Global Economic Supply & Demand

Global economic demand has remained positive yr/yr for the duration of the economic
recovery, but momentum has decelerated rather steadily over the past three years and
for the past year has been running at a decidedly subpar 2%. Global capacity growth has
exceeded that of demand for well more than a year, leading to declining operating rates,
falling commodities prices, decelerating rates of inflation and very importantly as well,
a sharp decline in the momentum of world trade. With banks globally still in repair
mode, credit to support trade finance and cross border investment has become more
limited, so that even prior rapid growth emerging economies are suffering a deterioration
of internal fundamentals as exports have slowed to a crawl and aspiring middle class
consumers  have drawn in more imports. To add insult to injury, an apparent commitment
by the Fed to curtail its very large QE program, has worked to force long term interest
rates up around the world.

Interesting then global PMI manufacturing data for Jul. and Aug. to date show an upturn in
output and new order rates. This is very good news even after acknowledging that PMI data
can be volatile. A re-acceleration in production and trade growth from the recent dreary
and socially risky 2% would be very welcome globally and for the US as well, since our
exports were a strong driver of recovery in the initial stage and have been quite subdued
since the spring of 2012.

Naturally, faster global output growth would eventually lead to higher inflation. However,
an acceleration of global capital flows needed to underwrite the kind of speculative
expansion witnessed over 2003 - 08 now seems remote as banks have more leverage
restrictions and are still unwinding remaining excesses from the last boom. As well,
business will take its time to gear up after experiencing the dramatic loss of sales
momentum seen over the past three years.

Note the recent improvement in the commodities market: CRB Weekly