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US Manufacturing Indicative of Double Dip Recession

-- Posted Wednesday, 3 August 2011 | | Disqus

By: Dr. Jeffrey Lewis


The double dip is one of the worst phenomena of an on-going recession.  When an economy double dips, the losers of the first dip who were confident enough to enter into a small recovery are wiped out, thus setting the course for a very long second leg in an economic crisis.


The cause of recessions and double dips are respected by all schools of economic thought.  Economists suggest that the boom often turns to bust when stockpiles of wholesale goods become too large, and thus industry cuts back to allow wholesale inventories to ease with the cyclicality of demand.  The result is slowing employment, faltering economic activity, and an eventual chain reaction which spreads throughout the entire economy.


The United States manufacturing sector seems to be in such a lull.


According to the Institute of Supply Management, a trade industry responsible for the Index of Manufacturing Activity, manufacturing confidence found a two-year low in July.  The reading was reported as 50.9 percent, off from the 55.3 percent in June.  Astute followers of the news will notice that this was the lowest reading since July 2009, which just happens to be the month that economic think tanks declared the recession over.


Whereas any reading over 50 is growth, the index had previously risen for 23 straight months.  Now, failing to reach two years of consistent growth suggests that a double dip is on the horizon.  


Excuses for the failing manufacturing industry are plenty.  Among most economists’ responses were claims that the Japanese earthquake would necessarily slow the manufacture of cars in the United States, especially from foreign firms such as Toyota Motors.  The slowdown does naturally affect some manufacturers within the industry, but American based automobile manufacturers are picking up the slack in stride. 


Analysts should wonder if the slowdown in US manufacturing isn’t the result of a foreign happening, but one which happened domestically: the debt ceiling debacle.  Manufacturers typically find the US to be a costly place to do business; however, the benefits are plenty.  Among the biggest benefits is the realization of relative political security in knowing that their property and plants will not be seized by government overnight, as is the case in many developed world nations.  US manufacturers can plan further into the future in the United States, making it an excellent place for long-range projects like manufacturing centers.


We should also wonder why the weak US dollar is doing so very little to propel manufacturing.  The strongest months for US manufacturing were in the first months of the year, when the dollar was at its strongest.  Year to date, the US dollar has given up 7.5% to the Euro, 7.3% to the Australian Dollar, and just over 5.2% to both the British Pound and Japanese Yen.


Any way you slice the recent economic report, you will find that it does not paint a good picture for the US economy.  Weakness in manufacturing removes hours from employee schedules, reduces demand for the US dollar for international sales of manufactured goods, and will ultimately trickle through every other industry.


Investors should know by now that any response to manufacturing weakness will be currency debasement and lower dollar values.  This bodes well for investment metals.


Dr. Jeffrey Lewis

-- Posted Wednesday, 3 August 2011 | Digg This Article | Source:

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