Focus on US New Orders for Durable Goods.
Some days ago, Federal Reserve Chairman Ben Bernanke talked on TV about US employment; or specifically why the rate of unemployment has not fallen much further given the apparent strength of the US economy.
The fact that US unemployment rate has fallen at all is a blessing. After all, the population growth is around 1% and productivity gain is 3-4%, and sometimes much higher. Simple math might suggest that the US economy must exhibit nominal GDP growth of 4-5% just to maintain employment on an even keel.
The last Raff Report showed trends in US capacity utilisation and installed capacity. The data showed the US economy not operating anywhere near full capacity. That being the case, inflation is unlikely and no pressure is building to greatly increase employment levels for most industries.
The US leading indicator is shown above; at first glance it looks as strong as a bull’s roar. The 1st Derivative is still positive, but check out the second derivative that records the rate of change; it has been negative for some months. A change in direction of the 2nd Derivative should not be ignored and will form the subject of a Raff Report on the matter.
The Raff Report has tracked detailed US economic data as it might relate to demand for metals for over 30 years. Over that time period, the data has rarely given false signals.
Prior to 2002, the visual correlations between metal prices and US New Orders for Durable Goods was good. This was hardly surprising since in “olden times” the US was the biggest consumer of metals. It still might be today if supply and demand was adjusted for the metal content of traded goods. Based on apparent consumption China is king, but in terms of reality nobody seems to know.
The chart above shows the sharp acceleration in New Orders for Durable Goods from the depths of the GFC. What a ripper you might say; but the reality is that the pace of recovery is slowing rapidly, in fact it has turned negative. The US economy is closing in on the peak of a business cycle; it has already recovered creating a dilemma for the White House and US Treasury.
Readers not convinced by the last chart should carefully consider the next picture showing US New Orders for Nondefense Capital Goods Excluding Aircraft. New orders for aircraft are notoriously volatile and have to be left out to appreciate the broader trend in new orders of capital goods. Once again the 2nd derivative is plunging into negative territory and the 1st derivative, although positive, might not remain so for many more months.
New orders for all manufactured goods excluding defense is shown in the next picture. In general terms new orders lead industrial production by 6 to 9 months. It is no wonder that some pundits are concerned about the US sliding back into recession by year-end. It certainly seems that in terms of business cycle peaks and troughs that 2012 will probably be a watershed year.
The lackluster housing sector is depressing demand for consumer durables, which in turn is weighing on demand for fabricated metal products.
The recovery in orders for Motor Vehicles and Parts has been unspectacular, and are still well below pre-GFC levels, but moving in the right direction. It seems that households remain fearful and reluctant to commit to major items of expenditure. The charts that follow to not paint a pretty picture.
The simple truth is that the US economy is nearing a cyclical high and going forward there will be more talk of additional printing of money otherwise known as quantitative easing. It is difficult to imagine that the US will avoid a slowdown either late 2012 or early 2013. With the US running out of options to fix its economy in tandem with massive problems in the Euro Zone, precious metals are set to outperform other investments even if precious metal prices move sideways. Perhaps a repeat of 1987?
Readers of the Raff Report will recall a bearish view on US domestic gas prices which have just plumbed a new low in real terms, falling below US$2.00 per mcf. Just as Prime Minister Gillard and her posse plan to rape and pillage key sectors of the resource sector the stitching is coming undone. The US is set to begin exporting LNG from the West Coast to Asia. A collapse in gas prices will weigh on the prices of other fuels, namely thermal coal and petroleum. Also in the headlines is the pending closure of a BMA coal mine in Queensland. Commodity prices might be strong but mining and processing costs are rising sharply.
The Labor Government looks at mining as a dripping roast; but guess what, it could turn into a burnt sausage. Someone needs explain to Treasury what happens to mining profits if revenue falls 10%. It seems that there is little understanding of the term leverage that works in both directions.
The best way to put an end to a two-speed economy is to pull the rug from under the booming sector. Obtaining credit for all the QLD gas projects is going to get increasingly difficult. Perhaps the QLD gas export industry might be like a mouse plague when one day there is hordes and the next day almost none. But who will survive?
Members of Parliament on both sides of the House should always remember those very wise words from Winston Churchill at the Yalta Conference which went something like this: “it is always wise to look ahead but difficult to look further than you can actually see.”
To run a country on the basis of wishful thinking is ridiculous, but then that is what the current Government of Australia is doing.