What is your economic forecast for 2010? Are there specific economic markers that you find particularly useful and upon which you rely on in making your prediction?
From my perspective, the United States economy for the last decade has serial bubbled its way to the illusion of wealth. First the internet bubble and then cheap credit financing a housing bubble lined the American consumer's pockets with a seemingly endless growth in wealth.
Now, without the benefit of another asset to quickly inflate, it would seem that we're facing a long-term retrenchment of the consumer as he begins to realize that the last ten years of "wealth creation" may have been quite illusory.
To make matters worse, declining consumer demand and tightened credit markets have pushed unemployment rates to new highs further burdening the consumer. To me, any real sustainable turnaround in our economy will have to be lead by a sustainable growth in demand from the American consumer and for this to tangibly affect the "real economy.
That is the provision of tangible goods in the United States as opposed to our tail-wagging-the-dog reliance of financial services as an engine for growth. In the above graph, we see a decided inverse relationship between U.S. Manufacturing Capacity Utilization versus the Unemployment Rate.
Now, this may be a little bit of chicken or the egg, but it's clear to me that the linchpin of any sustainable economic rebound will be a rebound in real production through manufacturing. Increased capacity utilization improves employment, spurs new investment which in turn spurs finance, and thus feeds the demand for corporate services and other "soft" services in the industry.
So, how will we know that we're on solid footing again? I believe that close attention must be paid to three statistics compiled by the economic census - manufacturing shipments, orders, and inventories.
In the above graph, quarter-over-quarter inventory growth clearly mimics and leads manufacturing capacity utilization. Admittedly, the link to inventories does not seem predictive enough for those of us hoping to get ahead of the rebound.
My proposal is to use a metric derived from the census orders and shipments data which I call national book to bill. For those unfamiliar with book-to-bill ratios, it is the number of orders in a company's order book versus the number of orders filled in a given period.
Typically used in the technology sector, this number gives us an idea of whether or not there's sustained demand for a company's supply. Similarly, we can create such a metric based on census numbers by dividing new orders by shipments.
Book-to-bill ratios greater than 1.0 imply order demand in excess of supply and less than 1.0 imply insufficient demand. Above, we see book-to-bill graphed against quarter-over-quarter change in inventories between 1997 and 2009 which incorporates both bubbles.
First and foremost, we see the beginnings of deterioration between books to bill leading inventory accumulation. Instead, particularly between 2003 and 2005, inventory accumulation begins to lead the book to bill ratio. To me, this is a tell tale sign of unsustainable growth through "inventory stuffing" - the buildup of inventory due to euphoric projections of the future.
Most recently, we see book-to-bill making a small turn ahead of the bottom in inventory growth and could well signal that we've reached the bottom for our current cycle. Obviously, in my mind, we will not be truly in the clear until the "national book to bill" ratio improves above parity (1.0) and along with it comes increased plant capacity utilization and employment.
Author Resource:
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