Recent Slowdown Just Temporary, Says FMA’s Kuehl
Although the gloom and doom brigade has been out in force in recent weeks, and the markets reflect a new sense of impending doom, the slowdown is only temporary and not the start of another breakdown in the economy, says a leading manufacturing industry economist.
“Admittedly, some of this reaction is justifiable when one looks at the numbers released lately,” says Dr. Chris Kuehl, economic analyst for the Fabricators & Manufacturers Association, International. “The housing market is still skidding, the consumer has retreated in the face of more inflation threats and the jobless rate has worsened. The manufacturing sector in particular seemed to lose its position as the engine of the recovery.”
Yet, in the current economic update newsletter Fabrinomics published by FMA, Kuehl asserts this downturn is just a blip and cites three reasons why it won’t last.
“Perhaps the most important factor is the unexpected surge in inflation that occurred at the start of the year,” Kuehl says. “This is not yet an increase in the all-important core rate that motivates the Fed to make decisions. But when the real rate of inflation spikes, there is an almost instant consumer reaction, when the inflation comes from hikes in commodity prices.
“The emergence of the ‘Arab Spring’ took the world by surprise,” he adds. “Within days, the price per barrel of oil had thrust ahead by almost $20, and the price of gas jumped by 70 cents. The consumer was fresh off the memory of 2008 and assumed that it was only going to get worse, and the talking heads reinforced that perception. The result was a rapid withdrawal of consumer confidence, which took a big chunk out of overall demand.”
According to Kuehl, the price of oil may be heading down soon, and gas prices have already eased. More important, the inflation threat is not yet manifesting in a way that will shift consumer behavior permanently.
“The three factors that beget inflation are hikes in commodity prices, shifts in the wage structure, and an overall abundance of money in the system,” he explains. “At the moment, only commodity prices have become a factor. In other words, the inflation pressure felt by the consumer is coming from fuel and food, and there may be some modest relief on the way for both of these sectors. If the consumer thinks that the threat of much higher pricing is not so immediate, they will likely relax and get back to their old patterns.”
A second reason the downturn might be short-lived is that much of the decline of the last few weeks has been related to the issues stemming from the Japanese earthquake, Kuehl maintains.
“The flow of parts and supplies for the world was interrupted and many manufacturers felt the pinch,” he says. “The Japanese are already starting to recover, most of those parts will be flowing soon, and by the end of the year there will be a return to some semblance of normal.”
Finally, some of the conditions that led to the expansion of the recession are fading, and these improvements will start to show up in the months ahead, Kuehl says.
As for manufacturing, export demand will return, although it has not declined all that much in the past few months. The larger drop has been in inventory build. Until the consumer gets more aggressive, there will not be a drawdown sufficient to provide much impetus for the manufacturer, Kuehl says.
“As in most other recoveries, the consumer will hold the key,” he adds.