrial output:

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The trend for both is clear: downward. Why is this case? Lowered demand for industrial output worldwide.

Why is there lowered demand? There is no definitive answer. But large economies across the globe are suffering. Europe is sinking into recession. Some nations in Europe are already arguably into recession. China is going through significant market convulsions. Japan is entering recession. The entirety of Central and South America are either entering recession, or deep into recession; the largest economy in Latin America, Brazil, is a total basket case.

So demand has fallen. This is reflected in lowering industrial output.

However, the U.S. economy is not based on manufacturing. It is a service-based economy. Therefore, these charts can only paint a vague picture of what is happening. But it offers a clue. Lowered industrial output is a tried-and-true precursor to economic recession. Could this be a sign of impending recession? Maybe.

An economic rebound and increase in demand would reverse this trend and stave off recession. But where is such a rebound going to come from? We’ve already discussed the other major markets of the world, which are all stagnant at-best. I do not think any of the major markets are going to rebound anytime soon. Why would they? What would cause a rebound in any of these markets? I cannot see what would produce such a recovery.

Perhaps the rebound will come domestically. But how? From what sector? The automobile sector has been a major driver (pun intended) since 2008; but auto sales seem to have peaked:

Automakers cut back sharply on production in August after a big gain in July, lowering overall factory output last month.

The Federal Reserve says manufacturing production dropped 0.5 percent, the biggest decline since January 2014. The drop in auto output accounted for most of the decline. Production of computers, airplanes and furniture also fell.

Overall industrial production, which includes mining and utilities, dropped 0.4 percent in August, after a 0.9 percent rise in July.

Auto production plunged 6.4 percent, its steepest fall in more than three years, after an outsized gain of 10.6 percent in July. Those violent swings partly reflect difficulties in seasonally adjusting the data and are likely temporary. Auto sales are strong and on track to top 17 million this year for the first time since 2001.

It is too early to make any definitive pronouncements on the auto industry. A couple months may even this out. But it worth noting: the auto sales bubble may be popping, which would be a major blow to U.S. industrial production.

Could the U.S. economy rebound on housing? I don’t think so. In fact, I think we’re in the midst of another nationwide real estate bubble. Nowhere in America is this better demonstrated than in San Francisco:

US-San-Francisco-California-median-home-sales-prices-1971-2015-05

This is mania. There is no way this can be sustained. People buying property in SF right now are going to lose a ton of money when the market busts. People who are selling property in SF right now are getting out at the high point. The smart folks are selling, and the dum-dums are buying.

Bottom line: Manufacturing in the U.S. is slipping. I do not see any viable way in which the U.S. economy will make a significant rebound to reverse this. I am not making a wailing prophecy of doom and gloom, but all that I’ve mentioned is worth noting. We are not yet at Code Red, but a solid Code Yellow.

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