Tuesday, 27 January 2015

US Data Confirms Conjunctural Shift To Long Wave Summer

Some time ago, I wrote that the Long wave boom that began in 1999, was shifting to its Summer phase, a shift that occurred around 2012.

I wrote at the time that it would be signalled by the sharp rise in primary product prices coming to a halt, as those high prices brought large new supplies on stream.  That part of the analysis has been shown to be correct as oil prices, and other primary product prices have fallen, as supply has risen sharply.

I also wrote at the time that this shift would be signalled by a slowdown in technological innovation, which would have several consequences.  Some time ago, in illustrating this shift, and one of the consequences of this slow down in innovation, I pointed to Apple.  It had in the previous phase been a bell-weather of technological development, being responsible for a range of new products.  I pointed out that, increasingly Apple's new product launches were nothing more than revamped versions of its existing products.  The consequence would be for new launches to cannibalise existing demand for products, especially as basically the same product was sold in cheaper and more expensive versions.  That also happened, and I pointed out that a consequence was that Apple was having to reduce its profit margins to be able to continue to sell in the large volumes it required.

The other consequence of this slow down in technological innovation, I pointed out was that productivity growth would slow down, and this would mean that unit costs would tend to rise, and profit margins would again start to be squeezed.  The only solution to both these problems is for capital to invest in additional productive-capital.  It means it must begin to invest in additional research and development to come up with really new products to sell, rather than merely superficial changes to existing products, and to create new production techniques to raise productivity.  In the first instance, as marx describes of this phase of the cycle, capital must invest in additional productive capacity, as each individual capital seeks to reduce unit costs by producing on a larger scale, and capturing or at least defending market share from its competitors.

The economic data released in the US in the last hour confirms this analysis once more.  The data shows that durable goods output december was down sharply, and the data for November, was also revised down.  Durable goods, here is a proxy for investment in capital.  In part, this reduction is the consequence as I had predicted a few months ago, of the three year cycle, which has already caused a slow down in economic activity in China, the EU, UK and elsewhere.  The data released at a company level also confirms the analysis.

Profit figures from a range of companies from Caterpillar to Microsoft show profit growth slowing, even where revenues have continued to increase.  In other words, it shows that profit margins are getting squeezed.  At this stage of the long wave cycle, the consequence of this is always to require that an increased proportion of profits goes to investment and capital accumulation, and a smaller proportion to the payment of dividends, rents and so on.  The demand for loanable money-capital thereby rises, whilst its supply declines, pushing interest rates and yields higher.

Its no surprise, therefore, that the US stock market has shown a decline of over 300 points in the DOW futures ahead of the market open.  It is the kind of response I have analysed in the series on the long wave, as well as in the series on fictitious capital.

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