Tuesday, May 10, 2011

Manufacturing Is Leading the Whole Economy

Bloomberg -- "Once-ailing manufacturers are enjoying a robust rebound as cost-saving moves from job cuts to a greater reliance on technology help drive stronger-than-forecast growth. The shift has helped set the stage for a potential “manufacturing renaissance,” says James Paulsen, chief investment strategist at Minneapolis-based Wells Capital Management. He predicts the industry will set the pace for U.S. expansion and the American stock market during this decade, as technology did in the 1990s.

“Manufacturing is leading the whole economy,” said Paulsen, whose firm oversees about $340 billion. U.S. manufacturers “had to find religion. They’ve really cleaned up their balance sheets. What is left is the cream of the crop.” 

Investors’ confidence in the industry is evident in the Industrial Select Sector SPDR Fund (XLI), an exchange-traded fund made up mostly of manufacturers including Peoria, Illinois-based Caterpillar Inc. (CAT) and Boeing Co. (BA) in Chicago. The fund has climbed 37 percent since Dec. 31, 2009, compared with a 20 percent rise in the Standard and Poor’s 500 Index (see chart above, click to enlarge)."

35 Comments:

At 5/10/2011 7:49 AM, Blogger VangelV said...

Boeing? While its existing lines of civilian aircraft are well engineered and sold in a competitive marketplace Boeing's military products do not get sold in a competitive marketplace. The fact that Boeing benefits from trillions wasted on foreign wars is not exactly the good news that is being spun in the media. Then we have the big design and development problems with the new Dreamliner, which ultimately may turn out to be a nightmare that drives the company towards insolvency.

 
At 5/10/2011 8:24 AM, Blogger PeakTrader said...

Small businesses need to take up the slack.

Nonetheless, "Corporate America" has been strengthening for decades.

U.S. multinationals offshored low profitable goods, imported those goods at lower prices and at higher profits, redeployed resources into more profitable goods, including goods with market power, and freed-up resources for emerging firms.

U.S. industrial and tech firms have much stronger balance sheets, particularly after the quick and massive "Creative-Destruction" process, mostly from 2000-02.

 
At 5/10/2011 8:42 AM, Blogger PeakTrader said...

Small-Business Index in U.S. Fell in April to Seven-Month Low
May 10, 2011

“Owners found no reason to be optimistic about the future and so no reason to pick up the pace of spending and hiring,” William Dunkelberg, the group’s chief economist, said in a statement. “Spending must recover here to get employment up and running.”

 
At 5/10/2011 8:59 AM, Blogger PeakTrader said...

Small Business Optimism Falls Again
May 10, 2011

A growing gap is emerging between the large corporations and small businesses, even as expressed by the S&P 500 vs. the Russell 2000 (whose members are far bigger than those in the NFIB survey).

Just 16% of survey respondents plan to increase hiring, down 2%.

 
At 5/10/2011 9:10 AM, Blogger PeakTrader said...

Other related small business news (May 10, 2011):

“It’s difficult to know exactly why the outlook for small firms is in decline; but it’s a safe bet that political and economic uncertainty – about the deficit, the threat of inflation, rising energy and healthcare costs – are at top of the mind for most small-business owners.”

The disparity “suggests that the bulk of new hiring is happening in larger firms and the smaller counterparts on Main Street – the ones traditionally responsible for leading the country out of recessions – are still struggling to hire.”

Some good news?:

The report “could have been much worse”...said Ian Shepherdson, chief US economist at High Frequency Economics. “Small firms remain gloomy, and hiring and [capital expenditure] intentions are still very weak, but we think this should be the floor.”

 
At 5/10/2011 9:22 AM, Blogger VangelV said...

U.S. industrial and tech firms have much stronger balance sheets, particularly after the quick and massive "Creative-Destruction" process, mostly from 2000-02.

Do they? And how does it benefit US workers when the capital is deployed abroad and creates jobs for foreign workers instead?

 
At 5/10/2011 9:35 AM, Blogger PeakTrader said...

VangelV, it frees American workers of unnecessary jobs, and allows limited resources (e.g. labor, capital, land, raw materials, energy, etc.) to shift into higher skilled-higher quality-higher paying U.S. jobs.

 
At 5/10/2011 9:48 AM, Blogger VangelV said...

VangelV, it frees American workers of unnecessary jobs, and allows limited resources (e.g. labor, capital, land, raw materials, energy, etc.) to shift into higher skilled-higher quality-higher paying U.S. jobs.

I agree that is what would happen if government got out of the way and let the markets work. But that is not what is happening because high tax rates prevent repatriation of earnings and domestic capital formation. Those 'high paying' jobs are not there because the private investment is not there.

 
At 5/10/2011 9:58 AM, Blogger Buddy R Pacifico said...

"Then we have the big design and development problems with the new Dreamliner, which ultimately may turn out to be a nightmare that drives the company towards insolvency."

Boeing is not going insolvent because it is reverting back to a Boeing culture. The acquisiton of McDonald-Douglas led to weaker engineering and magical supply chain thinking.

U.S. manufacturing renaissance is being led by Ford CEO, Alan Mullaly. Mullaly should have been CEO of Boeing, but McDonald-Douglas executives took over Boeing, and Bill Ford wisely hired Mullaly away from Boeing.

Boeing is turning back to its engineering led culture and supply chain lengths are being reigned in. The Dreamliner (787) is going to be an excellent plane but there is still a lot of slogging through a multitude of problems.

 
At 5/10/2011 10:09 AM, Blogger PeakTrader said...

The net effect of many government policies has made it more difficult for most small businesses to succeed.

It's important to note, the U.S. is, by far, the most capital abundant country in the world. Yet, most of its high-paying jobs are labor intensive.

Jobs in Silicon Valley and Wall Street, for example, are labor intensive. A factory in China is capital intensive (and labor abundant).

 
At 5/10/2011 10:27 AM, Blogger PeakTrader said...

Moreover, I may add, U.S. production has become "lighter," and less energy intensive.

The knowledge economy produces many goods & services that weigh little or nothing.

 
At 5/10/2011 10:29 AM, Blogger PeakTrader said...

Of course, the energy savings on the production side were used on the consumption side.

 
At 5/10/2011 10:42 AM, Blogger VangelV said...

Boeing is not going insolvent because it is reverting back to a Boeing culture. The acquisiton of McDonald-Douglas led to weaker engineering and magical supply chain thinking.

I don't think so. Boeing needed McDonnell Douglas (check your spelling) because it needed the government defense contracts to enhance revenues and Douglas screwed up when it tried to force the DC-10 on customers who wanted another model and due to the problems faced by the aircraft when AA screwed up and caused an engine to fall off and kill all of the people on Flight 191.

U.S. manufacturing renaissance is being led by Ford CEO, Alan Mullaly. Mullaly should have been CEO of Boeing, but McDonald-Douglas executives took over Boeing, and Bill Ford wisely hired Mullaly away from Boeing.

The way I remember it Mullaly was rejected by the Boeing board, which did not deem him capable of leading the company as well as Stonecipher, who was a real bastard but a very capable executive. Obviously, Ford chose well because Mullaly was better than anyone from within the company.

Boeing is turning back to its engineering led culture and supply chain lengths are being reigned in. The Dreamliner (787) is going to be an excellent plane but there is still a lot of slogging through a multitude of problems.

First, unless the fracture toughness issues are resolved only a fool would get on that airplane model. Second, there is no way to make a decent return on civilian aircraft.

 
At 5/10/2011 10:49 AM, Blogger VangelV said...

The net effect of many government policies has made it more difficult for most small businesses to succeed.

Very true. Unlike the big companies small business can't spend a lot on accountants and lawyers to get around rules put up by Congress.

It's important to note, the U.S. is, by far, the most capital abundant country in the world. Yet, most of its high-paying jobs are labor intensive.

Nonsense. Your airports, railroads, highways, and bridges are below many Developing World standards. Cities are falling apart. Commercial buildings and houses lay abandoned. Few new refineries or nuclear power plants have been built over the past thirty years. Many oil pipelines are old and past their design lives. Sewer and water systems are crumbling under city streets. The economy has shifted away from production and towards consumption.

Jobs in Silicon Valley and Wall Street, for example, are labor intensive. A factory in China is capital intensive (and labor abundant).

But many Wall Street jobs are not very productive for anyone other than Wall Street firms. The Wall Street performance is an accounting illusion brought on by the changes forced onto FASB and by actions taken by the Fed. If those firms had to value their assets properly and could not sell them to the Fed they would be insolvent.

 
At 5/10/2011 11:39 AM, Blogger Buddy R Pacifico said...

VangelV wrote:

"First, unless the fracture toughness issues are resolved only a fool would get on that airplane model. Second, there is no way to make a decent return on civilian aircraft."

Fracture isssues? Proof? The dynamic testing I am aware of is 150% of actual load, which is as engineered and expected.

Return on civilian aircraft? The 747 and 777 are quite profitable. The 737 is moderately profitable but sales volume helps bottom line.

 
At 5/10/2011 11:42 AM, Blogger PeakTrader said...

VangelV, I guess, you didn't notice the U.S. productivity boom, record breaking U.S. profit growth, huge foreign capital inflows (i.e. capital account surpluses), etc.

"Too many" assets and goods (e.g. bigger and better houses, autos, imports, etc.) are a problem when diminished marginal utility and a lack of liquidity reach the point where Americans won't buy anymore goods unless they're almost free.

Wall Street not only facilitated the U.S. profit boom, and help lower prices for U.S. consumers, it recycled dollars by selling securites overseas, and diversified the risk worldwide, which provided dollars to U.S. consumers.

 
At 5/10/2011 12:09 PM, Blogger PeakTrader said...

VangelV, also I may add, you're talking about some poorly managed big cities.

My dad is a civil engineer. Take a look at Bellevue, Washington or the 100 mile stretch between Orange County and San Diego California. There are many new cities in the U.S.

Moreover, take a look at some older U.S. cities, e.g. Denver Colorado. Recently, it built three new pro sports stadiums, a new convention center, a huge central library, renovated the entire lower downtown (that looks like the 1920s when it was new), repaved the streets and rebuilt the sidewalks, built an international airport, a light rail system, etc.

Around 10 miles southeast of Denver is another Denver: The Denver Tech Center, which has grown faster than Silicon Valley. There are about a hundred tech campuses, impressive new malls, and upper income housing tracts have replaced empty fields all the way to the mountains in the west and Castle Rock in the south.

 
At 5/10/2011 12:25 PM, Blogger Benjamin said...

Vange-

Lately, you have said that living standards are higher in China than the USA.

That would imply that getting a guy to work on a factory line for $1 an hour is going to get harder in China (indeed, would be impossible already, but your statements are not always sensible).

So, if the typical Chinese workers is living in a nice house, has a car, and maybe a working wife, do not you expect jobs to come back to the USA, where GM nows hire fresh employees at $12 an hour?

 
At 5/10/2011 1:16 PM, Blogger juandos said...

"it frees American workers of unnecessary jobs, and allows limited resources (e.g. labor, capital, land, raw materials, energy, etc.) to shift into higher skilled-higher quality-higher paying U.S. jobs"...

Yeah PT I agree with you on the principle but those supposedly 'unnecessary jobs' come with paychecks and are part of the tax base...

Considering today's political atmosphere what companies want to invest in business that will offer higher paying jobs?

I mean look at today's U6 number of 15.9%...

 
At 5/10/2011 2:41 PM, Blogger PeakTrader said...

This comment has been removed by the author.

 
At 5/10/2011 2:46 PM, Blogger PeakTrader said...

This comment has been removed by the author.

 
At 5/10/2011 2:53 PM, Blogger PeakTrader said...

Also, I may add, almost the entire U.S. homebuilding boom took place in new cities and neighborhoods.

Huge segments of many big U.S. cities would be ghost towns if it weren't for tens of millions of poor immigrants and their children.

 
At 5/10/2011 2:54 PM, Blogger PeakTrader said...

Juandos, should we blame American businesses for producing more output with fewer inputs?

Who's to blame for too few small businesses, too little residential and commercial construction (and production of related goods), energy underproduction, and high costs of health care and education?

 
At 5/10/2011 3:12 PM, Blogger QT said...

Peak Trader

...I'm thinking you mean government?

Excellent posts.

VangeIV,

Would love to know how many developing nations have better infrastructure than the U.S. China, Brazil, India, Asian tiger economies may have impressive infrastructure but these are the exception...hardly representative of conditions in developing countries around the world.

 
At 5/10/2011 3:32 PM, Blogger PeakTrader said...

QT, thanks.

What to do with a shrinking city?:

A Shrinking City Knocks Down Neighborhoods
Mar 15, 2011

Youngstown, Ohio, gave up on the idea that a city needs to grow. Now, the city is trying to figure out how to shrink.

The population was shrinking year after year.

Without the dream of growth, Youngstown just had a bunch of empty houses that no one was ever coming back to. So the city started demolishing thousands of empty houses.

Thousands of people will leave one neighborhood, and maybe a dozen people will stay behind.

So Youngstown has been offering financial help for those people left behind, offering to move them to a place with more neighbors.

"...streets could be closed," D'Avignon says. "Trash wouldn't have to be picked up in that area."...the city will close entire neighborhoods...That would save the city a lot of money.

Earlier this week, the 2010 census numbers came out for Ohio. Youngstown's population shrunk by 18 percent in the last decade.

The city can only...hope that the population does eventually stabilize, while there's still some city left to enjoy.

 
At 5/10/2011 3:47 PM, Blogger Benjamin said...

PT_
Detroit is trying farming. Maybe farming can make a comeback in Youngstown. Usually towns started out due to good farmland.

And think of the endless fount of federal subsidies and lard that would pour into Youngstown when you started farming.

Farming is subsidized; manufacturing is not.

 
At 5/11/2011 7:38 AM, Blogger VangelV said...

Fracture isssues? Proof? The dynamic testing I am aware of is 150% of actual load, which is as engineered and expected.

The aircraft is three years behind schedule.

Return on civilian aircraft? The 747 and 777 are quite profitable. The 737 is moderately profitable but sales volume helps bottom line.

I remember having a beer with Gene Siddal, who was a McDonnell Douglas executive at the time. He was contemplating retirement and talking about the industry in general. One of the things that he pointed out was how terrible a business the civilian aircraft business was and all of the accounting tricks designed to make it look better than it was. He said that it finally took Boeing, the leader in the sector, until the mid 1980s to finally turn a profit on its investment in civilian aircraft. He pointed out that if the military side of the business did not cover some of the overheads and other expenses the civilian side of the business would be a lot worse.

It is possible for Boeing to show a profit on some of its business by assuming a much longer run than is likely. When you depreciate very expensive tooling over 800 units it is much easier to show a profit than if you used a more realistic estimate of 450 units. The problem is that even with all of the favourable assumptions you are still going to have very low margins and would be lucky to make a higher return than holding ten year treasuries.

 
At 5/11/2011 7:47 AM, Blogger VangelV said...

VangelV, I guess, you didn't notice the U.S. productivity boom, record breaking U.S. profit growth, huge foreign capital inflows (i.e. capital account surpluses), etc.

What boom? It looks to me as if depreciation may be higher than new capital investment. That does not indicate that a boom is taking place. High paying jobs have been lost and been replaced by retail jobs. That does not bode well for productivity. The labour participation rate is low. The financial sector is showing phony gains once again because it is allowed to pull values out of thin air and to dump impaired assets to the Fed. Fannie and Freddie are losing billions every quarter and are sitting on mortgages that will never be repaid. I guess it is easy to pretend that there is a boom when losses are not counted because they are covered by taxpayers or papered over by the Fed.

"Too many" assets and goods (e.g. bigger and better houses, autos, imports, etc.) are a problem when diminished marginal utility and a lack of liquidity reach the point where Americans won't buy anymore goods unless they're almost free.

They are a problem when Americans are drowning in debt and have to cut back in order to prevent bankruptcy. (See Japan's balance sheet recession to see how this works.)

Wall Street not only facilitated the U.S. profit boom, and help lower prices for U.S. consumers, it recycled dollars by selling securites overseas, and diversified the risk worldwide, which provided dollars to U.S. consumers.

Wall Street engaged in major fraud and stole money from American investors and taxpayers. As reward, its losses were socialized after the bubble burst and we now see executives making millions once again. I suspect that when the next dip occurs and Wall Street is on the ropes again people like you will call for another bailout. And after the losses are forgiven again you will jump up and down to claim that productivity is going up and profits are huge.

Being delusional may be a way to feel good but some of us prefer to make money by being realistic.

 
At 5/11/2011 8:42 AM, Blogger VangelV said...

VangelV, also I may add, you're talking about some poorly managed big cities.

My dad is a civil engineer. Take a look at Bellevue, Washington or the 100 mile stretch between Orange County and San Diego California. There are many new cities in the U.S.


Let me begin by pointing out that you can find towns in which you have household earnings well above the state average and where residents are better educated and more established than the state average. These towns will look better because of their demographics and because they have fewer and younger city employees that need to be paid for by the population.

Bellevue is a very good choice because it pops up on 'best cities to retire or live' lists thanks to a number of factors it has going for it. I knew of the place because it has popped up on my own places to retire lists over the years.

But one data point does not change the facts. The US has too many cities that are badly run and in danger of becoming insolvent. And if prices for energy keep going up some of the smaller towns and cities will feel the pain because some of their residents often depend on jobs that require driving or on people who drive. And if you take a look at Bellevue you will find that it has not been spared the downturn. House sales have fallen as have permits for new home construction. New home prices are down around 20% as builders find that they can't find customers willing to pay or being able to afford the prices paid in 2008.

Moreover, take a look at some older U.S. cities, e.g. Denver Colorado. Recently, it built three new pro sports stadiums, a new convention center, a huge central library, renovated the entire lower downtown (that looks like the 1920s when it was new), repaved the streets and rebuilt the sidewalks, built an international airport, a light rail system, etc.

The facts are still the same. All those activities were not free. Taxpayers had to pay for them or had to promise that they would pay for them by covering the bond interest. But from what I recall hearing in the news Denver was going to have to cut education, police, fire coverage, etc., because of its poor finances.

 
At 5/11/2011 8:45 AM, Blogger VangelV said...

Around 10 miles southeast of Denver is another Denver: The Denver Tech Center, which has grown faster than Silicon Valley. There are about a hundred tech campuses, impressive new malls, and upper income housing tracts have replaced empty fields all the way to the mountains in the west and Castle Rock in the south.

You can't keep cherry piking the odd data point here or there and expect to draw valid conclusions about the sate of the general economy. It seems to me that you want to believe so much that you will look for information that supports your view while you ignore that which argues against it. While that may make you feel better, delusional views are not helpful in real life.

 
At 5/11/2011 9:09 AM, Blogger VangelV said...

Lately, you have said that living standards are higher in China than the USA.

No, I have not. China is still mainly a rural country with many very poor people living in the countryside. Unless you go to some of these areas you cannot believe the level of poverty.

What I am saying is that after you account for taxes, non-monetary compensation, and purchasing power many of China's factory workers have a standard of living that is not much lower than their American counterparts. When your company gives you an apartment, subsidizes the utilities, offers free day care services, pays your insurance premiums, and offers health care you can't only look at the $700 you get after taxes per month and argue that Chinese workers are paid so little.

My wife's maid of honor and her husband both teach music in Xi'an. They own their apartment, which was offered by their university at a very low price. At around 2,000 square feet it is very large. It comes with a parking space, access to the subway and a number of bus routes. It is next to a huge shopping district and plenty of restaurants, theaters, museums, etc. The place is full of flat screen television sets, an audiophile system with two tube amps (that sell for around $6K per block in Toronto) and a state of the art reference speaker system. The kitchen was large with granite counter-tops and top of the line stainless steel appliances. The place was full of antique musical instruments and some very nice and very expensive art. All of that came from the money made by two music teachers. Now how do you suppose people like that can make so much money if the ordinary worker is paid $0.80 per hour?

My mother-in-law, who also teaches music, has managed to accumulate a few condominiums, which are fully paid for, generate rent, and are supposedly worth around $200K each. The bulk of her earnings come from teaching the children of ordinary workers, most of whom are the ordinary middle class of New China. How does all this happen if earnings are as poor as is being claimed?

My contention is that the residents of many of China's cities live much better than they used to and significantly better than those in the countryside. That is because the Chinese cities are huge generators of wealth and teeming with economic activity. The Chinese save and have little trust in government paper money. They are more likely than many other people to take some of their savings and invest in areas where prices are low. By doing so they stimulate activity in those areas and reap the benefits of the rising asset values that their investments made possible.

Eventually the Chinese will have to have a very sharp correction because some activities have run ahead of the economic conditions that are necessary to support them. When that happens there will be a lot of turmoil in domestic and foreign markets. But the Chinese people will persevere and things will get better for them because they have the capital to generate wealth.

 
At 5/11/2011 9:17 AM, Blogger VangelV said...

That would imply that getting a guy to work on a factory line for $1 an hour is going to get harder in China (indeed, would be impossible already, but your statements are not always sensible).

What I am saying is that they are getting far more than $1 per hour. The free housing that the company offers to that engineer and his family is a benefit that is not captured when you measure compensation. Neither are the utilities, insurance, food, health care, and other benefits that are not counted.

So, if the typical Chinese workers is living in a nice house, has a car, and maybe a working wife, do not you expect jobs to come back to the USA, where GM nows hire fresh employees at $12 an hour?

I have never said that all of the houses are great. Some of my friends in Yangliang had very poor housing, particularly when they were new hires and unmarried. At the lowest level of value to a company you may only get a bed in an apartment that you share with three other guys. (Some companies have larger rooms with more beds.) You go to the company maintained basketball courts, gym, or soccer pitch and see company sponsored concerts or other entertainment.

You get better accommodations, more money, and more benefits as you gain experience and increase your value to the company. At that point you find that an engineer, manager, or planner may have just as much of a cost to a Chinese company than his American counterpart.

 
At 5/11/2011 9:45 AM, Blogger VangelV said...

Would love to know how many developing nations have better infrastructure than the U.S. China, Brazil, India, Asian tiger economies may have impressive infrastructure but these are the exception...hardly representative of conditions in developing countries around the world.

I never said that China was representative of the developing world infrastructure. I said that the US was a lot closer to developing world standards than China was.

 
At 5/11/2011 10:22 AM, Blogger juandos said...

"Juandos, should we blame American businesses for producing more output with fewer inputs?"...

Its NOT about blame per se PT since we've hashed that over quite a bit and you note some of the symptoms from the actions of those who are to blame...

American businesses are fairly productive and efficient in spite of governmental interference...

Still governmental interference is killing small business and they collectively don't have the resources of a multinational to fight the government...

Since small business is one of main sources of employment in this country, what do we do to alleviate some of their problems?

 
At 5/11/2011 10:44 AM, Blogger Buddy R Pacifico said...

VangelV made an assertion and again I request proof or withdraw it as hyperbole:

""First, unless the fracture toughness issues are resolved only a fool would get on that airplane model."

What is it VangelV?

 

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