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Monday, July 5, 2010

Is the Sky Falling? Few Media Outlets Highlight Continued Global Manufacturing Expansion

Happy 4th (now 5th) of July! We thought we'd quickly again touch on an apparent tendency in the media to emphasize the negative and also relay a piece of news from the WSJ we Tweeted last week. Perhaps we've shared too much "economy" news in recent weeks (given our primary emphasis on stocks), yet the below table provides additional evidence that things remain okay despite gloomy headlines. On the latter, consider two headlines that surfaced the same day as the below data, the first of which was featured front and center on Yahoo! Finance (YHOO) Thursday afternoon:

Fears that the economic recovery is fizzling grew Thursday after the government and private sector issued weak reports on a number of fronts.
The above is from the AP. Not to be left out, the WSJ also chimed in with:

Global Manufacturing Loses Momentum, Fueling Worries

Our view: no question, to risk stating the obvious, jobs and real estate remain a challenge for the U.S. economy. As we've pointed out previously, creative destruction and constant corporate streamlining are perpetual negative pressures. AND, the real estate sector? Let's revisit one of our posts from December, Interesting Stat: How Much Private Sector GDP is from Construction and Real Estate?:
  • The data suggest that nearly 21% of metropolitan area private sector GDP is derived from construction and real estate (residential and commercial). If we add in public sector GDP -- which also happened to be approximately 21% of total GDP in 3Q09 based on government data (link here) -- and assume that the private sector GDP referenced in the table includes personal consumption, private investment, and net exports for each metro area, then the contribution from construction and real estate declines to around 16-17% of total GDP. 
So, a healthy real estate market is critical for GDP growth. Yet, as we noted in another post, real estate runs in long cycles up and down, typically seven years up and down. EXCEPT, the last cycle was approximately "up" for ten years, the last few of which were extremely up. Thus, we might only be in year three or so of a potentially prolonged real estate down cycle. In our view, more time is likely necessary to absorb excess inventory, both residential and commercial.

The good news? Lots of positive things are happening here and around the world across various sectors, including technology and elsewhere that should keep the economy chugging along. AND, the good news we tweeted last Thursday, also from the WSJ (but from its economics blog, not front and center in the WSJ or elsewhere):
  • "Manufacturing activity continued to expand in much of the world in June, though the pace of expansion was again slower in most countries. Greece, Hungary and South Africa were the only countries registering a contraction."
We emphasize "continued to expand".... The table best tells the story:

Manufacturing Activity, by Country
Click on the top of any column to resort the chart. (See last month’s chart.)

Country    June PMI    May PMI    Monthly Change    Expanding or Contracting   
Australia 52.9 56.3 -3.4 Expanding
Brazil 52.7 52.4 0.3 Expanding
China 52.1 53.9 -1.8 Expanding
Czech Republic 57.6 57.6 0 Expanding
Euro Zone 55.6 55.8 -0.2 Expanding
France 54.8 55.8 -1 Expanding
Germany 58.4 58.4 0 Expanding
Greece 42.2 41.8 0.4 Contracting
Hungary 49.5 49.6 -0.1 Contracting
India 57.3 59 -1.7 Expanding
Ireland 51.8 54.1 -2.3 Expanding
Italy 54.3 54 0.3 Expanding
Japan 53.9 54.7 -0.8 Expanding
Netherlands 55.9 56.5 -0.6 Expanding
Poland 53.3 52.2 1.1 Expanding
Russia 52.6 52 0.6 Expanding
South Africa 48.4 51.1 -2.7 Contracting
South Korea 53.3 54.6 -1.3 Expanding
Spain 51.2 51.5 -0.3 Expanding
Switzerland 65.7 66.4 -0.7 Expanding
Taiwan 53.8 57.4 -3.6 Expanding
Turkey 53.2 56.5 -3.3 Expanding
U.K. 57.5 58 -0.5 Expanding
U.S. 56.2 59.7 -3.5 Expanding
Sources: WSJ Research

Our point: most of the world is still expanding, something few media outlets seemed to prominently highlight. While deceleration can be seen as a negative, some sort of slow-down off of huge Y/Y growth comparisons driven by initial recovery and inventory restocking was inevitable. Based on positive global trade figures, our expectation is that the demand remains sufficient to pull through inventories and support further growth. Alas, the sky isn't falling. 

Happy investing,

Jeffrey Walkenhorst

Disclosure: long YHOO.

© 2010 Jeffrey Walkenhorst
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