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Tuesday, September 02, 2014 1:06 PM

US Manufacturing ISM Expansion Continues for 15 Consecutive Months

US manufacturing continued its expansion for the 15th consecutive month. It has been in expansion since May of 2013 when it registered 50.0.

Manufacturing ISM Index

For details, lets turn to the August 2014 Manufacturing ISM® Report On Business®.

ISM at a Glance

Series DataAug IndexJul IndexPercentage Point ChangeDirectionRate of ChangeTrend (Months)
PMI™ 59.0 57.1 +1.9 Growing Faster 15
New Orders 66.7 63.4 +3.3 Growing Faster 15
Production 64.5 61.2 +3.3Growing Faster 6
Employment 58.158.2 -0.1 Growing Slower 14
Supplier Deliveries 53.9 54.1 -0.2 Slowing Slower 15
Inventories 52.0 48.5 +3.5 Growing From Contracting1
Customers' Inventories 49.0 43.5 +5.5 Too Low Slower33
Prices 58.0 59.5 -1.5 Increasing Slower13
Backlog of Orders 52.5 49.5 +3.0 Growing From Contracting 1
Exports 55.0 53.0 +2.0Growing Faster 21
Imports 56.0 52.0
Growing Faster 19

This was a solid report.

Mike "Mish" Shedlock

12:29 PM

Ukraine to Need Another $19 Billion from the IMF

Ukraine is already on the hook to the IMF to the tune of $16.7 billion. Today the IMF reassessed: Ukraine Crisis Hits Economy and Could Require Bigger loan.

In its first full review since agreeing a $16.7bn standby facility earlier this year, the IMF warned that the two main risks it had foreseen – intensification of the conflict in the east and a natural gas shut-off by Russia – had materialised.

If fighting continued in eastern Ukraine at the same level throughout 2015, it added, Ukraine would need additional financing of $19bn to shore up its central bank reserves.

“I am afraid that this should be the IMF’s base case. The original IMF programme was built on totally unrealistic assumptions,” said Tim Ash, economist at Standard Bank, in a note to clients. “The main question being asked by investors is when, not if, Ukraine will be forced to restructure/reprofile its debt ratios.”

Under its base case, it forecast Ukraine’s economy would contract 6.5 per cent this year – making it one of the worst performers in the world – rather than the 5 per cent previously assumed. Growth next year would be only 1 per cent, down from 2 per cent previously forecast, even if the fighting stopped soon.

If fighting continued through the rest of this year and 2015, however, the economy would contract by 7.3 per cent this year and another 4.2 per cent next year.

Many experts had warned when the IMF-led bailout was agreed that it was based on the most optimistic assumptions, with western political leaders anxious to support the new government in Kiev. But the fund conceded that Ukraine now faced “heightened geopolitical tensions and deepening economic crisis”.

“Intensification of the conflict in the east and escalation of the gas dispute with Gazprom, two of the key risks identified at the time of the programme request, have materialised,” it added. These had affected “confidence, balance of payment flows, economic activity and budget execution” and had led to larger-than-anticipated deposit outflows and bigger depreciation of the national currency, the hryvnia.
Inquiring minds may be wondering how Ukraine can possibly pay this back. The answer is they can't and won't. Alternatively Ukraine will be in an economic depression for decades if they try.

Mike "Mish" Shedlock

1:32 AM

France Needs a "Thatcher Moment" But First a Depression

It is amusing reading day in and day out the Keynesian cure for what ails Europe, especially France.

Consider France. Public spending amounts to 57% of French GDP, yet Keynesians want still more. The sad irony is that 100% would not be enough. In fact, it would make matters worse.

France suffers from too much government spending and too much government interference everywhere one looks.

The Problem

On Sunday, in Eurozone Currency Dispute Intensifies: France Wants More ECB Action to Correct Overvalued Euro, Germany Doesn't I summed up the problem.

Inflation Won't Cure France

Contrary to popular belief, inflation will not spur consumer spending. Nor will inflation create any jobs or cause wage inflation.

Nonetheless, France demands the ECB wizards fix something that cannot be fixed by monetary policy.

Problem number one is the eurozone itself. The euro is fatally flawed. In addition, France's problem is that it is not competitive with Germany and arguably even Spain, not that the Euro is too high.

France desperately needs structural reforms.

  • It is nearly impossible to fire someone in France, so businesses are reluctant to hire. 
  • Government and union rules on everything are sheer madness.  
  • France seeks to save local bookstores by taxing online retailers and elimination of free shipping. 
  • Agricultural subsidies to save inefficient French farms (at great expense to the rest of Europe) are inane. 
  • Pension rules need fixes, and the retirement age needs to increase.
  • The "French way of life" is incompatible with rising productivity, especially on a relative basis, so France is increasingly left behind.

How is QE supposed to fix all that? It can't and it won't, but it increasingly looks as if the ECB may give it a try.
The Solution

Yesterday, Steen Jakobsen, chief economist for Saxo bank, summed up the solution: France needs a crisis and a "Thatcher Moment".

Via email ...
French President François Hollande unveiled his new government under Prime Minister Manuel Valls on August 26, and there have been a few changes. While most senior ministers have retained their positions, economic minister Arnaud Montebourg was replaced by Emmanuel Macron, a former investment banker and economic adviser at the Elysée.

Hollande is already the most unpopular president in French history so he is not risking much by removing a political opponent like Montebourg (who should never have been part of a so-called reform program to begin with). Montebourg is a man of the old school and of old ideas: Among other things, he titled himself "Minister of Industrial Resurrection." His ideas included threatening to fine businesses for each job they failed to create and speaking against globalisation.

The problem for President Hollande and any reform efforts is that, as much as removing Montebourg was a victory for his economic strategy, it was also a loss in terms of his political ability to rule both his party and the French state. We often forget that economic policy without political backing is like skiing without snow: Policy needs political anchoring.

The supply-side economics and ideas of Prime Minister Valls are good, but they are not sufficient to stop the "rotting of France". More and more observers argue that what France needs is either an European Central Bank that goes into full Quantitative Easing mode, a France that pushes for fiscal expansion, or even both. Not only is that short-sighted, it´s also wrong: France needs a new political system, a new tax regime, a less bloated government sector, and fewer subsidies. France is not lost, it´s just disorientated and lacks purpose.

France is its own worst enemy. It believes in old virtues and ideas from a time gone by. Dirigisme, the French version of socialist capitalism, has failed. In its place there needs to appear a a robust commitment to its strong and well-educated workforce. France has the ability to innovate and its early stage small- and medium-enterprise support ranks among the best in the world. Unfortunately, its tax policy, its inability to attract capital and — more importantly — its dismal return on capital are significant impediments to new growth or any reforms.

France needs a Thatcher moment, with a new leader brave enough to get elected on a mandate for change. It needs a leader brave enough to tear down a political system that generates macro- rather than micro-scaled policies, an elitist society with too many incentives for bad behaviour and disincentives for private initiative, innovation and hard work. With or without Hollande, France just doesn’t seem ready to change yet. That is why we need a deep recession and even a depression before we see real change. Real changes can only emerge from a true crisis.

The good news is that France that has never been closer to this mandate for change than now, if only because we are quickly approaching the point where things can’t get any worse. French history is full of examples of crisis yielding quickly to dramatic change. The one that comes most quickly to mind is when King Louis XVI lost his monarchical powers during the French revolution. He inherited an enormous state debt (sound familiar?) and tried a number of policy moves, but in the end the crisis overwhelmed him, and he and his Ancién Regime subordinates lost not only their power, but their heads.

It’s time for a 21st century revolution in France. Dirigisme is dying. Vive la France.
Good News

The good news: A depression in France may be just around the corner.

Bad News

The bad news: The extremists waiting in the wings leave a lot to be desired.

Practical View

Socialists have so messed up the country in every way, that heads need to roll (just not literally as during the French revolution). Thus, any major shakeup could be a good thing, even if a free-market candidate is not the first one to surface in a new power shift.

Mike "Mish" Shedlock

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