Wednesday, May 4, 2016

The Canary in the Industrial Mine

A picture in black and white of the kind of Canaries used in the coal mines.
The Canary in the Industrial Mine
People across the nation seem to know that something is wrong. Yet, the media continues to collude with the Obama administration in their attempt to hide what's clear to all: the economy never recovered.
While the eerie feeling that something bad is about to happen is pervasive, most find it challenging to know exactly what causes it? After all, the stock market boomed higher and higher, right? Well, yes. But like with all other asset bubbles, higher equity prices don't guarantee value. Just remember that homes went up in price not because of a higher value to society but because there was too much speculative money chasing the homes available. The same is happening with stocks. How do I know? It's easy. There is simply no national economic activity to talk about. And to make things worse, capital spending since the White House scared the hell out of businesses has remained at zero. In other words, there has been no investment in future productivity.
When looking at our GDP, we all know that the president got a free ride thanks to the fracking revolution that took us from being a heavy oil importer to energy independent. All the buildup that saw Texas go through an incredible economic boom took place not because of Obama's support for hydrocarbons but despite of his direct opposition. I wrote about this in a previous article.
Dark Graph of the (FRED) Federal Reserve's Industrial Productivity Index
Fed's Industrial Production Index
Yet, outside of our oil renaissance, industry in general remained quiet. When looking at the government's own data on industrial productivity, it is clear that we never recovered. The Federal Reserve's chart to the left shows that industrial activity in the US has followed a very different path than that from the stock market. While technically we went back and touched the pre-recession top, we didn't achieve any such thing in real terms; after accounting for the eroding effects of inflationary pressures. After adjusting for inflation, we simply have yet to reach levels achieved by the Bush administration.
You don't have to believe shadowstats.com and their estimate of what the Industrial Production Index would look like after removing the effects of inflation. Their chart below uncovers our countries terrible economic performance. Still, we could at least acknowledge that in real terms the so called recovery would be much more anemic than what is suggested by the FED's chart. If so, it is safe to conclude that there has been no recovery.
Dark Graph of Shadowstats.com's Industrial Production Index after Inflation
Shadowstats.com - Industrial Production Index after Inflation
Still, many would argue that we are not an industrial nation. That our GDP's strength lies on the incredible American consumer. Here, I raise the bull-sh&#t card once again.
Understanding why the American consumer is not what the media would lead us to believe isn't hard. It just takes a little business insight.
Any business person knows how to price their products. Keystone-markup, for example, is a well known term among professionals. Well, anyone with a pen, a napkin and half a sense on how to price goods will intuitively understand that, if factories and retailers get their typical markups, the consumer will account for about 60% of all the translations taking place.
When the government calculates GDP, they take all sales by every entity in the economy and reduce them by the value of imports. So a factory in the US pays about $15.75 for labor and raw materials. A retailer pays about $45.00 for the factory's gizmo after it is delivered to its doors. Finally, a consumer pays $100 in retail value for the same gizmo. Even under this simplistic scenario, an average consumer will be 62% of the total GDP. Now that if the country is a heavy exporter, an average consumer will become a higher percentage of the GDP. If, on the other hand, the country is a large exporter, then the opposite happens; the consumer's portion of GDP goes down.
List of global Household's final consumption expenditures as a percentage of GDP
The very average US consumer 
Let's take a look at the portion of consumers around the world and their share of their national GDP. I invite you to browse the list to the right.
American consumers are clearly not exceptional. Instead, they are average at best. The US consumer is right at the middle of the group. Now that if we still insist in arguing that our consumer is somehow very strong as a way to explain its large portion of GDP, then how do we explain Guatemalan consumers, who are in fact a larger portion of the Guatemala's GDP? Do American consumers aspire to be like Guatemalans?
It simply doesn't make sense. We are not a consumer based nation. If anything, all nations are consumer based. As long as manufacturers don't pay more for their inputs than consumers pay for final goods, the same scenario will prevail. I think it is safe to assume that the consumer's portion of GDP is to remain within a narrow range until the earth cools.
As I have shown in many previous instances, our elected leaders are economically handicapped. They themselves do not understand even the simplest of economic principles. Moreover, they are apathetic to the smallest of financial research. Yes, they don't know business and don't want to learn. It is no wonder that they are currently pushing thousands of businesses into the abyss.
At the end of the day, our economy will continue to depend on industrial activity as the place where every good renaissance starts. God have mercy on us!

1 comment:

  1. Rodolfo J. NodalMay 4, 2016 at 3:52 PM

    Loved it !! clear , succinct and with a little touch of mercy in closing.

    ReplyDelete