Outside the Box

Orders and Production: No Time for Complacency

August 7, 2012

We have been assaulted with economic news of all sorts, from every corner of the globe, while trying to watch the Olympics and while we would rather be enjoying summer and decompressing (at least in the Northern hemisphere).

But the data keeps coming. My friend John Silvia, the Chief Economist of Wells Fargo, has been with me in Maine this past weekend. And as we caught fish and shared our thoughts, we also both managed to get out our respective writing done. His note this morning is a particularly interesting analysis of US data, which has him wondering about his call for tepid growth but no recession

“A run of weaker-than-expected economic data in recent weeks has engendered the usual speculation of whether or not the economy is poised to slip back into recession. In this piece, we describe the critical role of industrial production in the current cycle and discuss how deterioration here could signal trouble for the broader economy. We also analyze what has happened in past cycles when these components have simultaneously slipped into contraction territory.”

My son Trey and I have been going to these Maine summer events for six years. The last time the conversation was as, let’s say, “concerned,” was in August of 2008. This year the concern about Europe has been evident. My main thesis is that the US should not fall into recession unless it is pushed. And Europe could be the catalyst, if they do not control their problems. Much of the continent is in recession, and Greece, Portugal, and Spain are in what can only be called depressions.

The longer the Europeans vacillate about what to do, and continue to offer up nothing more than hope and endless summits, the worse it will get. They cannot avoid a very costly decision. Either breakup or a full fiscal union is going to be massively expensive. The only thing that can be more costly is to avoid doing either. If they don’t act decisively, they will most certainly drag the US and global economy into recession as well.

The last month has been perhaps the most intellectually stimulating of my life. I write this on a plane home. (The economy may be tepid, but the planes I have been on in the US have been oversold for the last few months. Which means the free upgrades are getting harder to come by.) I am looking forward to digesting what I have been confronted with. Some of it has been enormously positive, and some of it disturbing. The true surprises really have been to the upside. The past month has reinforced my very-long-time (admittedly almost extreme) positive outlook, though we face an immediate future that we may best characterize as not so bullish. And if I were a citizen in most any European country, my prospects would seem dark indeed.

But that is a topic for later letters. For now, let’s look at what John Silvia and his most solid team have to offer us.

Your mind on overload analyst,

John Mauldin, Editor
Outside the Box

subscribers@mauldineconomics.com

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