Yesterday, we got the PMI survey data for U.S. manufacturing in the month of May and the overall index was slightly above 50, which indicates expansion. So, of course, the headline readers were re-assured that the U.S. is not in recession. Right? Nope.
First, here’s the data:
PMI Manufacturing Index Flash
Released On 5/23/2016 9:45:00 AM For May, 2016:
Consensus Range: 50.5 to 51.5
And here is the chart for the Index showing that it is just above contraction:
The PMI Index includes all sorts of data about future expectations and other kinds of hopium, rhymes with opium.
Now for a very important fact: in May actual manufacturing production declined for the first time since September, 2009. This news about output was not in the headline stories you read. The chart below looks less positive, doesn’t it?
You probably also didn’t see the comments from Markit’s Chief Economist Chris Williamson:
- “The weak manufacturing PMI data cast doubt on the ability of the US economy to rebound from its disappointing start to the year in the second quarter. The survey is signalling that manufacturing will act as a drag on economic growth in the second quarter, leaving the economy once again dependent on the service sector, and consumers in particular, to sustain growth.”
- “Output is falling for the first time since the height of the global financial crisis, with factories hit by slowing growth of order books and falling exports. Backlogs of work are also dropping at the fastest rate since the recession, meaning firms will be poised to cut capacity unless inflows of new work start to pick up again.”
- “The survey’s employment gauge is in fact already running at a level consistent with a further reduction in the official measure of factory payroll numbers.”
If you are going to read one of these reports, you need to read the whole thing.
Unfortunately, most of the information we get on the U.S, economy comes from the federal government. As I have said previously, this data is so messaged by higher mathematics that it has become meaningless or misleading.
Fortunately, the private sector also produces data that does not serve a political agenda. One such source is the monthly Cass Freight Index produced by Cass Information Systems from data provided by America’s 400 largest truck and rail shippers. The most recent monthly report for April was published last Friday. Traditionally, trucking and railroad activity has been a key indicator of the health and direction of the U.S. economy.
You are about to see a chart that is undeniable evidence that we have entered a major economic slowdown.
This is not a seasonally adjusted index so you can clearly see the seasonal variations in shipping activity. The red line shows the level of activity for the first four months of this year. You can also clearly see that the trend is sharply down since 2014. In fact, the first four months of this year are the worst since April of 2010. The reality is that we have now seen the Cass Index decline on a year-over-year basis for 14 consecutive months.
In 2007-2008, there was a similar decline in this Index but the Federal Reserve and other “experts” assured us that there was not going to be a recession. Then we immediately proceeded to plunge into the worst economic downturn since the Great Depression of the 1930s.
Just because stock prices are artificially high right now does not mean that the U.S. economy is in good shape. In fact, there was a stock rally at this exact time of the year in 2008, even though the underlying economic fundamentals were rapidly deteriorating. We all remember what happened later that year.
As I reported earlier today, the monthly ISM Manufacturing New Orders Index is flashing recession. The March data was released on May 2 and it shows that New Orders have now declined for 17 straight months on a year-over-year basis, with March dropping 4.2% from a year ago.
Real Gross Private Domestic Investment (RGPDI) is another excellent leading indicator of recession. If businesses aren’t investing, recessions almost always follow. The latest update of this economic indicator became available last Thursday. Unfortunately, RGPDI is only reported quarterly.
As illustrated below, RGPDI turned down during the third quarter of last year. It fell a little further during the fourth quarter of last year and fell again in the first quarter of this year (the latest number), which again reinforces my belief that a recession is either underway or will soon begin.
You can see the pattern in the chart as clear as day. The gray vertical lines are recessions and each one of them occurs during a downturn in business investment.
I may sound like a broken record when it comes to this recession issue. But believe me, this is important. This ridiculously over-priced equity market will be punished beyond recognition by an economic recession, presenting investors with one of the best short opportunities in many years. And the onslaught of a recession will also complete the destruction of what credibility the Fed has left, opening the way for the mother of all gold rallies.