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The Recessions Are Underway
Submitted by Andrew Zaitlin of Moneyball Economics
"People's confidence that the consumer can somehow offset this industrial recession that we've had is really being shaken to the core with the disappointing numbers from some of these major retailers"
- James Abate, CIO of Centre Funds.
Recessions Are Underway
China drove the recent economic boom, just as it is behind the recent malaise. A turnaround in Chinese demand would certainly change things but the current data does not look promising.
For China’s trade partners, it means recession today. Only Germany and the US look positioned to weather the storm. Expect the next macroeconomic leg down to start in January. Between now and then, data will continue to weaken incrementally. Expect urgent Central Bank intervention in Taiwan, Korea, Brazil, and Australia.
It’s Not a US Recession… Yet
The US economy may be only 30% dependent on exports, but a sudden drop still hurts. Especially when GDP is growing only 2%.
The domestic hit this year from the downturn in commodities is well known. Falling prices and production immediately led to lower capital expenditure (CAPEX) spending on pipelines, extraction equipment, and so on. That extended to basic industrial component suppliers like pumps and fasteners, among others.
US exports pulled down as global customers got whacked.
After rising 2% from 2013 to 2014, non-petroleum exports suddenly contracted: down -3.5% year-to-date through August.
- Metal Exports -$3B
- Machinery Exports -$8B
- Industrial Machinery -$3B or -5%
While direct exports to China have fallen only $2B, the remaining drop is still China-related. The bulk of the export drop comes from commodity producing countries. Mexico and Canada account for $20B of the export drop and finished-goods producing countries that export to China (EU) account for $10B.
Bottom line: You can’t strip out $34B from the US economy without significant blow-back. If oil and mining companies were the first to be hit, the second victim of China’s downturn has been industrial goods suppliers. The next wave will be operating expenditures (OPEX), in the form of temporary workers.
The US Response: Slower Production
Hats off to US producers for responding quickly. Businesses have dramatically curtailed factory expansion and spending on capital goods.
The swift response is also a warning sign: if demand remains sluggish, additional cuts will come quickly.
Capital goods spending has also dropped. Some of that comes from IT spending shifts (Windows 10 release has pushed out some IT spending, the Cloud is reducing hardware spending). Most of the drop is business retrenching in the face of an inventory overhang.
Unfortunately, US producers are still behind the curve. While inventory production has slowed, demand is slowing even faster. US non-petroleum exports are contracting faster. The result: inventory overhang.
US: Weak Exports, Sudden Downturn in Imports
Not only have exports fallen to the lowest level since 2012; per the latest Census Bureau trade data through August, the pace is accelerating. That extends to exports minus food, autos, and oil which shrank 2X the rate of the previous six months.
The worst is yet to come. For more recent data, we looked at the biggest ports on either US coastline: Los Angeles, Long Beach, New York, and Savannah. (The individual port data was distorted by the 1Q 2015 West Coast ports slowdown and subsequent re-routing of cargo shipments via East Coast ports. So we combined all ports to get a clear overview.)
No surprise, the export story remains grim. Volumes continue to contract although the pace is flat, but this data includes oil exports and we know that they contracted in 4Q 2014 and 1Q 2015. Adjusting for oil and cargo, exports have probably contracted at a more constant pace. This means that it is possible that we are approaching a bottom of sorts.
Big surprise, imports turned for the worse. September imports suddenly collapsed to 0% y/y. The China-facing ports of Long Beach (-2%) and LA (-9%) fared the worst. It’s the lowest level of shipments since 2009. Just a guess, but it fits the industrial slowdown story (not holiday shopping season related).
Semiconductors: No Bottom and Continued Manufacturing Softness
Back in August, Southbay Research noted that semiconductor companies were uniformly less bullish. Recent earnings calls have reinforced the less bullish picture, and no wonder: top-lines have begun to contract.
Semiconductor companies are preparing for no growth. Silicon wafers are the basic building blocks of semiconductors. After surging last year, volume demand has collapsed from 11% in 2014 to barely 2% this year. Expectations are for 1% growth next year.
The standard playbook says to start with CAPEX cuts. The top three semiconductor manufacturers announced CAPEX cuts in the last month:
- Intel lowered CAPEX a further $500M, bringing total CAPEX budgets down from $11B last year to $7B.
- Samsung cut CAPEX $2B or 20%.
- TSMC to cut CAPEX $3B or ~30%.
The reason: China demand is lower than expected. Last year was a boom time for semiconductor makers as the Chinese smartphone market continued to surge. In particular, a new cellular infrastructure roll-out boosted sales of higher end phones. However, actual demand was overstated. The desire to not miss out on a sale drove handset makers to over-order.
“[There was] an artificial peak in retrospect meaning there was a lot of inventory being built up by our customers who all thought they were going to get a higher share… we had many customers thinking they were going to get a bigger share out of that.” -Jon Olson, XLNX CFO
The result was that supply exceeded demand and inventories surged. As the CEO of TSMC put it, the sudden weakness was surprising. The smartphone supply chain spent the summer bleeding off excess inventory. But demand remains weak. The China smartphone market contracted in 2Q. TSMC now forecasts 0% semiconductor growth in 2016, down from the previous forecast of 3%, citing China as the reason for weakness.
“Most of our customers are pretty optimistic about their own business… but growth has just slowed at least for now. And I think when you are CEO of the company and you take a look at what’s going on out there, you are sort of trying to save a little bit of money right now and waiting to see what happens.” -Don Zerio, CFO LLTC
Indeed, recent semiconductor sales continue to contract, and that’s after we include the massive production ramping for the new iPhone release (heavy demand for chips).
Expect more cost cutting and the start of layoffs. Beyond cutting back expansion plans, some companies are selectively shutting down production lines. Adding to the pain of excess capacity, more capacity is coming online. We expect layoffs and consolidation to accelerate into 1Q 2016. This is a great time for Chinese companies looking to hire talented engineers.
Adjusting to Slower Chinese Demand
“It’s not like [our customers have] seen a significant decline in demand. It’s just they haven’t seen the increase that they had originally planned.” -Richard Clemmer, CEO NXPI
Global exporters and producers are in a recession. China’s iron ore imports epitomize the current situation as Chinese demand flattened. While technically that’s not a recession (demand quantity has not dropped), the impact feels the same (falling prices and profits) and the response is the same: cuts in OPEX and CAPEX.
How did this all start? It began in late 2013, when China popped its credit bubble. The chilling effect was seen across the entire Chinese economy, from iron ore to housing prices. Everything proceeded to downshift in late 2013 as credit tightened. Credit bubbles tend to behave in the same way: hot money bids up assets and popping the bubble leads to over selling.
China’s bubble and current blow-back have some unique qualities:
- Significant global impact from changes in Chinese marginal demand
- Over reliance on real estate
The origins of the bubble started with China setting course on returning to economic might by becoming a manufacturing powerhouse and having world-class infrastructure. Both objectives turned China into a capital intensive economy and a destination for global industrial suppliers (machinery, commodities, etc.). Loose monetary policy facilitated the growth.
A boom in asset prices followed. This was partially the natural outcome of real demand driven by an unprecedented boom in consumption for domestic development and exports. It was also partially the outcome of credit bubble hot money that bid up asset prices.
Trouble came from significant and extreme corporate gambling in real estate and commodities. Seeing ever-rising asset prices, Chinese companies saw an opportunity: using special access to cheap credit, they bought iron ore, copper, and real estate which they then used as collateral to buy more iron, copper, and real estate. Actual demand, together with this artificial demand, combined to create the impression that consumption was racing higher. A false high growth trajectory was established and then reality hit. First came monetary tightening. Then came the Chinese government’s 2014 infrastructure budget which called for no growth. Producers were hit hard but borrowers were hit even harder. In other words: a textbook popping of a credit bubble.
- Overvalued assets get oversold and fall in price (commodities and real estate)
- Discretionary spending gets squeezed (gambling in Macau)
- Liquidity squeeze
Commodities have been hit especially hard.
- Focus of corporate gambling: loss of big demand coupled with stockpile sell-off
- Factory production slowdown: unprofitable factories dependent on loans to stay afloat are suddenly facing liquidity crunch
- Sluggish infrastructure spending: slowdown in public sector projects and private sector real estate development
Inventory adjustments define global trade through 2016. The market is still trying to discover the true levels of sustainable demand.
- Today: Bleed inventory, push out expansion
- Tomorrow: Reduce production and capacity
The first step is dealing with excess capacity. Here’s that iron ore chart again. Demand was on a trajectory of 80M-90M tons, and capacity was expanding accordingly. Instead, demand has stopped at 70M tons. That’s 15%-20% excess capacity.
As China exports deflation, political reality takes over. The Chinese government talked a good game.
When the new government took over in early 2014, one of its first moves was to emphasize the need for a more market-driven economy. In May 2014, President Xi stressed the point: a “decisive” role of market forces to allocate resources. We never believed it for a moment.
Then reality hit. The normal market reaction to a manufacturing recession is to close factories, reduce capacity, and fire workers. But that’s politically impossible in China. Instead the government is saving companies and hoping to export its way to growth. The Chinese government could reignite demand through more infrastructure spending. That would create a bottom in prices. We’ll know in December when the 2016 budget gets released. Regardless of spending initiatives, monetary policy will be to weaken the yuan, provide easy credit, and support dumping of excess supply into global markets. This is all very deflationary for the US and EU.
What This All Means
In the near-term (4Q 2015-1Q 2016), bleed inventory. The sequence of events will be:
- Push out factory expansion plans (CAPEX to drop)
- Reduce production (cut back extra shifts, slow hiring)
Longer term (2016-2017), cope with excess factory capacity. The sequence of events will be:
- Stop factory expansion plans (severe CAPEX cuts)
- Reduce production (shutter production lines, fire workers)
Industrial layoffs have already started, but will begin in earnest in 1Q 2016. Companies have entered a wait-and-see mode which is a precursor to layoffs.
This is a bearish place to be. Industrial company dividends are not at risk yet, but growth is very much under pressure. For the next 3-4 months, consider ETFs which are short Asia or short US industry.
One risk to this strategy is that Asian stock markets may jump on various currency moves or Chinese stimulus. Another risk is that the current adjustments to lower demand start to wind down by 3Q 2016, which would create a temporary boost to industrial stock.
The overall theme is excess supply, and it has yet to finish playing out across the ecosystem.
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Remedy for recession is easy, adjust statistical method of calculation. There, is fix!
From march .... IS U.S. Economy Set to Enter Recession by 2016?
What recession?
Damn, Boris! You're a miracle worker!
So we are entering a recesion and the Fed in their infinite wisdom is going to hike rates?
What!?!?!?!?! I thought they were going to give everybody cash?
Sumptin' tells me they don't know what the fuck they're doin'!
In soviet USA, doing knows you!
Once you realize that, all the pieces fall in place and it all starts to make sense, eh?
Good
I did an informal poll of some friends and family. Simple question " Are you spending more or less this holiday season?" Not one is spending more and most less. We are having a Christmas family party in a couple weeks and by unanimous consensus, we are not exchanging gifts this year. When my wife told me, I said "good!" We don't need anything and why spend money trying to buy gifts nobody else needs (or wants). Almost everybody's budget is tighter this year and I just got notification my monthly health premiums are going up in 2016.
So the health care sector is booming. Thank goodness!
Just think how well they would be doing if the laws were written in their favor.
i don't know that that is an economic issue. anectdotally, i have found a lot of people, even families with kids, are turning thier backs on the xmas hype around shopping and establishing no gift, one gift trditions.
Just stop doing it. Christmas crap gifting is for kids. Adults out there, stop the cycle of bullshit plastic gizmo "gift" giving.
No way man, just make the gifts that you are giving. Cut out the multi national Corps, the Chinese and the Tax man. Men make soap for your ladies. You need Lye (any plumbing store has it as drain cleaner) and Vegetable oil. Women love the shit. A large container (about a gallon) makes well over 100 bucks worth. One package of lye will make well over $1000 bucks worth.
"here Honey...I made you some Crisco/Drano soap....$1000 bucks worth!...to make you, you know, 'feel pretty'....Hugs?"
Of course your health insurance is going up -and for very good reasons. The pharmaceuticals spend tens of billions on adds educating us about erectile disfunction and what to do if you get one of those very scary and dangerous 4 hour erections. People are too stupid to go to their doctor and the doctors are too incompetent to deal with patients on such issues. And since only about half of Americans are on anti-depressants or adderol, or other meph based psychotropic drugs which act as a gateway to illegal drugs, promoting these drugs and the now 39 (and rising) mandatory vaccines is also expensive. So just keep paying your health insurance and quit complaining. Eat less, take your kids out of private schools, get a second mortgage or a second job.
Fucking A stocktivity +100. Its the most retarded holiday of the year - the season that guilts you into pissing money away on shit that nobody wants to get shit in exchange that you already or don't fucking need. Its the grandest circle jerk ever. Its far more efficient to say "hey everybody - I just gave you $50 bucks, and you all gave me $50 bucks back, and I thank you for it." Done! Everybody is happy and no one person is worse off.
Instead me and a buddy are going down to the hood and provide some much needed coin to some homeless for some boose, food, some ciggarettes, whatever they choose. Screw these organized charities where you can donate a box of toys to a needy family. fuck last year we did that, and we ended up going to finer shack than either of us could ever afford - dropped off a box of toys where inside they were sporting a 52" with the latest Sony games and couldn't be bothered to answer the fucking door.
Fuck kthe circle jerk. Time to resist that exponential chaos and immanent disappointment and instead, do the right thing.
how can we be in recession when .gov says we are at full employment. things are booming. who is zh trying to fool?
Of course it is. US oil production peaked this year. Of course there is going to be economic trouble on the horizon. :)
Oh okay...now it's a recession, but not yet...but soon..
I did my part to save the economy - I bought a freeze dryer for food. Each batch gives me about 7 meals. I now take advantage of local specials and make my garden produce easier to store for longer periods (15-25yrs.), power or no power. Canning is alright but more work and food does not last as long or taste as good. Give me another month or two and the food industry can stick their poisoned food you know where.
I bought a years supply of grass fed beef from a local farmer.
Okay - can it, salt it, freeze it, smoke it, jerky it, dry it, - tried it all and all have some downside and short storage problems.
MRE is the best solution I can come up with.
Yeah I definitely don't plan to rely on it if I have to bug out....it's more of a way to lock in prices and get a great deal.
Certainly dehydrated freeze dried is the way to go for portability and shelf life. Which reminds me I need some more of that.
“There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning.” Warren Buffett
This has rolled out globally with the Neo-liberal ideology.
The 1% have gone to war against the 99% (aka the global consumer base)
This is what the 1% winning looks like – global recession.
It's not a recession til I hear it on the nightly news /sarc/
It's not a recession til I hear it on the nightly news /sarc/
Is that a Helicopter I hear?
yes....and an austrian accent...
https://youtu.be/Xs_OacEq2Sk
With unemployment only 2% points above the all time low (2.93 actually) how can we be in a recession?
The highest rate for a single month is shared by November and December of 1982 with an unemployment rate of 10.8%
The year with the highest average unemployment rate was 1982 with an average unemployment rate of 9.71%
--
The lowest rate for a single month is shared by May and June of 1953 with an unemployment rate of 2.5%
The year with the lowest average unemployment rate was 1953 with an average unemployment rate of 2.93%
--
The most recent unemployment number was 5% as of 2015-10-01
I think once they seasonnaly adjust the data -- the recession will evaporate!
I'm sorry, but the notion that we have an economy that's growing at 1-2% a year is hogwash. Replace the phony-baloney CPI with a more honest estimate of our cost of living and this so-called recovery vanishes.
Simply put, we've been in an economic contraction since 2000. Mounds of easy money, exponential debt, and financial gimmickry cannot long hide the massive misallocation of capital and the painful restructuring the global economy desperately needs.
The first step in the healing process is to imprison (execute?) some bankers. The rest will fall into place rather quickly.
ZH had a writeup on what pushed the number up:
http://www.zerohedge.com/news/2015-10-29/and-biggest-contributor-q3-gdp-was
I get so confused with dollar metrics when the cost of materials has declined significantly. Can we get that export chart in units instead of dollars?
"It’s Not a US Recession… Yet" WRONG! The US Is Already In A Recession: http://forum.prisonplanet.com/index.php?topic=267901.0
Here are some signs of a coming recession.
1. Business loans for M&A not CAPEX.
http://www.zerohedge.com/news/2015-10-15/there-goes-final-pillar-us-recovery-loan-growth-paradox-explained
2. Factory orders continue to drop
http://www.zerohedge.com/news/2015-10-02/us-factory-orders-flash-recession-warning-drop-yoy-10th-month-row
3. Default risk spikes
http://www.zerohedge.com/news/2015-10-02/us-financials-default-risk-spikes-2-year-high
4. M&A set record
http://michaelekelley.com/2015/05/29/mergers-and-acquisitions-set-record/
5. Fed sees 2 bubbles
http://michaelekelley.com/2015/02/20/fed-warns-of-two-bubbles/
o Commercial Property higher than pre-2007 level.
http://nreionline.com/finance-investment/cre-prices-are-now-officially-above-pre-recession-peak
o Global Corporate Debt Market hits $5 trillion.
http://fn.dealogic.com/fn/DCMRank.htm
Here is how to prepare.
http://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens/
Here is how to get your mind off this stuff.
http://michaelekelley.com/category/humor/
G
https://thinkpatriot.wordpress.com/2015/11/13/why-not-presidential-debat...
And look at Smith's new book.
http://www.amazon.com/gp/product/1597260657?ie=UTF8&tag=charleshughsm-20...
I am just reading it, Uber is the end of the old economy, not the beginning of the new. No kidding, nation states on their last legs, endgame for oligarchs and Israeli-neocons.
https://thinkpatriot.wordpress.com/2015/11/11/dynamics-of-national-colla...
Tyler really means 'Depressions' in the article title but like so many in the perhaps otherwise 'Presstitute Media' he cannot or will not utter THE D-WORD.
THE D-WORD is untouchable because it is the truth.
THE D-WORD causes Economists and media hacks to stutter and stumble and mumble and otherwise trip all over themselves trying to avoid hearing it, seeing it, speaking of IT or in any way acknowledging the D-WORD's blasphemous existence.
THE D-WORD is the Shadow behind every Economist's back that follows him night and day.
The numbers say it is so and has been worseningly-so for years - even decades - yet the D-WORD remains untouchable precisely because it is so absolutely and relatively true.
The Excession comes to this World.
The Excession crushes even the mightiest economy to ruins under its immense weight and endless power.
Perhaps T.S. Eliot best described the Excession:
"What are the roots that clutch, what branches grow
Out of this stony rubbish? Son of man,
You cannot say, or guess, for you know only
A heap of broken images, where the sun beats,
And the dead tree gives no shelter, the cricket no relief,
And the dry stone no sound of water. Only
There is shadow under this red rock (Come in under the shadow of this red rock),
And I will show you something different from either
Your shadow at morning striding behind you
Or your shadow at evening rising to meet you;
I will show you fear in a handful of dust."
2015 Dec 25: Stores say "lowest xmas sales ever".
2015 Dec 26: People say "most happy xmas ever".
2015 Dec 27: People say "most relaxing xmas ever".
2015 Dec 28: Central banks say "uh, oh"!