A recent article in the Wall Street Journal explores how exports and imports of goods are lagging far behind their pace of past expansions, threatening future productivity and living standards.

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For decades, during periods of economic expansion, the growth of total imports and exports usually outpaced world GDP growth. However, during the past 3 years, the rate of growth in global trade can’t even match GDP growth.

Trade volume growth vs GDP growth. Source WSJ

Trade volume growth vs GDP growth. Source: WSJ

During the first decade of the new millennium, the world saw a burst of globalization, thanks to the huge expansion of emerging economies including China. A lot of production capacity was built during this period in order to meet the huge appetite of these growing economies. Read more

Long term forecasting is, in many people’s view, about as accurate as putting your finger in the air and taking a guess.

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Nevertheless, it is far from a fruitless exercise. If nothing else it makes us step back from the everyday pressures of business and look at the bigger picture, try to assess long-term trends and fundamental changes that are taking place that can largely pass us by on a day-to-day basis.

It also encourages us to look at our business and make judgements as to how well our current model would fit in a variety of future global scenarios. So reviewing the Economist Intelligence Unit’s latest report looking at the long-term forecast up to 2050 has much to commend it.

Emerging Markets Emerge

The report is available on download free from the EIU here and merely requires a registration. The report opens with an attention grabbing comparison of the top ten economies at market exchange rates by 2050 as predicted by the EIU.

Source: The Economist Intelligence Unit

Source: The Economist Intelligence Unit

Crucially faster growing emerging markets move up into the first , thrid and fourth slots as the old order, relatively speaking, falls back on slower growth. Demographics, of course, plays a part with aging populations in Europe and Japan limiting growth potential and the reverse in places such as India, Indonesia and Mexico driving growth in gross domestic product if challenging the ability of those countries to rapidly improve GDP per capita. Read more

The only US rare earths miner may miss a payment deadline today, President Obama signed an extension of funding for the Highway Trust Fund for just two more months and US economic growth actually contracted in the first quarter.

Molycorp Loan Payment Due Today

Rare earths miner Molycorp is expected to announce it will skip a $32.5 million loan payment today, triggering a 30-day grace period that could lead to a bankruptcy filing before the end of June, the Wall Street Journal reported, attributing the information to people familiar with the matter.

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In 2010, after Molycorp — formerly a unit of Chevron Corp. — was sold to private-equity firms in 2008 for $80 million— the company was able to raise $394 million in a public offering. Around that time, China tightened existing quotas on rare-earths exports in a bid to rein in overproduction and keep more supply available for domestic manufacturer and prices soared.

Since 2011, however, rare-earths prices have been on a long slide downward. Now with a market capitalization of around $150 million, Molycorp is indebted and unprofitable. Customers are putting in orders, but the company hasn’t met production targets at its Mountain Pass, Calif., mine and is in restructuring talks with firms representing its creditors.

Obama Signs Highway Funding Extension

President Obama on Friday signed a two-month extension of highway funding into law, the White House announced in an evening statement.

The measure, dubbed the Highway and Transportation Funding Act of 2015, extends several aspects of infrastructure funding through the end of July.  That includes highway aid and transit programs under the Highway Trust Fund, as well as freeing up monies in the fund and allowing tax revenues to be deposited in the fund.

White House press secretary Josh Earnest criticized the short-term funding measure earlier as lawmakers punting on the issue, encouraging Congress to pass a longer-term deal.  The stopgap measure represents the 33rd temporary fix for road project funding since 2008, Earnest noted, leading to some uncertainty among states for major highway plans.

US GDP Contracted in Q1

US economic growth in the first three months of the year was even weaker than initially estimated. The Commerce Department said Friday overall economy, as measured by the gross domestic product, shrank at an annual rate of 0.7% in the January-March period. That’s down from 2.2% in the fourth quarter of 2014.

GDP is the broadest measure of US economic strength, seeking to measure the total value of all goods and services produced in a calendar year.

An interesting post in the FT by a leading economist examines the growing concern that seven years after the financial crisis and the use of unprecedented stimulus measures and extended near-zero interest rates,the world may be stuck in a long-term trend of low growth.

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The author, Gavin Davis, is not to be dismissed as just another academic, he was head of the global economics department at Goldman Sachs from 1987-2001, and served as an economic policy adviser to the British government in addition to being an external adviser to the British Treasury.

Source FT

Source: FT

Chinese, Japanese Growth Down

Global growth is unquestionably slowing.

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It almost seems counter-intuitive, but when poor growth results come out of China there can often be a mini rally in prices as investors bet poor growth will necessarily mean more stimulus by Beijing.

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As a recent article in the Telegraph newspaper noted, the final figures for 2014 suggest China will probably turn in a 7.4% growth rate for last year, the lowest since 1990. Not surprisingly iron ore, coal and copper – commodities for which China is by far the world’s largest consumer – have all fallen in 2014. Take iron ore for example, slowing demand and rising supply have resulted in prices falling by 47% last year to $71 per ton now.

The surplus in iron ore supply is expected to widen to around 300 million metric tons of ore by the end of 2017 as major producers such as Rio Tinto and BHP Billiton continue to consolidate their output into bigger and more productive mines to reduce per-ton production costs.

Over the last year, the IHS Material Price Index for commodities has fallen 20%. The advisory firm’s chief economist, Nariman Behravesh, is reported as saying he expects that commodity prices will slide by a further 10% on average in 2015, despite the increasing chance that China’s government will underwrite a massive stimulus program to revive growth.

But we question this prevailing philosophy, how probable is it that Beijing will come riding to the rescue of the commodity bulls? Throughout 2014 China made it clear they are seeking to steer the economy away from export-led growth and towards domestic consumption. It is widely accepted this will result in lower growth but a more balanced and sustainable economy in the long term.

Having already taken much pain and achieved significant progress why would Beijing do a U-turn and pump investment into the economy? Particularly into areas that encourage industrial expansion where the country already has massive over-investment and excess capacity. Rules around bank lending and interest rates may be slackened to revive, or at least stabilize, the housing market, but Beijing is not going to oversee a boom in construction again. That caused no end of problems in the past and is unlikely to be tolerated this year.

Furthermore 7%+ growth is still a substantial driver of new jobs in the second-largest economy in the world, particularly when China has such poor demographics regarding new workers coming into the workplace. The rate of peasants coming to the cities has slowed as growth has moved westward inland, so the need for 10% growth rates is not what it was 10 years ago.

In short, we see this obsession with 7.5% plus growth rates and the implication that anything less will result in massive stimulus measures absurd, and feel we should become used to slower growth in China with all that it implies for lower metal demand growth in the second half of this decade.

The last reason China’s screwed? Absolute population. (Read the Top 3 Reasons in Part One here.)

The number of Chinese is likely to peak at below 1.4 billion sometime after 2020. Today, there are four Chinese for every American. By the end of the century, that ratio could fall to between 1.9 and 1.25, according to Beardson, with profound implications for the relative weight of the economy in the world.

As China’s recent mini-stimulus shows, while paying lip service to transforming the economy from investment-led to consumption-led, the reality is “old habits die hard.”

Beijing’s stimulus is right out the top drawer of traditional infrastructure-focused investment. In addition, state-owned enterprises account for a third of GDP, yet suck up 90% of credit, and until the state loosens control of interest rates and lending, that won’t change. Encouragingly the recent plenum made specific mention of such intent, even if it did not lay out any timetable.

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Some would argue the super-cycle is already over and in terms of double-digit growth, it almost certainly is.

But even Chinese growth of 7% today is sucking up commodities at a faster rate than 10-12% was in 2007, simply because it is 7% of a much bigger GDP number.

Miners have taken heart from recent rises in the rate of GDP growth to sustain their belief the economy has bottomed and will continue to rise into next year. And indeed it may: as we wrote recently, the Chinese economy is benefitting from a mini-stimulus this summer that supported investment in infrastructure and seems to have boosted the fortunes of the crucial construction industry.

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Read the first part of this post here

Would the US, Britain, or Japan change policy at the request of foreign powers because the foreign powers were, relatively, not doing as well? I don’t think so, especially if that meant lower support for exporters and industry, stoking inflation, and boosting internal consumption when the economy already has the lowest unemployment rate in Europe.

The villain here is not Germany, but the Euro. Arguably, if Germany left the Euro, one could see some immediate corrective swings occurring. Germany’s new currency would rise dramatically against the “new” Euro, and the remaining Euro countries would benefit from a massive devaluation in their currency, boosting competitiveness.

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Unfortunately, there would be no one to fund the hundreds of billions of dodgy loans and outright debt the area is saddled with. Because what is oft overlooked is the fact that Germany has been the largest contributor to the European Stability Fund and the European Central Bank. German guarantees supporting the existing bailout fund amount to €211 billion ($285 billion). The ESM will require a capital contribution from Germany. If the ESM lends its full commitment of €500 billion ($675 billion) and the recipients default, Germany’s liability could be as high as €280 billion ($378 billion).

As the FT points out, the size of these exposures is huge in relation to Germany’s GDP of around €2.5 trillion, and German household assets estimated at €4.7 trillion. Nor is Germany without its own problems. It has substantial levels of its own debt (over 80% of GDP), an ageing population, and deteriorating dependency ratios, to compound its problems.

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No wonder Germany suggested taking over the running of the Greek economy early in 2012. They wanted to be sure a major default didn’t start a domino effect that would end at Germany’s doorstep.

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What do you do when the US government shutdown prevents data releases? Start quoting Benjamin Disraeli.

That’s exactly what Bill Strauss, chief economist at the Federal Reserve Bank of Chicago, resorted to doing during his keynote speech at Day One of our conference, Commodity/PROcurement EDGE.

As Disraeli said, “there are lies, damn lies and statistics,” Strauss quipped, when talking about the labor market. Of course, national statistics are harder to come by as the federal government shutdown drags on, and agencies that usually report them are forced to take a break. That’s the case for the BLS, and the latest unemployment report, which was to come out last week and is now delayed.

Labor Outlook

Shutdown notwithstanding, looking over the last several years, 6.8 million jobs have been added since 2010 and over the past year added 2.2 million jobs over past year. By the middle of next year, there will be a new record high in US employment, which politicians will celebrate. “I will not be celebrating,” said Strauss. His take is that we’ll still be in the hole a year from now. The most recent reading was for August, a 7.3% unemployment rate, which is very misleading.

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How advanced is advanced manufacturing, really?

Perhaps the real question is, will advanced manufacturing advance the economy overall, and contribute enough to make US industries sustainable in our global environment?

Alright, enough advancement. Let’s take a look at a recent NPR article’s take on Chicago ­­– the fair city we publish from – and its manufacturing pedigree, and how the city’s metro area essentially serves as a proxy for US industry at large.

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