China and Eurozone Woes Land on American Shores

Eurozone Unemployment RateAs the months pass, the eurozone unemployment rate and manufacturing levels are contracting at record levels, not seen since the inception of the eurozone. The latest results for May were no different.

The unemployment rate in the eurozone rose to a record 11.1% in May from a record 11% a month earlier. (Source: Eurostat, July 2, 2012.) No surprise to anyone, the highest unemployment rates, originated from Spain—24.6%—while Greece, the latest unemployment rate figures for which are only from March, came in at 21.9%. The youth unemployment rates for both countries stood at 52.1%.

The only factor that can send these unemployment rates back down is if economic growth can be triggered. Unfortunately, eurozone manufacturing levels fell for the 11th straight month in June, as the economic contraction shows no signs of halting its slide. (Source: MarkIt Economics, July 2, 2012.)

One of the most important elements of the report: Germany’s economic contraction is gaining momentum to the downside. The “new orders” section within the report signals the health of the economy moving forward. In Germany, new orders for June fell at the fastest pace in over five months! At one time, Germany was the only economy holding the eurozone up. Could this no longer be true?

The eurozone is China’s largest customer. With the economic contraction in the eurozone picking up steam, how is China faring?

China’s manufacturing activity fell for the eighth consecutive month in June, with the readings now reaching economic contraction territory not seen since the first quarter of 2009! (Source: MarkIt Economics, July 2, 2012.)

New export orders in China are at their lowest level in three years! Due to this economic contraction, the unemployment rate rose for the fourth consecutive month!

Since China is an export-based economy, these weak manufacturing numbers mean the unemployment rate in China will continue to rise, putting more pressure on the Chinese to institute measures to counteract their country’s economic contraction.

This persistent weakness has been going on for months now and the economic contraction has begun to slow the U.S. economy as well. For more on that, please see my “Michael’s Personal Notes” section below.

With unemployment rates rising in Europe and in China, the global economic contraction is sinking the world deeper and deeper into a possible global recession. This global recession will be assured as the global economic contraction hits U.S. shores. Be careful with that U.S. stock market rally; it’s coming to an end, dear reader.

Michael’s Personal Notes:

In the U.S., the national survey that gauges the health of the manufacturing sector is published by the Institute for Supply Management. The last time this survey was indicating an economic slowdown here in the U.S. was July 2009, when the U.S. economy bounced from the economic slowdown and was seen by some to be coming out of its recession.

Well, in the most recent survey, the number dipped back into contraction territory, which makes it the first time it has done so since July 2009, indicating a recession is possible. Like all of the other manufacturing surveys, the new orders numbers are a key of future growth trends. (Source: Institute for Supply Management, July 2, 2012.)

There is no other way to put it other than the number plunged in June by 12.3%!

This is an indication of less demand from consumers and businesses here in the U.S. Does this mean recession? The export gauge also fell into the contraction area. The reason for the fallout was explained by the soft demand coming from China and Europe. It’s a vicious circle caused by a global economic slowdown.

The manufacturing sector of the U.S. economy was one of the bright spots during the economic slowdown after the financial crisis. Now that manufacturing is contracting as well, the economic slowdown is kicking into high gear.

Here is the problem. There are those who still cling to the theory that the U.S. economy can weather the storm and not join the countries suffering an economic slowdown or recession.

Well, China, Europe and the U.S. are all reporting weaker manufacturing numbers and unemployment growth figures; clearly signs of an economic slowdown. The only way this theory can hold is if the U.S. consumer can somehow continue spending, as they represent 70% of GDP growth.

With the unemployment figures still weak here in the U.S., this is working against the consumer. The other major issue I’ve been harping on in these pages over the last few months is real disposable income, which measures income after taxes and inflation are taken into account.

The latest figures for May reveal that real disposable income increased by a blip at 0.3% or 1.1% from last year. (Source: Bureau of Labor Statistics, June 29, 2012.) This gain is so small, there is no way the average American consumer can continue spending when paychecks are barely growing: economic slowdown.

The report also points to real consumer spending increasing by a minuscule 0.1% and 1.9% since last year. These numbers are not numbers associated with strong economic growth, but rather an economic slowdown. These numbers are not numbers that can sustain buying goods from China and Europe. These numbers are not enough to increase manufacturing here in the U.S. and are in areas more closely associated with a recession.

The vicious spiral continues to gain momentum, as the economic slowdown picks up the pace here in the U.S. With the rest of the world not pulling its weight, there is no way the U.S. can escape the economic slowdown.

Where the Market Stands; Where it’s Headed:

As this issue went to press this morning, the central bank of China announced it was cutting interest rates for the second time in two months. Moments later, the European Central Bank (ECB), the eurozone’s central bank, announced it was cutting interest rates to a new record low.

The world is awash in cash, dear reader. Old-fashioned money printing (today they just push a button on a computer to create more money) has been holding up world financial markets. All good things come to end. Money printing will not be able to indefinitely support the stock market.

What He Said:

“Consumer confidence does not change overnight. In the U.S., 70% of GDP is based on consumer spending. And in my life, all the recessions I have seen or studied have only come to an end when consumers started spending. With consumer sentiment getting worse, and with the U.S. personal savings rate at near-record lows, it may take two or three years for consumers to start spending again.” Michael Lombardi in Profit Confidential, February 25, 2008. By the end of 2008, the rest of the world was realizing the recession would be much longer and deeper than most had thought.