What exactly is going wrong?

by on July 10, 2014 at 7:26 am in Current Affairs, Economics, Uncategorized | Permalink

WHEN do individual pieces of data become a trend? In the past few days, we have seen a surprise 1.3% monthly slump in British factory output, a 1.8% decline in German industrial production, a 1.7% decline in France, and a 1.2% drop in Italy. No one can blame the weather for these numbers, as they did for first-quarter US GDP.

European stocks have been weaker, although a cumulative 2.6% drop is hardly a sign of panic.

That is from Buttonwood.  The Espirito Santo debt problem in Portugal is probably not a major event in its own terms, but slotted into this overall picture it is worrying nonetheless.  Is this what the end of QE looks like?  Or is this turn in events caused by something else?

Michael July 10, 2014 at 7:53 am

Pretty cheeky of you to point this out, Tyler.

What’s going wrong? European countries have been married to austerity, whereas America had more healthy Keynesian stimulus, so it’s recovering faster (but not fast enough).

Pretty simple, really.

ziel July 10, 2014 at 8:11 am

You’re forgetting about that little -2.9% drop in Q1? Oh, right, that was the weather, because the U.S. never had a rough winter before, certainly not 1Q 1994, when the economy grew 4%.

Spencer July 10, 2014 at 10:36 am

The trade deficit subtracted 1.5 percentage points from first quarter growth, or over half, and that was not related to the weather.

That was driven by a huge surge in non-petroleum imports.

Cliff July 10, 2014 at 10:35 am

Europe and the U.S. had about the same austerity

Bob July 10, 2014 at 1:48 pm

Yet a rather different monetary policy.

jon livesey July 10, 2014 at 3:40 pm

No, you’ve got the timescales all wrong. Austerity is a bad policy alright, but it’s been in place for five years. These recent drops in output are all in the past month. In the UK, for example, there was a 1.3% monthly drop in factory output, but a 4% increase year over year.

Ted Craig July 10, 2014 at 8:53 am

Weather is always an excuse, to a degree. As David Merkel once pointed out, nobody credits good weather for strong results.

msgkings July 10, 2014 at 1:17 pm

Because ‘good weather’ is the baseline, where economic activity is what it is and not affected by the externality of weather. Bad weather changes things, but for reasons that don’t reflect the actual underlying strength of the economy. Often there’s a bounce back the next quarter to make up for it and we may very well see that in Q2. The latest employment report for June showed that to some extent.

Ted Craig July 10, 2014 at 5:18 pm

But good weather isn’t always typical. So there should be reports of increased sales when there’s an early spring.

Brian Donohue July 10, 2014 at 8:56 am

‘healthy Keynesian stimulus’ means fiscal cliff tax increases and budget sequester?

Two words: monetary policy.

Brian Donohue July 10, 2014 at 8:56 am

oops… @Michael.

Bill July 10, 2014 at 10:05 am

Brian, Perhaps your argument would make more sense if BOTH the US and EU had not reduced interest rates. But, since both did, the differential in growth is noticeable, and, perhaps for some of argued for austerity, uncomfortable.

Brian Donohue July 10, 2014 at 10:33 am

Never reason from an interest rate change. The US has been at the ZLB for years. Update your talking points.

Three words then: unconventional monetary policy.

Bill July 10, 2014 at 12:27 pm

Brian, Don’t you understand what I am saying: BOTH the US and EU have had low interest rates for the entire period. The difference is austerity. Get it. I don’t need to update the talking points, I just need you to understand what is being said and not ignore the obvious.

Jason July 10, 2014 at 4:50 pm

Never heard of QE, Bill?

J Mann July 11, 2014 at 12:54 pm

I think Bill is saying that if interests rates don’t change, then there has been no change in the amount of money in the economy, even if cruder measures like counting the amount of money in the economy might indicate otherwise.

Therefore, even though the US increased money supply through QE and Europe did not, this does not count as “monetary policy” because Europe also had low interest rates.

Bill, did I miss anything? (I should stress that I agree with Brian, however.)

charlie July 10, 2014 at 8:59 am

Well, the areas people like to say where the great stagnation ends (telsa, self driving cars, drones, stupid sh**) are from companies that spend money.

(or a cynic would say they pretend to spend money, because if google has spent more than 1B on self driving cars call me a monkey)

Pretty simple really. Either spend that money or we’ll tax it to death.

cheesetrader July 10, 2014 at 9:18 am

And yet industrial metal prices are starting to creep higher.

derek July 10, 2014 at 9:58 am

Why? Here is my list. Of course I’m not one of those economic creationists who think there is someone bright and shiny that can save us all from our sins.

China parks a drilling rig in Vietnamese waters and Vietnamese folks get a bit testy and burn down factories. Nothing to see here folks, just move along.

Japan Abenomics is a catastrophic failure and the 2nd or 3rd largest economy is slowly circling the drain.

Hasn’t quite a bit of European investment been to move industrial production capacity into the lower cost eastern european countries? A shooting war in the Ukraine will put a damper on that quite effectively.

The US seems to be populated with businesses whose managerial staff have gone barking mad. The bother and nuisance of employees, how they get in the way of building the perfect system has been solved effectively by outsourcing and offsourcing. Now that brilliance is being applied to the customers. If only they would go away then we could build the perfect system. Seriously. I’m amazed at how difficult it is to buy what I need. There is no manufacturer in the US who makes a vehicle suitable for what I do for a living; reasonable payload, small and good fuel economy. I want to buy one but no one is selling. Same with the stuff I purchase for installation and sales. First they get rid of all the folks who actually built the damn business so they lost all the knowledge of what the customers need, now they won’t even fulfill orders in a reasonable time. This is consistent in all my dealings with US companies. The stupidity that was evidenced by the financial crisis in 2008 was rescued then nurtured by the gods of monetary largess.

And to my US based customers. No, no NO I am not going to submit to EPA rules. Until and unless the US Marines come across the border and force me to.

China is in far worse shape than we imagine. A data point. One of my employees went to Shanghai for holidays in February. One attraction was the high speed train. Notable was how empty it was. The commodity boom driven by Chinese consumption has been a bright spot, but is darkening with wide effect.

1/6th of the world’s population is engaged in a civil war. Low budget however, using up whatever arms richer nations have left around, so little economic benefit for elsewhere.

Cliff July 10, 2014 at 10:36 am

Abenomics is a huge success

Oakchair July 10, 2014 at 7:48 pm

No no Abenomics which has resulted in the highest rate of economic growth Japan as seen in 2 decades and has gotten Japan out of deflation is a failure, why because well I’m an idiot.

Brian Donohue July 10, 2014 at 10:45 am

I disagree. ‘Save us from our sins’? Eight million jobs lost, six long years just to get back to even. What kind of shake-out do you have in mind?

The last six years have been a time of sober consolidation for most people in the rich world. Keep on keepin’ on. Little by little. Accommodative monetary policy does ding dollar holders, as all good Austrians know, but it looks like it has generated growth and jobs in the face of higher taxes, budget sequester, and other sensible but difficult fiscal steps.

The rest of your rant was more curmudgeonly and anti-American than usual. Who pissed in your Tim Horton’s?

collin July 11, 2014 at 10:37 am

My guess why is the US doing better than Europe? A more flexible labor market (it is easier to move to Texas versus move to German), the increase in US sourced energy, and whatever the heck is causing the healthcare expense to fall the last four years.

Otherwise, the US federal government has been able to cut spending the last four years BY WITHDRAWING FROM IRAQ!

Komori July 11, 2014 at 1:52 pm

On the vehicles: What really gets to me is that a lot of the auto manufacturers have vehicles I’d love to purchase. They just won’t sell them in the US. Last time I was in the market, it was Honda with their Civic i-DTEC. Not in the market now, but if I was the Lexus IS 300h would be great, they just won’t sell it here. Heck, even the domestic automakers are pulling this stunt.

Engineer July 10, 2014 at 10:26 am

There is no manufacturer in the US who makes a vehicle suitable for what I do for a living; reasonable payload, small and good fuel economy. I want to buy one but no one is selling.

Yes indeed it’s the marketing people and their notion of “positioning”.

Where I live it’s impossible to buy reasonable-quality reasonable-price electronics.

If you want a laptop or home router that won’t die in 6 months you have to either buy a high-end model or shop in the US.

Willitts July 10, 2014 at 10:35 am

Yes, this is what the bad reaction to a deep recession and financial crisis looks like. Recession and double digit interest rates coming to a theater near you.

ChrisA July 10, 2014 at 10:41 am

Probably just noise. But if there is anything to it, might be reaction to the BIS BS report on the need to raise interest rates to stave off future crisis – presumably by causing one now. Or the recent discussions by various BOE about the need to raise interest rates to cool the housing market. Expectations are not being properly managed. .

Yancey Ward July 10, 2014 at 11:37 am

I have said it before, and I will say it again- at the end of this road, economists will be hanging from lampposts, if anyone still admits to being one.

Tom Crispin July 10, 2014 at 1:59 pm

Lawyers are that good at deflection?

Yancey Ward July 10, 2014 at 10:50 pm

The very best at it.

dead serious July 10, 2014 at 11:29 pm

We should be so lucky.

The fact that I bank CEOs haven’t even done jail time shows you how soft this country really is. And how complicit both parties are in keeping this giant financial con game going.

Ronald Brak July 10, 2014 at 8:31 pm

Maybe it’s because everyone in Europe has been watching the soccer?

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