United States: The ISM Conundrum

The ISM dropping below 50 undercuts the notion – as well as another one related to it.

In the absence of any monetary recognition, the only possible explanation for what we see has been “trade wars.” The geopolitics of protectionism don’t really amount to much which is why they’ve been classified with the other transitory stuff. But as the wrong-way global economy marches onward now through the third quarter of 2019, what else could it be?

A few billion in US tariffs imposed on Chinese goods entering the country can’t account for a contraction or even a slowdown in the American manufacturing. Nor can China’s retaliation on mostly US agricultural products. Some last year had warned that beyond import levies, there might develop supply chain bottlenecks which would create raw material shortages and then hold back some production.

A widespread industrial downswing here just isn’t consistent with the mechanics behind the trade wars.

Nor are the components underneath the headline ISM. The category for New Export Orders, in particular, plunged nearly 5 points to 43.3 in August, down from an already weak 48.8.

That’s why more and more mainstream accounts have had to appeal to non-specific qualifiers like trade tensions or “global growth concerns.” There is less demand for US goods which isn’t at all consistent with the main elements behind “trade wars.”

One Economist for Bloomberg puzzled over today’s inconsistencies:

To be sure, economic anxiety related to tariffs and increasing trade tensions is extracting a significant toll on business confidence. However, there was limited direct evidence of tariffs creating upward price pressures or materials shortages in the details of the report. As such, the second-order impacts from the tariffs (i.e. confidence effects and currency appreciation) appear to be having the more substantial impact.

Is negative confidence and harmful currency being made negative and harmful by tariffs, or is currency (rising dollar) responsible for the broad and broadening damage to the whole global economy first in confidence then in activity which in the absence of explanation people can only see “trade wars” as a near enough plausible cause?

The reason these “second-order impacts appear to be having the more substantial impact” is because they are the first order cause. In the absence of a monetary explanation, since the Fed “printed dollars” under four QE’s, the only way to try to explain the reversal in 2019 is to somehow make something very small into something huge.

A relatively small amount of tariffs and the concerns for bottlenecks become trade tensions which is destroying confidence. Not just in terms of goods flowing this way into the US, but somehow for goods flowing out of the US into the rest of the world.

It’s suspiciously convoluted because the dollar hasn’t been moved higher by sentiment over tariffs, it began to wreak havoc long before these were talked about seriously. The reason the global economy is weak, and therefore a lot less demand for US goods, is simply the global dollar shortage’s ravaging impact. The very kind we’ve seen three times before now.