Friday, January 2, 2009

Manufacturing decline a poor way to start 2009


ISM manufacturing index has seen the fastest decline since the 1980 recession. The fall-off since July is startling and ends any hope that manufacturing will offset the declines in housing. More importantly, the export sector was viewed as a bright spot earlier in the year but the sharp fall-off provides more evidence that there is a global growth slowdown. The US is not sending goods abroad and Asian economies are not sending goods to the US. The fall-off in exports from Asia and China in particular has been dramatic. See http://www.nytimes.com/2009/01/01/business/01exports.html?em

The link between China and the US is so strong that many are now calling the economic relationship or partnership Chimerica. An important issue will be how both countries continue this partnership. Much of the manufacturing decline will be placed on China which has been the main factory for "platform companies" like Wal-mart and other retailers. China will also have to continue to be an important buyer of debt. Given the cost to China in both the real and financial sectors, the question will be what will the US do for China. The simplest action will be to maintain an open trade door, yet this will also be the easiest policy for the US to change through erecting trade barriers. One hopes that we do not see trade barrier legislation like Smoot-Hartley from the 1930's. This will only prolong the current problems.

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