May 30, 2013 Patrick Oliver-Kelley

US Overview

Orders for U.S. durable increased in April after falling for seven months as companies invested in aircraft and capital equipment. The 1.5 percent gain in bookings for goods meant to last at least three years would follow March’s 6.9 percent decline. Orders excluding transportation equipment may have risen 0.5 percent last month after dropping 2.9 percent in March.

Quickening activity in the housing and auto industries may ripple throughout manufacturing, rendering the economy better able to recover from a slowdown this quarter. At the same time, government cutbacks, higher taxes on consumers and cooling exports are crimping demand, which means any rebound will be slow to develop. Orders for non-defense capital goods excluding aircraft picked up by 0.5 percent last month following a 0.6 percent drop in March.

The U.S. economy cooled in the second quarter, giving businesses a reason to reduce the amount of stockpiles they hold. The federal government has also slashed outlays under sequestration, and American earners are facing increased payroll taxes.

Eurozone

europe in recession

Reform is underway across most of the euro zone and some southern European countries are regaining their competitiveness. But it is too early to exhale. The idea that the euro was yesterday’s problem is a dangerous figment. The malaise is spreading to core countries. Retail sales are falling, unemployment is not. Government, household and company debt is still excessive. Europe’s leaders must grasp the nettle and act. Stagflation is staring in the face of the entire euro zone. Growth boosting reforms are a must. It should pursue the free-trade agreement on offer from the United States, its biggest trading partner. It must muster the will to do what must be done. Politicians are squandering the chance for an orderly reform. The French-German relationship, the zone’s most important one, has seized up. If it does not move forward, Europe will be under a shadow for years to come.

The European Central Bank lowered its growth forecast for 2013 to -0.4% from a previous estimate for 0% growth, and the growth forecast for 2014 was cut from 1.1% to 1%. Furthermore, this year’s inflation forecast was cut to 1.7% from 1.8%, and inflation for 2014 is now forecasted at 1.6%. The ECB’s monthly bulletin further said that risks to Euro-zone economic growth remain to the downside, while the risk to inflation is balanced.

Asia

China’s march to global dominance in manufacturing is slowing down. The country’s spectacular economic growth has vaulted large segments of its population into the middle class, and they want better pay and benefits, shorter work weeks, and other perquisites that their Western peers enjoy.

As China’s momentum slips, U.S. manufacturing fortunes are on an upswing. U.S. corporations made unusually high profits in the wake of the Great Crash: During the weak recovery years of 2010-2012, after-tax corporate profits were 43% higher than during the stronger recovery of 2003-2005. Workers took the brunt of the decline, while corporations invested their savings in a brutal restructuring of production operations. Cruel as that was, the United States has emerged from the crash as one of the world’s most cost-competitive manufacturers.

While data supporting the manufacturing recovery story are mostly anecdotal, the anecdotes are coming in floods. Surveys show fully one fourth of US companies offshoring have been moving some or all of their production back home. Factory automation keeps labor-force costs in check, and U.S. manufacturing unions are far less militant than they once were. Caterpillar, Ford, and Whirlpool have been reshoring major product lines as well.

Meanwhile, an impressive list of foreign companies is relocating factories to the United States: Samsung is building a semiconductor plant in Texas; Airbus will make planes in Alabama; Toyota is outsourcing production of minivans to Indiana for export to Asia. Rolls-Royce is expanding its U.S. airplane engine parts production operations to service its global customers.

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