The Chicago Tribune from Illinois. The vultures are circling. In an abrupt reversal, the commercial property industry that started 2007 giddy about its prospects enters 2008 facing falling property values, a seized-up credit market and concerns a slowing economy could dampen future leasing and rental rates.
The downtown Chicago leasing market faces 6 million square feet of new offices in development that will start coming online in 2009. Also, some older office buildings that had been eyed for conversion into residential condominiums may remain in the office supply.
It seems pretty obvious now that many buyers will have problems meeting pro forma [rent and income] projections and that there was too much optimism in these deals, said David Funk, director of the Cornell University Program in Real Estate.
In Chicago, office building sale prices fell 17 percent in the fall compared with the spring. Last month, only two properties sold for a total of $91 million, compared with a year earlier when 16 properties sold for $2.3 billion. Nationwide, the dollar volume of sales is off about 55 percent, reported Real Capital Analytics.
Commercial property performance always comes down to jobs, said Jeff Samaras, an executive VP at real estate firm Cushman & Wakefield Illinois Inc. If the economy gets into a mess, all bets are off.
The new year could bring a new reality for landlords and investors, said Christopher Carroll, managing director of a Chicago-based financial-services firm. No one can bet on selling a building for a higher price unless they have a plan to create value through sound operations, Carroll said.
In 2008, I expect to see [lenders] repricing properties on a grand scale, saying you can have this at 30 or 40 cents on the dollar for certain buildings in some markets, said Carroll.
"CARACAS, Venezuela (AP) -- Venezuela launched a new currency with the new year, lopping off three zeros from denominations in a bid to simplify finances and boost confidence in a money that has been losing value due to high inflation.
President Hugo Chavez's government says the new currency - dubbed the "strong bolivar" - will make daily transactions easier and cure some accounting headaches. Officials also say it is part of a broader effort to contain rising prices and strengthen the economy.
"We're ending a historical cycle of ... instability in prices," Finance Minister Rodrigo Cabezas said Monday, adding that the change aims to "recover a bolivar that has significant buying capacity."
Prices have risen as Chavez has pumped increased amounts of the country's oil income into social programs, reinforcing his support among the poor and helping to drive 8.4 percent economic growth in 2007.
The central bank is promoting the new monetary unit with an ad campaign and the slogan: "A strong economy, a strong bolivar, a strong country." Officials, however, have yet to clearly spell out their anti-inflationary measures.
Some Venezuelan critics, meanwhile, have dubbed the new currency the "weak bolivar," noting its predecessor, the bolivar, has seen its purchasing power suffer in an economy where inflation ran roughly 20 percent in 2007 - the highest in Latin America.
Venezuelan economist and pollster Luis Vicente Leon said that while the new currency may provide "the perception of stability" for some, it is largely a "cosmetic change."
..."
"Its time to pay the bill for all the foolish borrowing and lending."
Or we can just lower the interest rate again....
Well, the surge in oil prices that started with the first discount window cut is going to make that a much harder sell.
It'll be interesting to see what alternatives they try to cook up. But in the end they all amount to the same thing -- trying to find an easy way to generate prosperity.
One day, I hope, we'll finally relearn that "easy" and "prosperity" don't go together.
As an aside ,the treasury market is setting up for a potential race to lower rateds later in the week. Some speculators are reported to be selling as the 2year note trades to the low yield end of the recent range.If the labor report on Friday is weak(and I believe that to be the significant risk) the shorts will be forced to cover. Traders dont want to be digging out of a huge self imposed hole on the third trading day of the year. JJJ
john Jansen wrote: As an aside ,the treasury market is setting up for a potential race to lower rateds later in the week.
I know it was a typo, but there is an unintentional element of truth there. Our treasuries are being rated lower by the ROW. Hence the rush by Sovereigns to buy something else (pretty much anything else).
"Goldman Sachs predicting that food commodities (soy, wheat, corn, etc.) will continue to boom."
That's nice they also said gold was going to fall to 718. The last time they said oil was going to 105 a couple of years ago it fell like a rock and we know these guys take both sides of the trade so watch out. Dollars are being destroyed not created by some omnipotent FED.
forgot to add, just like those pathetic retailers that jacked up the price of generators 500% when the ice storm took power out across the NE a few years back, I sure as hell hope all remember who those people were.
I've been suspicious of the ISM all through the boom and equally so now during the 'bust'. I think it skews heavily toward (1) large OEMs and (2) assembly over fab - fab btw is where a lot of the mfg value added and jobs are, in automotive 70-80% of the value added is down stream of the automotive assembly plants.
In the boom we saw > 50 ISM and it implied 'mfg was doing well'... yet the small to medium fab & component mfgrs I knew were getting crushed (offshore competition). There might have been a lot of assembly out there but much of that assembly was made from offshore components.
Now the small to medium sized shops I work with are getting busy - I have a very large RFQ in for a Chicago firm coming from a UK branch of a large multi-national auto supplier (would have gone to Eastern Europe without even a look see in NAFTA Zone two years ago) and another email from a different large multi-national asking if we have the capacity to double & triple our production on some of their components - meaning they are looking at expanding domestic content in their product mix (we can double but not triple without more tooling).
ISM won't show any of that I just mentioned. ISM asks buyers are they buying more or buying less and does it cost more or does it cost less. It doesn't ask where the stuff comes from or how much of it contributes to their final sell (do they add a lot of value or just passed through).
I bet there is a lot being missed in this ISM release just like a lot was missed during the 'boom'.
Just an alternate view from where the sausage is being made.
fab btw is where a lot of the mfg value added and jobs are, in automotive 70-80% of the value added is down stream of the automotive assembly plants.
That was unclear - downstream, upstream depends on which direction you look in the supply chain - what I mean is that purchased systems, components and raw materials comprise 70-80% of the cost of mfg'ing a vehicle... a smaller fraction of the total cost is the actual 'assembly' yet that's what most folks think of when they think 'automotive mfg'... the final 'assembly line'. Yet that's only the tip of the iceberg.
Last bit of useless banter on this subject - I've long felt it would be preferable from an economic & societal basis for the US to 'make less but make more'. Meaning do less final assembly but produce more higher value sub-systems and components.
Believe it or not it usually takes more brains and technology to engineer & make the subsystems & advanced materials making up the product that to perform the final assembly of the product itself.
Think transmissions, engines, hydraulics & control systems in an automobile vs. bolting them together at the end. Same is true in lotsa products - appliances, electronics, etc.
The folks responding to the ISM survey are BUYING components not necessarily having anything to do with the making of those buys.
I'd rather see us assemble less over all (meaning lower ISM numbers going forward) yet designing & making more of what IS ASSEMBLED than the direction we had been heading the last dozen years.
I know it contradicts the Apple 'Platform Model' but in most cases that model is a myth. It is very difficult to control the IP for long if you don't control the actual technology of how that IP is 'materialized' into an actual product.
We could actually be a wealthier society if we bought & assembled less and made more.
Dryfly, good stuff. You are definitely referring to "upstream" when talking about materials, components and all that happens before later stages of assembly.
"Believe it or not it usually takes more brains and technology to engineer & make the subsystems & advanced materials making up the product that to perform the final assembly of the product itself."
I think you're correct on this point, but hasn't that always been a problem with statistics on manufacturing, at least in the U.S. The VAT countries used to break it down pretty well.
BTW, in my life "final assembly" means plugging in the power cord so I guess I contribute nothing at all even though I benefit from the finished product.
But is it not exactly because there is more cost in the subsystems than final assembly that their production migrates towards those nations whose governments subsidize that production (through exchange-rate manipulation)?
n a US plant, how much impact on wages (overtime, new workers) would doubling production have?
Obviously that depends. In this particular case the molds the critical components are produced in were made to run higher volume than original forecast... that was by design... say twice what we expected but not three times what we expected.
Result is that increasing capacity UP TO the 2X point hardly increases labor or capital costs at all since the process is automated - a small increase in total labor but an actual decrease in unit labor cost (fewer set ups and more parts - set ups are labor intensive).
Going above that 2X threshold requires a 'step up' in capital cost because an additional mold will be required to meet that demand. That's a pretty sizable increase in cost going from 2X to 2X + 1... but once you approach 3X the unit costs start approaching the 2X level again. Think 'step' function in total cost and 'saw tooth' in unit cost.
A lot of US mfg is like that - it won't be a big drain on actual 'fab' capacity but on tool makers & automation techs it could be... those are the guys who will be needed to make the 'step ups' happen.
I think a lot of US mfg is there - no problem increasing capacity up to a point then big problems after that (at least for short run - low cost increases in capacity).
But is it not exactly because there is more cost in the subsystems than final assembly that their production migrates towards those nations whose governments subsidize that production (through exchange-rate manipulation)?
Exactly. That's why a weakening dollar is so important - it helps break the manipulators subsidy.
There are still labor cost advantages in many of those countries... but if you need GOOD tool makers and automation techs then getting bad ones cheaper isn't a deal.
It took Japan a couple decades to train good techs and by the time they were done they were as or more expensive than equally competent US techs. They subsidized that learning curve (and have hung in the game since then) via currency manipulation.
A weak dollar just levels the playing field AND increases the 'price' they have to pay to subsidize their 'learn'. Places with really low labor rates will still be cheap but no bargain unless they get good too.
A strong mfg base will offset some of the mess that the housing market has inflicted on us (or rather that we let ourselves inflict on our selves). Ironically it will be in the white collar side - if you run factories then you need accountants & such. If they (foreigners) run those factories then they will eventually end up with those office employees. I've said many times - outsource a production line and the office follows pretty soon thereafter.
It won't save us but will help some - I see it happening even as overall mfg is struggling (autos, appliances and building products especially). The value added in components does require bodies to make work.
But my point originally was that ISM won't tell the whole story 'cause they BUY product and don't necessarily do a lot of value adding mfg with it. Relying on ISM is sort of like relying on NAR to tell us how healthy the RE market is - in some ways its meaningful and in others not so much. Just be aware of the biases and the structure of the industry and the numbers will make more sense.
Here is a chart of ISM's PMI for the last 40 years.
Look how much larger the swings were in the past. I attribute TWO causes for that:
(1) JIT-Lean Mfg (better inventory control)
(2) Companies are less vertical and more horizontal so they MAKE less and buy more finished goods.
Why does that matter? Long lead times and large EOQs for basic raw materials like steel required in vertical mfg make big purchases more common/economical as compared to buying completed systems. Result of those two will mean large swings in purchasing behavior both to the up side and down and thus large swings in ISM.
I think the ISM pre-1990 compared to post-1990 (this is when Lean JIT took off with a vengeance) is as bad a comparison as inflation pre-1990 to today.
It is interesting how much the PMI runs counter to your first hand experience. Especially when you look at the two biggest laggers in the index: New Orders were down 6.9% and the Production Index fell 4.6% (Employment, Supplier Deliveries, and Inventories did not have as large of changes). I will be interested to see what next month's figures are.
Kind of shoots a hole in the idea that we can "devalue" our way to prosperity. In the short term, job growth in the manufacturing sector isn't going to be able to save a collapsing service economy.
I remember being a kid and walking into WalMart when they still pretended to be "made in America". I remember seeing a sign touting the "made in America" measuring cups and the six US jobs created. Six US jobs were all that were needed to put measuring cups on every shelf in every Walmart in America.
I've got to think that if a US manufacturer can double production without a lot of incremental cost that the overhang in Asia has to be much higher.
Kind of shoots a hole in the idea that we can "devalue" our way to prosperity. In the short term, job growth in the manufacturing sector isn't going to be able to save a collapsing service economy.
You can't devalue your way to prosperity but NOT devaluing is worse - then you have don't even have 'working poor' which is the goal od devaluation... keep people working for less money relative to a basket of int'l currencies.
Devaluation is unavoidable in our current state, it is the result of decades of imbalances boiling over at once - primarily huge current account deficits year after year...
I mean what do you expect when all you give is paper for somebodies else's hard labor? When they find out you won't or can't trade real goods with them for all that paper - wouldn't you expect the paper to devalue? What other outcome would you expect?
I've got to think that if a US manufacturer can double production without a lot of incremental cost that the overhang in Asia has to be much higher.
I'm not suggesting EVERY domestic mfgr can double production w/o a hiccup... but more can than people realize - I've heard lotsa sr execs tell me they are running at 60% of capacity... I used to be a plant engineer/front line supervisor and know that really means, that they are running LESS than 60% of REAL capacity... its 60% of current capacity without any effort... a little debottlenecking and they squeeze out 25% more capacity than they thought they even had. Been there done that.
The question is at what price? With a dollar deval - they got cover to raise prices AND steal marketshare - that's what a devaluation is about - keep your people working & companies earning but for less in real terms.
That's where your Asian overhang kicks in - that and their central banks. Do they just sit idle and watch their marketshare decline or do their masters of the universe step in and nuke their own currencies to 'keep the playing field even'... even from their perspective that is.
It is interesting how much the PMI runs counter to your first hand experience. Especially when you look at the two biggest laggers in the index: New Orders were down 6.9% and the Production Index fell 4.6% (Employment, Supplier Deliveries, and Inventories did not have as large of changes).
Again its where you are in the food chain...
Take the hypothetical example of an automobile with 80% of the cost to mfg parts & systems:
80% is parts
...50% domestic
...30% foreign
20% final assembly (all domestic)
Lets say we have a 5% increase in domestic parts content due to currency shift...
80% parts
...55% domestic
...25% foreign
20% final assembly
Now if you have a 6% decline in orders overall the actual domestic parts producer is still 'better off' than before... it's equivalent to a 51.7% marketshare at the higher order level ((1-.06)*55).
The foreign producers however see both effects - lost marketshare AND lower orders overall (1-.06)*25 equivalent to 23.5%... compared to 30% prior.
Now I don't expect to see effects that large IN REALITY - certainly not in the short run. But it highlights how some could benefit even if the overall trend is in decline. I think I'm starting to see that and those companies are hiring... believe it or not.
Also shows how some will be hurt - in this case offshore producers. I expect we're gonna see foreigners bitch like crazy when the weak dollar really starts to kicks in.
Dryfly, many thanks for your insights. and as for the masters of the Chinese universe, their nuke the currency option is off the table. got no choice but to tell their industries to grow up. Beijing is showing marked indifference to the collapse of "sunset industries".
Also shows how some will be hurt - in this case offshore producers. I expect we're gonna see foreigners bitch like crazy when the weak dollar really starts to kicks in
Hmmmm.....
The Great Depression was preceded by round after round of competitive devaluation eventually leading to tariffs and an all out trade war.
Dryfly, many thanks for your insights. and as for the masters of the Chinese universe, their nuke the currency option is off the table. got no choice but to tell their industries to grow up. Beijing is showing marked indifference to the collapse of "sunset industries".
Kou Jie | 01.02.08 - 11:04 pm | #
I hope you're right Kou Jie - otherwise it will be a race to the bottom. No one wins that race.
The Great Depression was preceded by round after round of competitive devaluation eventually leading to tariffs and an all out trade war.
Kicker | 01.02.08 - 11:51 pm | #
Sure but they didn't have free floating currencies then - they had fixed exchange rates many tied to some 'hard metal'.
Now we mostly have freely floating currencies EXCEPT for a few that have de facto fixed rates maintained via manipulation to protect their export industries.
So if the one of the other 'floating currencies' fall due to fundamental weakness putting pressure on manipulation practices... is that 'bad'?
I mean how else do you correct long running and systemic trade imbalances WITHOUT having to result to tariffs?
Or is it proper for those foreign laborers to get ONLY paper for their labor? They get more and more paper and we get their stuff?
And if they are going to trade that paper for stuff who makes it? And what do THOSE FOLKS do with the paper?
In the face of that the currency isn't supposed to 'devalue'?
If we want a strong currency AND prosperity - then we have to produce goods and services we offer in exchange for the goods and services others offer us. That hasn't been happening to the tune of almost a trillion dollars a year imbalance.
So if the one of the other 'floating currencies' fall due to fundamental weakness putting pressure on manipulation practices... is that 'bad'?
Could be for me.....
A global deflationary recession that was met with round-after-round of competitive devaluation may mean dropping asset prices, stable "core" prices, and increasing commodity prices.
Not exactly a good place to be if your holding cash.
Happy new year,
finally, a French coffee press that
gets the mud out. I bought one and very happy with it.
off course, I only drink Jamaican blue mountain coffee.
ThinkGeek :: Aeropress Coffee Maker
Creation of derivatives will continue, but who will have cash to buy into risk?
DH
So as not to start the new year on such a dour note, employment numbers should be nudged up by people panning for gold out west.
Hey there is only one DH that is not anonymous.
DH the fertilizer man is doing just fine with his fertilizer stocks.
Well, it's finally gotten cold enough to wear my winter clothing, plus now I have a reason to wear my riot gear too!
More CRE pain-
The Chicago Tribune from Illinois. The vultures are circling. In an abrupt reversal, the commercial property industry that started 2007 giddy about its prospects enters 2008 facing falling property values, a seized-up credit market and concerns a slowing economy could dampen future leasing and rental rates.
The downtown Chicago leasing market faces 6 million square feet of new offices in development that will start coming online in 2009. Also, some older office buildings that had been eyed for conversion into residential condominiums may remain in the office supply.
It seems pretty obvious now that many buyers will have problems meeting pro forma [rent and income] projections and that there was too much optimism in these deals, said David Funk, director of the Cornell University Program in Real Estate.
In Chicago, office building sale prices fell 17 percent in the fall compared with the spring. Last month, only two properties sold for a total of $91 million, compared with a year earlier when 16 properties sold for $2.3 billion. Nationwide, the dollar volume of sales is off about 55 percent, reported Real Capital Analytics.
Commercial property performance always comes down to jobs, said Jeff Samaras, an executive VP at real estate firm Cushman & Wakefield Illinois Inc. If the economy gets into a mess, all bets are off.
The new year could bring a new reality for landlords and investors, said Christopher Carroll, managing director of a Chicago-based financial-services firm. No one can bet on selling a building for a higher price unless they have a plan to create value through sound operations, Carroll said.
In 2008, I expect to see [lenders] repricing properties on a grand scale, saying you can have this at 30 or 40 cents on the dollar for certain buildings in some markets, said Carroll.
Real Estate Buyers : Real Estate Buyers News and Photos - South Florida Sun-Sentinel.com
Its all connected. Housing, debt levels, consumer spending, demographics, political turmoil, election year politics, manufacturing, stagnant incomes, derivative explosion, illusionary financial profits, rising inflation, slowing gdp growth,etc.
Its time to pay the bill for all the foolish borrowing and lending.
"Its time to pay the bill for all the foolish borrowing and lending."
Or we can just lower the interest rate again....
ISM under 50? No one could have seen this coming!
Paid for by The Committee to Elect ConjureBag as OmbudsThingy.
That would be "OmbudsEntity," methinks.
OT - A glimpse of a different reality.
Business, financial, personal finance news - CNNMoney.com
"CARACAS, Venezuela (AP) -- Venezuela launched a new currency with the new year, lopping off three zeros from denominations in a bid to simplify finances and boost confidence in a money that has been losing value due to high inflation.
President Hugo Chavez's government says the new currency - dubbed the "strong bolivar" - will make daily transactions easier and cure some accounting headaches. Officials also say it is part of a broader effort to contain rising prices and strengthen the economy.
"We're ending a historical cycle of ... instability in prices," Finance Minister Rodrigo Cabezas said Monday, adding that the change aims to "recover a bolivar that has significant buying capacity."
Prices have risen as Chavez has pumped increased amounts of the country's oil income into social programs, reinforcing his support among the poor and helping to drive 8.4 percent economic growth in 2007.
The central bank is promoting the new monetary unit with an ad campaign and the slogan: "A strong economy, a strong bolivar, a strong country." Officials, however, have yet to clearly spell out their anti-inflationary measures.
Some Venezuelan critics, meanwhile, have dubbed the new currency the "weak bolivar," noting its predecessor, the bolivar, has seen its purchasing power suffer in an economy where inflation ran roughly 20 percent in 2007 - the highest in Latin America.
Venezuelan economist and pollster Luis Vicente Leon said that while the new currency may provide "the perception of stability" for some, it is largely a "cosmetic change."
..."
Goldman Sachs predicting that food commodities (soy, wheat, corn, etc.) will continue to boom. Not a good prediction for inflation IMHO.
Bloomberg.com
Wow, gold futures at $850. What a way to start off the new year!
Wow, CR, these are two negative stories. Why are you trying to provoke rich so early in the New Year?
Ugly numbers.
"Its time to pay the bill for all the foolish borrowing and lending."
Or we can just lower the interest rate again....
Well, the surge in oil prices that started with the first discount window cut is going to make that a much harder sell.
It'll be interesting to see what alternatives they try to cook up. But in the end they all amount to the same thing -- trying to find an easy way to generate prosperity.
One day, I hope, we'll finally relearn that "easy" and "prosperity" don't go together.
Then we can get back to building real wealth.
Goldman Sachs predicting that food commodities (soy, wheat, corn, etc.) will continue to boom. Not a good prediction for inflation IMHO.
Don't you know? Food doesn't count towards inflation.
If exports slow down, then Krugman's argument that they have compensated for the housing bust will come a cropper and a recession be upon us for sure.
Spot gold just touched $860.00, an all time high in nominal terms.
Notice how the weak dollar immediately transfers to commodity prices while not so directly affecting manufacturing and exports.
I wouldn't be surprised to see $1200 gold before this year is over. When manufacturing and exports will rebound is a little more obscure.
As an aside ,the treasury market is setting up for a potential race to lower rateds later in the week. Some speculators are reported to be selling as the 2year note trades to the low yield end of the recent range.If the labor report on Friday is weak(and I believe that to be the significant risk) the shorts will be forced to cover. Traders dont want to be digging out of a huge self imposed hole on the third trading day of the year. JJJ
I think July credit crunch finally hit ISM.
As Conjure said, "If there's no Ho, Ho, Ho, look out below."
Bears, Happy New Year.
john Jansen wrote: As an aside ,the treasury market is setting up for a potential race to lower rateds later in the week.
I know it was a typo, but there is an unintentional element of truth there. Our treasuries are being rated lower by the ROW. Hence the rush by Sovereigns to buy something else (pretty much anything else).
Of course the Fed will lower the interest rates. That's all that they know how to do, apparently.
We all heard the same "well oil and commodities and inflation will rise as the dollar falls if they cut arguments".
That seems to be a price the Fed is willing to pay. Hang on for the ride.
OmbudsConduit is my suggestion for the title. Taken already? If so sorry.
Detroit News: New Year to be tougher than old year for Michigan
"Goldman Sachs predicting that food commodities (soy, wheat, corn, etc.) will continue to boom."
That's nice they also said gold was going to fall to 718. The last time they said oil was going to 105 a couple of years ago it fell like a rock and we know these guys take both sides of the trade so watch out. Dollars are being destroyed not created by some omnipotent FED.
There are more analysts now popping up likes weeds claiming no one saw this coming just to cover their own useless butts.
forgot to add, just like those pathetic retailers that jacked up the price of generators 500% when the ice storm took power out across the NE a few years back, I sure as hell hope all remember who those people were.
I've been suspicious of the ISM all through the boom and equally so now during the 'bust'. I think it skews heavily toward (1) large OEMs and (2) assembly over fab - fab btw is where a lot of the mfg value added and jobs are, in automotive 70-80% of the value added is down stream of the automotive assembly plants.
In the boom we saw > 50 ISM and it implied 'mfg was doing well'... yet the small to medium fab & component mfgrs I knew were getting crushed (offshore competition). There might have been a lot of assembly out there but much of that assembly was made from offshore components.
Now the small to medium sized shops I work with are getting busy - I have a very large RFQ in for a Chicago firm coming from a UK branch of a large multi-national auto supplier (would have gone to Eastern Europe without even a look see in NAFTA Zone two years ago) and another email from a different large multi-national asking if we have the capacity to double & triple our production on some of their components - meaning they are looking at expanding domestic content in their product mix (we can double but not triple without more tooling).
ISM won't show any of that I just mentioned. ISM asks buyers are they buying more or buying less and does it cost more or does it cost less. It doesn't ask where the stuff comes from or how much of it contributes to their final sell (do they add a lot of value or just passed through).
I bet there is a lot being missed in this ISM release just like a lot was missed during the 'boom'.
Just an alternate view from where the sausage is being made.
fab btw is where a lot of the mfg value added and jobs are, in automotive 70-80% of the value added is down stream of the automotive assembly plants.
That was unclear - downstream, upstream depends on which direction you look in the supply chain - what I mean is that purchased systems, components and raw materials comprise 70-80% of the cost of mfg'ing a vehicle... a smaller fraction of the total cost is the actual 'assembly' yet that's what most folks think of when they think 'automotive mfg'... the final 'assembly line'. Yet that's only the tip of the iceberg.
Last bit of useless banter on this subject - I've long felt it would be preferable from an economic & societal basis for the US to 'make less but make more'. Meaning do less final assembly but produce more higher value sub-systems and components.
Believe it or not it usually takes more brains and technology to engineer & make the subsystems & advanced materials making up the product that to perform the final assembly of the product itself.
Think transmissions, engines, hydraulics & control systems in an automobile vs. bolting them together at the end. Same is true in lotsa products - appliances, electronics, etc.
The folks responding to the ISM survey are BUYING components not necessarily having anything to do with the making of those buys.
I'd rather see us assemble less over all (meaning lower ISM numbers going forward) yet designing & making more of what IS ASSEMBLED than the direction we had been heading the last dozen years.
I know it contradicts the Apple 'Platform Model' but in most cases that model is a myth. It is very difficult to control the IP for long if you don't control the actual technology of how that IP is 'materialized' into an actual product.
We could actually be a wealthier society if we bought & assembled less and made more.
Just sayin'.
Dryfly,
Just curious on that example you mentioned.
In a US plant, how much impact on wages (overtime, new workers) would doubling production have?
Here is a chart of ISM's PMI for the last 40 years.
http://bp3.blogger.com/_KmhLSrQWxsg/R3vnsJ6unvI/AAAAAAAAAG8/Nu6t3KK_LVE/s1600-h/PMI.jpg
The recession signals are starting to flash stronger.
Dryfly, good stuff. You are definitely referring to "upstream" when talking about materials, components and all that happens before later stages of assembly.
"Believe it or not it usually takes more brains and technology to engineer & make the subsystems & advanced materials making up the product that to perform the final assembly of the product itself."
I think you're correct on this point, but hasn't that always been a problem with statistics on manufacturing, at least in the U.S. The VAT countries used to break it down pretty well.
BTW, in my life "final assembly" means plugging in the power cord so I guess I contribute nothing at all even though I benefit from the finished product.
dryfly,
But is it not exactly because there is more cost in the subsystems than final assembly that their production migrates towards those nations whose governments subsidize that production (through exchange-rate manipulation)?
n a US plant, how much impact on wages (overtime, new workers) would doubling production have?
Obviously that depends. In this particular case the molds the critical components are produced in were made to run higher volume than original forecast... that was by design... say twice what we expected but not three times what we expected.
Result is that increasing capacity UP TO the 2X point hardly increases labor or capital costs at all since the process is automated - a small increase in total labor but an actual decrease in unit labor cost (fewer set ups and more parts - set ups are labor intensive).
Going above that 2X threshold requires a 'step up' in capital cost because an additional mold will be required to meet that demand. That's a pretty sizable increase in cost going from 2X to 2X + 1... but once you approach 3X the unit costs start approaching the 2X level again. Think 'step' function in total cost and 'saw tooth' in unit cost.
A lot of US mfg is like that - it won't be a big drain on actual 'fab' capacity but on tool makers & automation techs it could be... those are the guys who will be needed to make the 'step ups' happen.
I think a lot of US mfg is there - no problem increasing capacity up to a point then big problems after that (at least for short run - low cost increases in capacity).
Does that help?
But is it not exactly because there is more cost in the subsystems than final assembly that their production migrates towards those nations whose governments subsidize that production (through exchange-rate manipulation)?
Exactly. That's why a weakening dollar is so important - it helps break the manipulators subsidy.
There are still labor cost advantages in many of those countries... but if you need GOOD tool makers and automation techs then getting bad ones cheaper isn't a deal.
It took Japan a couple decades to train good techs and by the time they were done they were as or more expensive than equally competent US techs. They subsidized that learning curve (and have hung in the game since then) via currency manipulation.
A weak dollar just levels the playing field AND increases the 'price' they have to pay to subsidize their 'learn'. Places with really low labor rates will still be cheap but no bargain unless they get good too.
A strong mfg base will offset some of the mess that the housing market has inflicted on us (or rather that we let ourselves inflict on our selves). Ironically it will be in the white collar side - if you run factories then you need accountants & such. If they (foreigners) run those factories then they will eventually end up with those office employees. I've said many times - outsource a production line and the office follows pretty soon thereafter.
It won't save us but will help some - I see it happening even as overall mfg is struggling (autos, appliances and building products especially). The value added in components does require bodies to make work.
But my point originally was that ISM won't tell the whole story 'cause they BUY product and don't necessarily do a lot of value adding mfg with it. Relying on ISM is sort of like relying on NAR to tell us how healthy the RE market is - in some ways its meaningful and in others not so much. Just be aware of the biases and the structure of the industry and the numbers will make more sense.
JMHO.
Here is a chart of ISM's PMI for the last 40 years.
Look how much larger the swings were in the past. I attribute TWO causes for that:
(1) JIT-Lean Mfg (better inventory control)
(2) Companies are less vertical and more horizontal so they MAKE less and buy more finished goods.
Why does that matter? Long lead times and large EOQs for basic raw materials like steel required in vertical mfg make big purchases more common/economical as compared to buying completed systems. Result of those two will mean large swings in purchasing behavior both to the up side and down and thus large swings in ISM.
I think the ISM pre-1990 compared to post-1990 (this is when Lean JIT took off with a vengeance) is as bad a comparison as inflation pre-1990 to today.
Again JMHO.
We still have a U.S. Factory sector ? Whoever knew ?
Dryfly,
It is interesting how much the PMI runs counter to your first hand experience. Especially when you look at the two biggest laggers in the index: New Orders were down 6.9% and the Production Index fell 4.6% (Employment, Supplier Deliveries, and Inventories did not have as large of changes). I will be interested to see what next month's figures are.
Thanks dryfly...
Kind of shoots a hole in the idea that we can "devalue" our way to prosperity. In the short term, job growth in the manufacturing sector isn't going to be able to save a collapsing service economy.
I remember being a kid and walking into WalMart when they still pretended to be "made in America". I remember seeing a sign touting the "made in America" measuring cups and the six US jobs created. Six US jobs were all that were needed to put measuring cups on every shelf in every Walmart in America.
I've got to think that if a US manufacturer can double production without a lot of incremental cost that the overhang in Asia has to be much higher.
Kind of shoots a hole in the idea that we can "devalue" our way to prosperity. In the short term, job growth in the manufacturing sector isn't going to be able to save a collapsing service economy.
You can't devalue your way to prosperity but NOT devaluing is worse - then you have don't even have 'working poor' which is the goal od devaluation... keep people working for less money relative to a basket of int'l currencies.
Devaluation is unavoidable in our current state, it is the result of decades of imbalances boiling over at once - primarily huge current account deficits year after year...
I mean what do you expect when all you give is paper for somebodies else's hard labor? When they find out you won't or can't trade real goods with them for all that paper - wouldn't you expect the paper to devalue? What other outcome would you expect?
I've got to think that if a US manufacturer can double production without a lot of incremental cost that the overhang in Asia has to be much higher.
I'm not suggesting EVERY domestic mfgr can double production w/o a hiccup... but more can than people realize - I've heard lotsa sr execs tell me they are running at 60% of capacity... I used to be a plant engineer/front line supervisor and know that really means, that they are running LESS than 60% of REAL capacity... its 60% of current capacity without any effort... a little debottlenecking and they squeeze out 25% more capacity than they thought they even had. Been there done that.
The question is at what price? With a dollar deval - they got cover to raise prices AND steal marketshare - that's what a devaluation is about - keep your people working & companies earning but for less in real terms.
That's where your Asian overhang kicks in - that and their central banks. Do they just sit idle and watch their marketshare decline or do their masters of the universe step in and nuke their own currencies to 'keep the playing field even'... even from their perspective that is.
Interesting times.
Dryfly,
It is interesting how much the PMI runs counter to your first hand experience. Especially when you look at the two biggest laggers in the index: New Orders were down 6.9% and the Production Index fell 4.6% (Employment, Supplier Deliveries, and Inventories did not have as large of changes).
Again its where you are in the food chain...
Take the hypothetical example of an automobile with 80% of the cost to mfg parts & systems:
80% is parts
...50% domestic
...30% foreign
20% final assembly (all domestic)
Lets say we have a 5% increase in domestic parts content due to currency shift...
80% parts
...55% domestic
...25% foreign
20% final assembly
Now if you have a 6% decline in orders overall the actual domestic parts producer is still 'better off' than before... it's equivalent to a 51.7% marketshare at the higher order level ((1-.06)*55).
The foreign producers however see both effects - lost marketshare AND lower orders overall (1-.06)*25 equivalent to 23.5%... compared to 30% prior.
Now I don't expect to see effects that large IN REALITY - certainly not in the short run. But it highlights how some could benefit even if the overall trend is in decline. I think I'm starting to see that and those companies are hiring... believe it or not.
Also shows how some will be hurt - in this case offshore producers. I expect we're gonna see foreigners bitch like crazy when the weak dollar really starts to kicks in.
Dryfly, many thanks for your insights. and as for the masters of the Chinese universe, their nuke the currency option is off the table. got no choice but to tell their industries to grow up. Beijing is showing marked indifference to the collapse of "sunset industries".
Also shows how some will be hurt - in this case offshore producers. I expect we're gonna see foreigners bitch like crazy when the weak dollar really starts to kicks in
Hmmmm.....
The Great Depression was preceded by round after round of competitive devaluation eventually leading to tariffs and an all out trade war.
Dryfly, many thanks for your insights. and as for the masters of the Chinese universe, their nuke the currency option is off the table. got no choice but to tell their industries to grow up. Beijing is showing marked indifference to the collapse of "sunset industries".
Kou Jie | 01.02.08 - 11:04 pm | #
I hope you're right Kou Jie - otherwise it will be a race to the bottom. No one wins that race.
The Great Depression was preceded by round after round of competitive devaluation eventually leading to tariffs and an all out trade war.
Kicker | 01.02.08 - 11:51 pm | #
Sure but they didn't have free floating currencies then - they had fixed exchange rates many tied to some 'hard metal'.
Now we mostly have freely floating currencies EXCEPT for a few that have de facto fixed rates maintained via manipulation to protect their export industries.
So if the one of the other 'floating currencies' fall due to fundamental weakness putting pressure on manipulation practices... is that 'bad'?
I mean how else do you correct long running and systemic trade imbalances WITHOUT having to result to tariffs?
Or is it proper for those foreign laborers to get ONLY paper for their labor? They get more and more paper and we get their stuff?
And if they are going to trade that paper for stuff who makes it? And what do THOSE FOLKS do with the paper?
In the face of that the currency isn't supposed to 'devalue'?
If we want a strong currency AND prosperity - then we have to produce goods and services we offer in exchange for the goods and services others offer us. That hasn't been happening to the tune of almost a trillion dollars a year imbalance.
So if the one of the other 'floating currencies' fall due to fundamental weakness putting pressure on manipulation practices... is that 'bad'?
Could be for me.....
A global deflationary recession that was met with round-after-round of competitive devaluation may mean dropping asset prices, stable "core" prices, and increasing commodity prices.
Not exactly a good place to be if your holding cash.