Contraction in the North American manufacturing sector .

Very recently, the press and social networks showed a high sensitivity to the dissemination of information related to data that indicate a possible contraction of manufacturing activity in the United States, in what some argue would be a sign that the country is moving Towards a recession.

All specialists, investors, politicians and the public in general focus their attention on the facts related to the North American and Chinese economies for a fundamental reason: being the largest economies on the planet, they exert a very strong indirect influence on the rest of The national economies of the world. In the same way, for cultural reasons, mostly Americans, educated or not, devote special interest to the macro-economy issues of their country and participate, in one way or another, in the political discussions related to it. This attitude contrasts with the extraordinary passivity with which the rest of the world assumes the political acts of its representatives or of those who hold power. Passivity and stoicism that breaks from time to time and explodes to become a cycle of uncontrollable violence.

However, macro-economics is a subject of specialists, who need to possess a certain level of scientific background to be able to address, understand and explain the behavior of economic, political and social phenomena that are of some complexity. If such levels of difficulty can lead specialists to make mistakes, we cannot expect the general public to succeed in all their interpretations or views.

The content of the data to which I refer feed a periodic report that publishes the ISM with some frequency and reflects the behavior of the US manufacturing and non-manufacturing product corresponding to the months immediately prior to the publication of said report.

ISM - Report on Business - Manufacturing

Although capitalist economies are based, among other things, on the principle of freedom of enterprise and the right to make the best decision that favors our interests as economic agents, we see that economic activity is not carried out in a manner unordered but presents regulatory elements whose operation depends on a system of signals and alerts that indicate the moment in which a specific action must be taken. Just as the pilot of an aircraft constantly monitors its navigation instruments and maintains permanent contact with its control tower to carry out the appropriate and precise actions that allow the trip to be executed smoothly; in the same way, the political systems of the different countries execute the necessary acts to reach high rates of economic growth and, in this way, fulfill the first necessary condition so that the citizens who live there aspire to enjoy a standard of living highest.

So that economic activity is under constant scrutiny and scrutiny through a set of statistics and indicators of various kinds in order to allow us to form an idea about what is happening with the fundamental economic trends so that they are then activated political or governmental mechanisms, if necessary.

For management, logistics and review reasons; Statistics that measure the level of the national product, either general or by economic sector, are issued several months after the period they are evaluating. In the case of the United States, this delay is within a period of approximately 6 months; while in other countries this period of time can reach up to 24 months. As we can see, such prolonged periods of time between the date of issuance of the statistics and the period under evaluation prevent the necessary information from being taken to make the appropriate decisions regarding economic policy or act urgently before the appearance of emergencies in the macro-economy plane. 

In this sense, each nation has a set of statistical systems that show the behavior of the real sector of the economy immediately after the end of the period under study. In the United States, we can point out the ISM report as one of several examples; while in other countries figures such as the consumption of electricity are often used. In any case, the main objective is to have quick information that provides clues about the behavior of the national product. However, to have instant information you have to sacrifice other elements, such as accuracy.

The ISM report is a report that condenses unweighted qualitative data, which means that the figures she throws may present a much higher margin of error than that usually used by specialists in their research. These levels of error are not the result of the lack of competence and professionalism of those involved in the task of constructing this report, but rather the sacrifice that is made in order to have some information in the instant immediately after the end of the period under study.

Obviously, the data corresponding to the national product come largely from the accounting systems, statistical systems, management systems and control systems used by private and public companies that are considered representative of the national economy and, therefore, enter in the sample that will be used to calculate the official statistics of the nation. However, these companies, despite having data processing systems of high complexity, high speed and high cost, do not have a definitive figure of any item at the end of the current period. Without this information it is impossible to build a system of indicators that illustrates, quickly, about the trends that are materializing in the national economy. Despite this, we know that the senior officials of these companies, who are considered representative of the economy, because they handle information related to the activity of the company in which they work, can provide data and clarify their nature. qualitative, which are likely to be processed schematically, to result in the report we are referring to.

It is evident that the margin of error associated with the information obtained in an interview or through the emptying of surveys, which do not imply commitment or responsibility, is much greater than the data coming from the financial statements of these companies, these being endorsed by signatures of public accountants, consulting firms, auditing firms and support of the corresponding supervisory public body. Here is the reason why we should be aware of the margin of error implied in reports of this type. If these possibilities of inaccuracy exist in these reports of rapid emission, we must not hurry to affirm that the North American economy is heading towards the disaster. On the other hand, we see that the aforementioned report, although it indicates a contraction in the manufacturing product, we see that it also indicates that the non-manufacturing product maintains a growing trend, which minimizes the possibility that the US economy is entering a recession stage But then, how can we interpret the content of the ISM report ?

ISM - Report on Business - Non Manufacturing

First of all, we have to be clear that the US economy is going through a period of radical transformation in its structure during the last thirty years due to the rise of the telecommunications sector, the digital economy and the overvaluation of the dollar . To illustrate this phenomenon, we must take into account that fifty years ago the presence of the manufacturing sector in the stock market activity was evident. Then we must evaluate the representative value of the sample used to produce this report since a sample of companies representing the manufacturing sector designed five or ten years ago may not be reflecting the reality that prevails today. An economy in constant transformation, as is the US economy, must constantly make the necessary adjustments to its statistical systems and indicators, otherwise, we could be observing things that do not exist.

My personal opinion is that the North American manufacturing sector has been growing for many years by a magnitude less than proportional to the growth of the national product, which means that, in relative terms, this sector is less and less important. In the same way, I suspect that within the manufacturing sector there has been a process of closing companies and shrinking existing companies that fails to counteract the expansive effect generated by another group of companies in the sector that take advantage of their comparative advantages for such purposes. This is how the consequences on employment in the sector can be devastating since on the one hand a long process of job loss would be occurring as a result of the disappearance and operational shrinkage of existing companies that is not compensated by the productive expansion of the winning manufacturing companies for reasons of automation, robotization and the handling of very high technology elements.

The decision that Americans must make is that they should apply incentives to manufacturing activity or allow the US economy to adopt the structure imposed by the circumstances. In this sense, the commercial war represents an incentive for the manufacturing sector because this commercial policy would allow US products to recover the space that, at the moment, is being occupied by foreign products.

To get an idea of ​​the magnitude of the growth of the North American economy in the last decades, let's see that, the colossal North American trade deficit coincides with a slow growth of the North American manufacturing product. That is to say, there was not a displacement of North American products by foreign products, but the markets offered increasing quantity of both products.

United States GDP From Manufacturing

Despite the recent social problems, it is clear that the United States is the largest, strongest and most stable economy in the world. So far there are no reasons to think that economic events linked to a recession may occur in the coming months.

Massive investments in infrastructure will prevent recession in China

A few weeks ago we witnessed the announcement of the US government about the possibility of restrictions and obstacles to those US investments made in China directly or indirectly, using or not using the stock market; as well as Chinese investments made in the United States, especially those that are financial in nature, such as government bonds. As we can see, the Trump Administration is sending clear and clear signals to global economic agents that cannot be interpreted without increasing the risk margins that condition the economic activity they carry out.

US investment in China rises despite trade war, says consultancy - Tom Hancock - Financial Times

The North American investment was the fundamental base on which rested the portentous growth of the Asian giant that, together with the low wages and the access of the Chinese products to the North American market, generated an economic dynamics so accelerated, as it has never been seen before. Now, things have been changing, the volume of North American investment has been surpassed by the volume of Chinese investment, so, although it continues to be important, it no longer has the primary character it had a few decades ago. However, it is gross investment volumes that temporarily prevent China from taking the path of economic recession.

Expectations anticipate that the process of correction of the US trade deficit will continue, so it is expected that the volume of Chinese exports to that country will be further reduced, which means a reduction in the aggregate demand of the Asian nation and the Entry into the route of the economic recession.

We would have said that the characteristics that the Chinese economy has prevents it from having an effective monetary and fiscal policy that would allow it to counteract the effects of a probable economic recession that is yet to come, so we suggested that a fairly heterodox measure, such as subsidy to companies, could contribute, to some extent, to shovel the effects of the referred recession.

However, connoisseurs of the Chinese economy and those who manage to obtain information circulating on the grounds of the Chinese Nomenclature say that such recession will not occur because the Asian giant has the resources to undertake investment projects that maintain the Chinese economy in constant dynamism. 

If the Chinese Nomenclature, led by Xi Jinping , decides to allocate surplus sources of the Chinese economy to the execution of investment projects of various kinds, the global economic outlook changes substantially. We would have then that the next decade will show us two nations enjoying a great economic boom, China and the United States. This would happen despite the fact that as of 2023 the US economy began to experience problems with pricing and while, on the other hand, the rest of the world was torn between recession and economic stagnation. However, the scenario is still apocalyptic; by the end of the next decade we could be attending the most spectacular economic contraction event that has ever happened: China could undergo a process of economic contraction that would exceed 20% annually, but, without consequences for the rest of the world; it would be a kind of "disaster of the Tower of Babel".

One of the drawbacks posed by the very rapid growth of the Chinese economy was that it was not accompanied by the strengthening of the institutions of this immense nation, for the simple reason that there was no time for it; there was not even time to count the money generated by the spectacular profits.

Two of the social benefits that institutional strength brings are credibility and a political system that allows the best possible decision to be taken, given the circumstances. The credibility in the institutions contributes in many ways to the well-being of the citizens who belong to a society that has this characteristic, but, as far as we are concerned, institutional credibility is an indispensable requirement to have a very high Government borrowing capacity. China, despite having excellent economic, social and financial indicators, lacks a government order that has a very high debt capacity as it does, for example, the United States or some European countries. Being able to access a gigantic fiscal deficit is an indispensable requirement for government authorities to perform the necessary maneuvers to avoid economic collapse. China does not have that maneuvering power.

On the other hand, holding power does not guarantee the best decision. A system of political freedoms allows critics to point out, without any fear, what are the points at which some authority is failing; This system may also have mechanisms that oblige said authority to amend the course and correct the mistakes made in the event that it does not wish to do so. Just as the Chinese Nomenclature and the post-Mao reformers brought the Asian giant out of the economic and social disaster in which their country was located, so they can return this nation to its starting point; without anyone being able to do something to prevent it.

The North American investment that begins to be established in China from the decade of the 80 was an investment that generated very accelerated dynamics, an investment destined to the production of tradable goods and services that will be commercialized in other latitudes; it was an investment carried out by the private sector in order to generate large profits, therefore, it was a beneficial investment for society. On the contrary, the investment that China has been developing is fundamentally an investment in infrastructure, which generates a spiral of economic growth more violent than the investment destined to the production of goods and services due to the characteristics of its spending structure; but these do not have a favorable impact on the accounts of the external sector because the service provided by these structures is not transferable. In the same way, the expansive effect that these investments will cause in the internal economy will be merely transitory, since it does not generate the multiplier effects that will prolong this expansion during several economic periods. The operation of the infrastructure does not generate profits if same, but depend on the dynamics caused by other economic sectors. Basing a nation's economic growth on infrastructure investment is dragging that society to collective suicide.

Politicians know that the construction sector generates explosive growth dynamics throughout the economy. In Latin America, for example, political groups that hold power are very concerned about having good interaction with the representatives of the construction sector and providing all the collaboration so that this sector does not find any obstacle in their efforts and projects, but they understand It is also a sector that presents a very unique behavior, so it would be a major mistake to base the economic growth of the nation on the behavior of the construction sector. Such are the characteristics of this sector that Latin American politicians prefer, rightly, to continue with the growth model based on the export of raw materials.

Indeed, the content of what is discussed here is in line with the expectations of investors who handle large money flows globally. This is what indicates the evolution of the yields of Chinese bonds in the very long term since the onset of the trade war. If investors migrate from their long-term Chinese bond positions to other positions, it is because, given the current circumstances, they expect China to be in an unfavorable situation in ten years compared to its current situation. The admirers of the Chinese economy intend to overthrow the previous argument stating that, at this time, the US ten-year bond also shows an unusual rise without economists claiming that an economic catastrophe is expected to occur in the United States.

China Government Bond 10Y

In these pages we maintain that, in the very long term, the North American economy will suffer the consequences of a certain global economic recession caused by the commercial war but with a much lower intensity, so that this prediction would not justify an accentuated movement in the performance of the North American ten-year bond. The recent increases in the yield of these bonds can be attributed to adjustments carried out by the Federal Reserve at the time of operating its monetary policy. In any case, to know the different levels of alarm that the financial instruments of the United States have, we can observe the situation that occurred during the Second Petroleum Schock that occurred at the end of the 70s, during the Cold War and after losing the Vietnam War , was the worst moment in the recent history of that country after the bankruptcy of 1929. At that time the yield of the US bond at ten years reached 18%. Therefore, if this indicator reaches values ​​of 2 or 3%, the last thing we can suspect is the advent of a disaster in the US economy. 

United States Government Bond 10Y

In the same way, in these pages we maintain that the global economic recession should appear immediately after the arrival of the Chinese recession. Only if China undertakes an aggressive investment plan in order to prevent such recession from happening, would we have a situation in which Europe, Latin America and part of Asia have to face recession and economic stagnation events before the Chinese recession happens .

At this time some European economies show signs of economic stagnation that cannot be attributed exclusively to the commercial war. This phenomenon, together with Brexit , has caused European economic agents to be extremely cautious when making their consumption and investment decisions but, by themselves, they are not creators of the European stagnation. This extreme prudence may render the monetary incentive plan that the European Central Bank seeks to implement ineffective. 

The trade war cannot be approached as an economic phenomenon that will impact the world economy for one or two quarters. It is an event that will generate consequences for one or two decades.