Taking Economic Forecasts at Face Value

Markets in the US roared back to life last month; a clear sign, say the economically blind and the politically deaf, that all is well in the realm of mammon.

The Dow stacked on 700+ points. In percentage terms, the broader S&P 500 index rose by even more. The dollar strengthened too, as worried European investors flew to the “safety” of the least-bad currency they could find.

But what’s this? US manufacturing, a “mainstay of the expansion,” appears to be faltering. Reports out this week tell us that (what used to be) the backbone of the American economy “unexpectedly” contracted for the first time in three years. Bloomberg was on the case:

The Institute for Supply Management’s index fell to 49.7, worse than the most-pessimistic forecast in a Bloomberg News survey, from 53.5 in May, the Tempe, Arizona-based group’s report showed today. Figures less than 50 signal contraction. Measures of orders, production and export demand dropped to three-year lows.

Assembly lines may be slowing as consumers temper purchases of vehicles and other goods and companies limit investments in new equipment. At the same time, export markets for manufacturers like DuPont Co. (DD) and Steelcase Inc. (SCS) are finding it more difficult as Europe struggles with a debt crisis and Asian economies including China weaken.

“Manufacturing is gearing down,” said Neil Dutta, head of US economics at Renaissance Macro Research LLC in New York, whose 50.5 forecast was the lowest in the Bloomberg survey. “It’s consistent with the idea that the uncertainty is weighing on businesses. Europe is taking a bite out of the export sector.”

Funny how bad news is always “unexpected” or “worse than expected.” Economists are like boxers who always expect to land a punch…but never to receive one. Bad news seems to forever catch them off guard, knocking their quack models and pseudo-theories for six. Alas, it takes a brain to feel pain. Here bereft, the economist is always gingerly back to his feet…and always unprepared for the next uppercut.

He should take our advice: Throw in the towel, hang up the gloves and call it a day.

But hey, at least the US is not Europe. Not yet. Figures released this week showed Spain’s manufacturing activity falling to its lowest level since May, 2009.

“Economists had expected a weak figure,” reported one paper, “but this is even worse than they forecast. It underlines the steady deterioration in Spain’s economy, which is already in recession.”

The story was similar across the eurozone, where manufacturing activity continues to slow from the Thames to the Danube. Germany, France, Italy, Spain, the Netherlands and Greece all registered negative growth. As might be expected (by all non-economists), the employment situation worsened too, rising to 11.1% during the month of May…a euro-era record.

As is the case elsewhere, total unemployment figures tell only part of the story. The devil is in the demographics, as they say, where an increasingly unsettled euro-youth continues to suffer inordinately high unemployment. Even in the least-bad Eurozone nations, unemployment for those considered “young” ranges between 8-10%. But in Spain and Greece, one in two people under 25-years of age are without work. What will these kids do with all that spare time on their hands? Will they accept their gloomy, jobless fate sitting down? Will they quietly inherit the debt to which their fathers have shackled them? Will they pay into mandatory welfare programs likely to be extinct long before their time to receive benefits comes due?

Never mind all that, say those who created the necessary conditions for this mess…and who continue to throw (other people’s) good money after bad. The Troika is coming! Yes, Fellow Reckoner, after more than a decade of intervention, meddling and knob-twiddling, the statists are back to make the situation worse. Reports MarketWatch:

The heads of a delegation of European Commission, International Monetary Fund and European Central Bank officials — known as the troika — will begin a three-day visit to Athens Thursday to assess Greece’s progress made in implementing its latest 173 billion euro ($219 billion) bailout program.

“The troika visit will start Thursday and run through to Saturday,” one senior Greek government official said.

What havoc can these vapid neckties hope to wreak that they have not already wrought? Haven’t the people had enough of their…involvement? This, from the sidelines of yesterday’s meeting:

Greece conceded on Thursday it had slipped “in some respects” in implementing the cuts and reforms demanded by lenders in exchange for saving Athens from bankruptcy, and tried to persuade them to cut the country some slack.

Yes, just what the lazing Zorbas need…more “slack.”

And why not? “Give it to ’em!” we say. How much, exactly? At least enough to fashion a decent noose.

Joel Bowman
for The Daily Reckoning