Busch: Who's Right—Consumers or Manufacturers?

The data out over the weekend has been uniformly terrible except for US retail sales. Starting in South Korea, they announced that exports were down 18.3% vs 11.1% expected. This is significant as SK exports mainly (over 75%) emerging markets. This means demand is falling off a cliff from these countries and calls into question whether they can lead the global economy out of its recession. Further substantiating this development, India announced at 12.1% drop in October exports.

In synchronicity, the global purchasing managers reports (PMI) are consistently a disaster. The November Chinese PMI sank from 44.6 to 38.8 as export orders collapsed. This is the largest drop in the index's brief history and indicates that China's export markets (Japan, US, and Europe) are in a serious recession. While several Chinese government officials attempt to keep a stiff upper lip and talk up next year's prospects, President Hu Jintao has said that the economic situation is a test of the Communist Party's ability to govern.

Europe is already having trouble governing as they grapple with formulating stimulus plans. The Euroland November PMI fell to 35.6 vs 36.2 expected. Switzerland November PMI fell to 35.2 vs 45.6 expected. UK November PMI fell to 34.4 vs 39.7 expected. Today, EU finance ministers are meeting to discuss splitting E200 billion in stimulus spending with the markets underwhelmed by the individual packages from Italy (E80 billion), UK (GBP 20 billion), and France (expected to announce between E80-100 billion). Germany appears to be reluctant to want to join the stimulus party as their unemployment rate actually fell last month to the lowest since 1992. Germany's Chancellor Angela Merkel has made it clear that they don't need a boost. This could indicate that the ECB may not cut as much on Thursday.

Today, the US announced the equivalent of the PMI and it was very soft as well. November ISM manufacturing dropped to 36.2 from 38.9. To state the obvious, this is a global collapse in manufacturing and underscores what happens to the world when credit is extracted out of the global economy. Contrary to the rally in equities last week, the credit crisis is on-going even with credit spreads improving from the near catastrophic levels. Clearly, manufacturers around the blue ball have clients telling them they don't want their products. This means that the clients are anticipating an extremely weak period of sales for the holiday season.

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So far, this seems to be underestimating the power of the US consumer to consume even under threat of losing their jobs and losing credit. In a survey of 3,370 shoppers, the National Retail Federation estimated shoppers spent an average of $372.57 over the weekend, up 7.2% over last year's $347.55 according to the WSJ. "But in a sign that sales over the next several weeks are likely to slow, shoppers said that by the end of the weekend they had completed a greater portion of their holiday shopping -- 39.3% compared to 36.4% last year, according to the NRF survey."

This indicates a lack of staying power for the future. The coming job losses that will be announced at the end of the week should mean lack of follow through on any equity rallies as well. My Xmas wish list is that a range to develops with no new significant lows. The PMI data shows that Santa has yet to make an appearance and that consumers still believe.

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Andrew Busch

Andrew B. Busch here