Another amusement time: market reacted positively on both New York and Philadelphia Manufacturing Index, said that they were better than expected, and claimed the worst is over.
Well, let’s take a look on both outlook, as follows:
Before I moved on further to show the amusement part, we need some knowledge on how these index are made. They are based on survey asking questions like “what do you expect on the number of order, comparing this month to last month”, with choices of answers “better, no change, worse” . Then after summing up the weighted average of each answer, readjusting for seasoning effects, and some other statistics tricks (that you are not interested), there you go, the manufacturing index.
Thus, this is the index NOT about how good or bad this month exactly. It is a comparison to last month, and, it is not even an absolute index, it is more like a percentage based index. How much % better or worse comparing with last month. The index is showing the SLOPE of the change of state of manufacturing, NOT the state of manufacturing itself.
In other words, if you want to know the actual STATE right now, you have to assume a month as basis, then use the index as percentages to calculate the actual state now.
Now time to do a little math as an analogy (the method is NOT exactly like this, before you would yell WRONG method, but the idea is comparable to the following):
For both indexes, assume Feb is = 100, and for clarity, just take 1 decimal place:
NY Index:
March = 100*(1–21.5%) = 78.5
April = 78.5*(1–78.2%) = 17.1
May = 17.1*(1–48.5%) = 8.8
June = 8.8*(1–0.2%) = 8.8
Philadelphia Index:
March = 100*(1–12.7%) = 87.3
April = 87.3*(1–56.6%) = 37.9
May = 37.9*(1–43.1%) = 21.6
June = 21.6*(1+27.5%)= 27.5
Look at the figures, one may interpret that “the worst has come and gone, because both figures have touched the bottom”!
But very first of all, have anyone paid attention how much both figures have dropped? And have anyone ever thought that, if you drop by 50%, you need to rise by 100% in order to get back to the original level? And, have anyone also then imagined, how hard it is to rise by 100%?
Second, the index is all based on survey, and hence filled with uncertainties and bias of participants. If the participants are always correct about their predictions, we should not see the bankruptcies of JC Penny, Hertz, and J Crews, etc. By now Bearsterns and Leyman Brothers should have kept running and perhaps expanding too.
Third, no matter how worse the pandemic is, as long as US has not been collapsed and even disintegrated, some manufacturing will continue to serve domestic demand, at the very least. So, without any economic knowledge, just by looking at the math, one will know that after a drop by more than 80%, the worsening speed will slow down. After all, unlike Crude WTI futures contracts that can go negative, you CAN’T have negative manufacturing situation.
Forth, it doesn’t take a continuously dropping manufacturing index to start and prolong a recession. Even if the index keeps improving, and bring the manufacturing state back to, say, 50, it is still half the capacity of Feb 2020. Under such low-running capacity, unemployment will continue to be high, and although it won’t mean a cease on consumption (we have welfare to ensure basic consumption), it means a halt on expansion of consumption, that our financial system very much relies on for profits and support further leverage, which in turn support innovation and resulting commercialisation. Thus, a continuously low index means a drag on innovation, also means a very slow and painful recovery, that takes years or even decade to complete.
Yet, no matter market players, media, or economists, all simply consider current situation as 1982–83, 911, or 2008–09, and even believe it is the bottom now. The problem is: the pandemic is most likely temporary, the residual effects are not. In 1982–83, the problem is hyperinflation, and it is easy to deal with: just sky-rocketing interest rate to a historical level 22%. On 911, terrorist attack can never be continuous and spreading like virus. And 2008–09, despite worldwide financial problems, we can maintain normal production and consumption, only at a slower rate and amount, and massive foreclosure of main-street shops and firms are not as serious as now. Or, from another angle, a 2-month lock-down can simply wipe out so many big chains reveal that the consumption market has long been fatigue and rely on stable cash inflow to keep afloat. It means something way horrible deep down.
And, one thing more, before I end this lengthy article, has anyone ever thought about that: what if high unemployment rate persist, and people are running out of money to continue their monthly payment on mortgages, student loans, credit loans, and any other loans and leases?
David Chan
dtwchan@yahoo.com
