I am very pleased to get a mention in the latest Hoisington Management Quarterly Review by Lacy Hunt. 
The Global Capacity Glut
The Hoisington 4th-Quarter Investment Review is now publicly posted, Here are a few snips courtesy of Lacy Hunt. (Emphasis added)
Factories across the world are growing increasingly idle. Global industrial capacity utilization (CAPU) has fallen significantly, and a rising unemployment rate has followed suit, signaling that the available factors of production globally are progressively more redundant. The reason this is relevant is that since 1990, this thirty-four year correlation is consistent with the U.S. experience where data has been available for seven decades. As such, CAPU appears to be the dominant supply-side variable in determining inflation in the United States, China, Japan, U.K. and the EU.
CAPU – At Recessionary Levels
In the United States, CAPU has plummeted to levels lower than at the start of all of the cyclical recessions since 1967 (Chart 1). This vividly reflects a significant underutilization of resources, a circumstance which has historically led to moderating economic growth. Based on nearly complete fourth quarter 2024 data, the U.S. CAPU is estimated to have been 76.9%, a significant 3.2 percentage points lower than the post-1967 average and 6 percentage points below the historical level of 82.9%, which is the average entry level for the cyclical recessions. This surplus capacity reflects an irregular cyclical decline in industrial production from the fall of 2022.
The estimated level of CAPU outside the U.S. in the fourth quarter was 74.8%, 4.3% lower than its post-1990 average of 79.1%. Since 1990, foreign CAPU has generally led U.S. CAPU.
As shown in Table 1, the latest CAPU in the U.K., the EU, Japan, and China were below their post 1990 averages by 9.5%, 4.7%, 15.9%, and 2.2%, respectively. This capacity glut explains why China, the world’s leading manufacturing economy, is experiencing outright goods deflation. With the yuan depreciating in the foreign exchange markets, China’s goods deflation is being transmitted globally.
US Capacity Utilization vs Major Foreign Economic Regions
Rising Unemployment: A Pivotal Factor in Economic Growth (
The U.S. unemployment rate (UR) has risen from a low of 3.4% in April of 2023 to 4.1% in December of 2024, an increase of 20.5%. This rise in unemployment was mainly a result of a highly noteworthy loss of six hundred twenty four thousand jobs in the private sector of the household survey, which reached its cyclical peak in 2023. The global aggregate UR for all five countries has also moved higher. By the end of 2024, the global aggregate UR had risen sufficiently to return to the level at the end of 2022, pointing to slower economic activity and weaker investment and, in turn, weaker consumer spending.
Three rules linking the unemployment rate to recession are worthy of discussion. These rules provide a framework for evaluating the lag between a rising UR and the magnitude of an increase in the UR before the start of an economic contraction. First, Edward McKelvey, a retired Goldman Sachs economist, found that when the current value of the 3-month moving average of the UR is subtracted from its 12-month low, and the difference is 0.2 percentage points or more, then a recession is likely to occur. Next, a former Fed economist, Claudia Sahm, found that the recession hurdle is for a difference of 0.5 percentage points, similar to McKelvey’s rule. Third, writing in the December 20, 2024, edition of ‘Mish Talk’, macroeconomic writer Mike Shedlock calculated a recession is triggered by a 0.015 percentage point difference between the current 3-month moving average from its five-month low. Shedlock’s procedure also eliminated recession calls when prolonged high unemployment was part of a continuing recession, not a new business cycle.
Shedlock’s rule was based on data dating back to 1948, a more extended sample period than either McKelvey or Sahm.
The McKelvey and Shedlock indicators currently exceed their recession entry levels. The Sahm indicator would be triggered by 0.1 percentage point increase in the 3-month average. Although widely rejected, the risk of an oncoming economic contraction remains elevated, an event that would further increase the overhang of excess capacity.
Thanks to Lacy Hunt for the mention.
Two Recession Indicators, What Do They Say Now?
For discussion of my recession indicator, please see Two Recession Indicators, What Do They Say Now?
I will do an update with the February jobs report, (January data).
A good debunking of Velocity
https://mises.org/mises-wire/quantity-theory-money-and-equation-exchange
My explanation is simpler but that is also excellent. V came up earlier today but don’t see it as a comment here.
OK: Velocity is an output. It causes nothing. V can rise or fall with prices, with GDP, with money, and with the number transactions.
That is a mathematical fact.
MV=PY
V= PY/M
Since V is not a constant and cannot be measured, so what?
Friedman’s mistake was assuming V was a constant or near-constant (range). It isn’t, essentially reducing the formula to V= V, M=M, PY=PY or GDP=GDP
V cannot be measured and causes nothing.
.5 = 2/4
.5 = 4/8
.5 = 16/32
.5 tells you nothing about the right side of the equation
V does not tell you anything or imply anything about M or P or Y or GDP
.5 = .5
Like .5, V is a result.
It cannot cause anything.
Tough read.
PV = nRT
It is a plug in number to balance the books.
In accounting debits always equal credits.
In economics figures don’t lie but liar’s can figure.
Velocity (with which money is spent) makes more sense to me than “demand for money”. As a concept, it makes sense and offers a partial, theoretical explanation of why prices are not so predictable as a function of the quantity of money/GDP.
But as Mish notes, it is a derivative. I don’t disagree with Mises that it has limited use, but I don’t quite get why they feel so strongly about it.
Income velocity, Vi, is endogenously derived and therefore contrived (N-gDp divided by M) whereas Vt, the transactions’ velocity of circulation, is an “independent” exogenous force acting on prices.
The Great Inflation was due to the monetization of time deposits (the end of gate keeping restrictions.. The “time bomb” of 1981 is prima facie evidence.
The 2012 expiration of the FDIC’s unlimited transactions’ deposit insurance was responsible for the “taper tantrum” (as predicted).
You’re right if you’re talking about income velocity. . Irving Fisher’s transaction’s velocity of money became a statistical stepchild. Income velocity may move in exactly the opposite direction as the transaction’s velocity of money, e.g., 1978.. The G.6 Debit and Deposit Turnover release was discontinued in Sept. 1996. There’s no longer a valid measure of velocity.
But we can fall back on economic theory As Dr. Philip George says: “The velocity of money is a function of interest rates”
As Dr. Philip George puts it: “Changes in velocity have nothing to do with the speed at which money moves from hand to hand but are entirely the result of movements between demand deposits and other kinds of deposits”.
Vi peaked in Sept-Oct:
Large Time Deposits, All Commercial Banks (LTDACBM027NBOG) | FRED | St. Louis Fed
Preceding the Great Inflation, using the transaction’s velocity of money in American Yale Professor Irving Fisher’s truistic equation of exchange, during the decade ending in 1964 aggregate monetary demand increased at an annual compounded rate of about 6 percent. In the subsequent 9 years, the increase was more than 13 percent, and in 1972-73 nearly 30 percent.
The sharp increase in DD velocity since 1965 was the consequence of a variety of exogenous derived factors which include:
1) the daily compounding of interest on savings accounts in commercial banks and “thrift” institutions (Saving and Loan Associations, Credit Unions, and Mutual Savings Banks),
2) the increasing use of electronics to transfer funds (ETF accounts)
3) the introduction of “negotiable” commercial bank certificates of deposits,
4) the rapid growth of ATS (automatic transfers of savings to DDs) and NOW (negotiable orders of withdrawal) accounts, and MMDA (money market deposit accounts)
…all which enabled people to economize on demand deposits (exploit opportunity costs)
5) in combination with these factors, higher interest rates are both a cause and an effect of higher turnover rates, thus contributing to the publics’ desire to minimize noninterest bearing checking accounts. By forcing up rates of inflation – and thereby interest rates, the public is induced by the higher interest rates, and by expected higher prices, to minimize its holdings of non-interest- bearing demand deposits.
What’s going on in Japan? CAPU down 16% and lowest of its peers. Heard lots about Europe’s struggles especially Germany but nothing about Japan.
Isn’t a relevant question where the excess capacity is occurring? As in, what specific industrial sectors are facing this problem? Not all factories are equal and most are specialized in producing particular goods or inputs in specific industries and often in specific locations, so an aggregate measure of industrial capacity might be good as an overall indicator of recession or expansion, but it’s also masking where the problems are in manufacturing. Excess capacity in one industrial sector doesn’t mean that all sectors are experiencing slack.
You were quoted because you did a fabulous job with adjusting the indicator. Kudos!
“Shedlock’s rule…”
Shedlock rules! Congratulations on such a notable recognition by a peer.
Tariffs could increase US capacity utilization some. Instead of paying the 25% tariff, pay 10% more for the domestic equivalent.
Depends on the item. For some, it’ll just be cheaper to pay the tariffs, for others a shift to domestic production will make sense. Good luck predicting which is which in advance.
Important to always peel back the onion when looking at broad indicators such as capacity utilization. In the U.S., utilization for Aerospace and Misc. Transportation Equipment has plummeted recently given the issues at Boeing. I assume that will eventually normalize and help support overall CAPU. Motor Vehicle and Parts (too much EV capacity?), and Primary Metals also soft.
So the deflation/recession trigger in April 2022, when NATO put sanctions on Russia after engineering an ethnic cleansing program in The Ukraine from 2014-“ThePandemicHoax” finally started showing up a year later, and then August 2024 we finally see the longest ever 2-10 yield spread inversion flip, and hey presto… here we are with at least 2 years of bad news ready to avalanche. When you look at GDP figures for places like Germany and China, you can see a situation that looks twice the size of the GFC, and as such looks likeley to roll into the 2030s.
Until the models blow up and there’s no eggs on the shelf…
A glut cannot happen at the market clearing price.
“This rise in unemployment was mainly a result of a highly noteworthy l
oss of six hundred twenty four thousand jobs in the private sector of the household survey, which reached its cyclical peak in 2023.massive increase in illegal immigration to the tune of 12M which has put a crap ton lower skilled Americans out of work and taking pay cuts.”In general, low-skilled mass immigration doesn’t just take out low-skilled expensive natives with rights etc… it also zaps the influx of brand new young workers, who are left to fester as NEETS and increase the population of the unemployable natives – everywhere.
2025. Sell in May and go away.
I have always enjoyed Lacy Hunt and his work. Well done getting in the QIR
Disgraceful
The Laken Riley Act passes the House 263 – 156 and now heads to President Trump’s desk to be signed into law. All 156 votes against were cast by Democrats.
Those 156 will pay with their seats.
Discriminating against criminals is racist.
Let’s hope so!
Isn’t the core of law about being able to deport folk that are accused of crimes.. but not convicted? So basically ….burn the witch
Martin Armstrong’s model predicted early May 2024 as the beginning of a worldwide downturn into 2028. I think you, too, see a recession. Trump’s war on trade, while understandable, will make matters worse. I’m a long-time follower of Martin’s model, and it’s been correct for forty years. One of the reasons for overseas recession or worse economic conditions is the dollar’s rise. The dollar will rise further, crushing the rhetoric of the dollar haters. Almost everything is in dollars worldwide; mortgages, contracts, and trade. Remember the Plaza Accord? The dollar was too high, so the leaders artificially forced it down in 1985, only to create the 1987 market crash.
The point here is the Model is picking up again markets being manipulated, which will cause severe issues into 2028.
I’ve noticed the USD rallying as well. I view the slowing European economy causing a USD rise. Investors are putting their money where it will get the strongest return, or greatest safety. It takes a lot of exchange from Euro to USD to see the rise in the USD, so enough big investors are probably hedging (know of) an expanded Russian-Ukraine war.
Mish,
Kudos on the mention from Mr. Hunt… He is one of the best…. As a prognosticator he has been wrong as we all have on our crystal ball forecasts.
I am not sure that he factors the unconventional means that the FED and the shadow banks have skewed the landscape, nor how increasing debt also increases GDP as Michael Hudson has shown.
For what it is worth, eventually he will be correct. Governments and the private sector cannot continue this extend and pretend without a day of reckoning.
Similarly, the Warren Buffet indicator of a recession is way, way past its due date.
This will make the day of reckoning all the worst due to the alphabet soup of the FED providing liquidity to those that have ownership of the regional district FED, political and economic connections in D.C at the Justice, Treasury Departments and of course the Federal Reserve.
Again, congratulations.
Please keep up your timely and relevant work.
This is terrible
CNBC reports today that CNN will be laying off “hundreds” of its 3,500 employees later this week, as the network struggles to make money following the 2024 election.
Lots of CNN fans here. 😆 🤣 😂
aka Idiots
Go woke go broke.
remember the wall on the southern border? good luck
At least a third of landowners approached by state officials have refused to let wall be built on their properties. That’s forced the state to largely build on ranchland in remote areas, or erect sections that are full of gaps. https://apps.texastribune.org/features/2024/texas-border-wall-greg-abbott-landowners/
Silly poors and their property rights.
My consolation prize is that drug addiction turns the user into a short match.so nice knowing you elon
Like you, you mean? I own all of your atoms and the electrons that orbit them.
… but do you have any Grey Poupon, Lord Soros?
There is always eminent domain the Trump way by exec order or through the national congress. Screw Texas and their legislature, and their ranchers.
We need to build that wall to keep out the immigrants that are fleeing their countries such as Venezuela and Cuba because the US sanctions them thereby making the conditions in the aforementioned countries worst economically so they have to leave in the hope of a better life in the US or joining families already here.
This is what empires do….
The west exploits poor countries, foments wars and civil unrest whenever folk object to being ripped off and then complains about economic migrants. just fo
That’s what they say now.
Lets see what they say when the wall is erected in those other places and suddenly all the illegals stream across the place of least resistance which will be their property. They’ll likely be begging for a section of the wall to be erected on their lands.
How about an ounce of prevention is worth a pound of cure.
US imperialism, CIA corporatism at our southern border, halting democracies through juntas, installing banana republics are the cause of the illegals crossing over in the main.
The maquiladoras are now staffed by Mexicans but also illegals staged in Mexico to keep wages low by US corporations to keep Mexico wages low.
The US has reaped what it has sown and Trump will only make it worst.
This is predatory capitalism, jingoism and imperialism coming together to divide and conquer the working classes in the US versus the illegals.
The illegals are fleeing poverty created by indigenous elites in their own country and the US deep state at the behest of the corporations.
Follow the money.
Katrina was the test project where Caribbean and Central American labor were substituted for African American US labor to rebuild New Orleans. Blacks rightfully took umbrage but at the wrong group.
Trump needs detailed and comprehensive enabling legislation that supersedes all existing tribal law, parks law and environmental law in order to get a real wall completed. I don’t think he’s ever understood that, and he’s unlikely to get it out of a 2-3 seat House majority. Ultimately he has to be willing to shut down the government – something he’s never really had the guts to do.
If such enabling legislation were in place, those landowners would have to pound sand, selfish bastards that they are.
Eminent Domain will be invoked. The porosity of the national border is not up to the individual landowner but is a decision of the Federal government.
The rate-of-change in our means-of-payment money, the proxy for R-gDp, is down. The ROC for inflation is up. That explains the yield curve.
The Global Industrial Capacity is down bc the US is flipping from offshore to onshore.
❤️ Lacy. He will be right eventually.
The only economic indicator that truly seems to make financial sense is the consumer delinquency rate hitting specific thresholds indicating that consumers are over extended. Once consumer finances are fragile, an unexpected event occurs that causes lenders to back away from further credit issuance at the pace that was present at the time. Consumers not having reserve capital shift from delinquency to default and dominos fall across all sectors as lenders panic. As an indicator, delinquencies reach these thresholds 12-24mos prior to recession with equities at their peak. The Sahm and McKelvey rules signal after recessions have begun and are not leading indicators.
As long as I’ve been reading, him Lacy’s letters always boil down to basically the same thing. Deflation is coming due to high govt debt levels & demographics, and treasury yields will fall. He has been wrong about that for what about that for 3 years in a row now? He seemed to be bullish long bonds even when the 10 yr was 2%?
Yes an admitted mistake
This can easily go either way here. Recession could start with expectations of a hike
And placing tariffs on imports from Canada will be enough to bring recession on at full speed.
The Fed could cut more and the yield on the 10 year could go even higher.
Correct. The Fed is on Hold
That has helped the Long Bond
You can see deflation manifesting outside of the USA everywhere.. Asia and Europe.
World economy is breaking down. US will be last to go.
Current Demographics will lead to high inflation especially in places like NYC…
For the last 2 decades Armies of immigrants imported from South Asia and central & Latin America have led rents to double and triple outside Manhattan because landlords know see this as well
It is coming, but no one can predict when.