Making Sense of Economic Indicators Part Three

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This is Part Three of a three-part series. Here are Parts One and Two.

Clearly, poor economic data creates an immediate reaction on the part of markets the world over and unfortunately the herd mentality can create a global rout. We remain less concerned about actual numbers per se, and much more concerned about the political climate in Washington and what that does for the economy.

This reminds me of a class I took while in grad school Intro to Public Policy. We had to write about a particular government policy and then an alternative government policy to a particular issue. I remember getting my hand slapped when I asked, “Can we write about doing nothing as a potential policy alternative to a particular issue? So, the professor didn’t like that question, but certainly “doing nothing has ramifications. We’ll explore this point momentarily.

But First, A Look at the Numbers

As my colleague Taras reported yesterday, auto producers certainly have their share of concerns, particularly over demand as well as too much capacity. Automakers themselves make similar cautious statements for the balance of the year.

PMI data has also turned a bit negative. Although all eyes rest on the closely watched PMI number as it relates to the manufacturing economy (that number went from 55.3 to 50.9) — barely in the growth zone — we tend to look at some of the report’s other elements that begin to tell part of the economic story. This month we noted a couple of changes that play a significant role new product orders which moved from 51.6 percent in June to 49.2 percent in July, reversing a 24-month growth trend. The second trend involves the backlog of orders now following a negative two-month trend moving from 49 percent to 45 percent in July. The one bright spot: export orders. At least they appear to continue to grow.

But as we reported yesterday, if absolute consumer demand continues on its current trend, we can envision a scenario where any second half manufacturing dip might show stronger numbers early in 2012. Of course, that requires more than faith, but sustainable underlying consumer sentiment.

Washington Has Put the Brakes on the Economy

Whether you believe John Maynard Keynes has little to do with what actually occurs in Washington (or rather, what doesn’t). Consider the following issues repeatedly articulated by companies in the manufacturing sector (some of those companies hold great sums of cash):

  1. What will corporate tax rates look like in 2012 and beyond?
  2. Will we have a carbon tax?
  3. How will the EPA regulate ozone standards? How many companies in each state fall “out of compliance?
  4. Will the NLRB (National Labor Relations Board) allow businesses to grow in right-to-work states?
  5. What will new health-care legislation actually cost my company and by when?
  6. Will we take advantage of lower-cost natural gas to create energy independence or will we put in place regulations with unknown costs?

These issues represent the lion’s share of what businesses need Washington to address to justify the “investments needed by our economy. Define the unknowns and let businesses develop the ROI and business case to spend some of that cash. Leave these areas nebulous, and it’s no wonder the cash sits on the sidelines.

–Lisa Reisman

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