From The King Report
Thursday July 1, 2004 – Issue 2950 "Independent View of the News"
A stunningly disturbing Chicago PMI trumped the Fed rate hike. The action in the markets yesterday suggested a change in economic perceptions. It could be the beginning of the end. The ugly Chicago PMI details: 56.4, 65 expected; employment fell to 53.6 from 54.8; production collapsed to 53.9 from 71.1; new orders collapsed to 56.8 from 74.4; prices paid jumped to 84.5 from 80.
You can forget all the post mortems on the Fed decision and communiqué; the real talk in the money world yesterday was the astonishing collapse in the Chicago PMI. Dec Eurodollars, which, like other markets had priced in a 25bp rate hike, rallied 13 bps. The perception that the Fed must or will raise rates sharply by year end is changing. And that was the topic in the Eurodollar pit yesterday.
Many professed surprise and concern about Fed dovishness. The reason for the Fed’s dovishness and the FOMC communiqué is emerging. But that does NOT excuse Easy Al for his malfeasance.
For months we have been warning that: 1) the US economy would peak in April –May and 2) Easy Al’s boneheaded policy of keeping rates at emergency levels even though inflation has been increasing for the past few years has the Fed so behind the inflation curve that Easy Al would be raising rates as the economy was rolling over. And that’s precisely what is occurring.
The Chicago PMI, as we keep noting, has been exhibiting more strength that any other index including the Fed’s Midwest survey. Yesterday the Chicago PMI crashed in the biggest drop since September 1974. 1974 was a seminal year in US economic history. Its recession was the worst since The Great Depression and marked the long-term trend of declining US real wages and US manufacturing and the ascent of Japan and Germany as manufacturing leaders. Japan is stagnant; Germany is in decline.
When the PMI and other sentiment survey were showing strength not substantiated in hard data we kept averring that the headlines like ‘US manufacturing at 20-year’ were egregiously duplicitous. These surveys are opinions, not hard data, and the economists that were heralding the strength should know better. The June collapse is evidence that reality has returned to those being surveyed. Of course this is a collapse in sentiment, but the data is showing contraction also.
Please recall that many months ago we noted that in Q3 when GDP soared to +8.3% US industrial production DECLINED. It wasn’t until Q4 and Q1 that US companies increased production and built up inventories. We stated then that this is what seeds a recession – businesses building inventory and registering tres jiggy sentiment readings AFTER a consumer binge. And that binge occurred on historically low interest rates, a tax rebate, accelerated depreciation biz benefits and war spending. Much of the stimulus has or is due to end. And the y/y comparisons that were so easy in April/May turn much tougher now. You don’t need complex econometric models or a staff of economists and statisticians if you think sans bias, ‘do the work’ and understand how the data is compiled and what it really represents.
An intractabull economist from a major firm, who for months hyperventilated on PMI survey strength, yesterday demurred on CNBC that you shouldn’t heed the Chi PMI’s historic decline for June.
Dan 
AI
