A Double Dip?

Are we headed to a return to recession in the American economy?

U.S. consumers cut spending in September and turned gloomier this month, underscoring the fragility of the economy's recovery even as signs emerged that manufacturing may be picking up.

Manufacturing may not be picking up as advertised. I will get to that in a minute.

How about a look at some unwarranted optimism?

A separate report showed factory activity in the nation's Midwest expanding for the first time in more than a year, but employment conditions deteriorated. A dismal job market appeared to weigh on consumers, with the Reuters/University of Michigan final index of sentiment for October slipping to 70.6 from 73.5 last month.

What are gasoline prices doing to consumer sentiment?

Gasoline prices are now up 17 straight days after climbing 0.4 cents overnight to $2.695 a gallon, according to auto club AAA, Wright Express and Oil Price Information Services. That is the highest price since Oct. 26, 2008.

Prices are up 5.9 cents from a week ago and 14.8 cents from a year ago.

The average retail price for gas was $1.686 a gallon in December. Today's price will tack about $50 a month on to the monthly gas cost for the typical customer compared with then. It comes at a time when unemployment is at a 26-year high.

"It's a wet blanket on the consumer. It's something visible you see," said economist Ken Mayland of ClearView Economics.

Oil prices that skyrocketed to $147 a barrel a barrel in July 2008 helped push the economy into recession to begin with, he said.

"Can high oil prices shut down the economy? Well, clearly the answer is yes," he said.

With pessimism ruling the economy rising gasoline prices are going to hurt sentiment. The stimulus by the government is nearly played out and the government's line of credit went mostly for present consumption and not future growth. On top of that people know that with Bush's tax cuts expiring in 2010, taxes will be going up. That will further dampen current sentiment.

Now what about manufacturing? Steel is a barometer of the economy, just as steal is the watchword of politicians. And steel is going down while steal is going up. Not a good combination.

Let me start with steel tubing prices.

Price increases flopped for steel tubing products in October--in fact, they slipped--as prices of the feedstock hot-rolled sheet plateaued at September levels and tube purchasing by original equipment manufacturers declined, according to buyers.

Market sources say the proposed increase of $50/ton for structural tube has been rescinded by tubing mills in the South and Midwest. The October market price reported to Purchasing.com is $634/ton, down a smidge from a $638 average in September-and well below the $720 list price for hollow structural sections.

So demand is meeting supply at a lower price. That can only mean lower demand.

Steel scrap prices are slumping.

The economy is recovering too slowly to help U.S. steel manufacturers maintain recent steelmaking rates in excess of 60%. So, Key Bank Capital Markets analyst Mark Parr writes to clients that ferrous scrap prices could continue to decline over the next couple of months, noting that export scrap pricing for November already has dropped $30/long ton. "Domestic mills and export buyers remain on the sidelines," the Cleveland analyst writes, "likely dampening the ability to substantially maintain or raise hot-rolled pricing realizations over the near term despite low supply chain inventories."

Analyst Eric Prouty at Canaccord Adams in Vancouver, British Columbia, says market research "indicates that scrap industry fundamentals are weakening due to falling ferrous scrap prices, a relatively quiet export market, the end of inventory re-stocking by domestic steel mills and weaker seasonal trends."

And finally a how about sheet steel prices whose demand reflects the demand for autos and appliances.

Commentary from various steel mills and large service center chains discussing fourth quarter outlooks says demand for steel is muted amid the continued downturn in manufacturing and construction. This has held down prices since buyers have refused to pay what the mill shave been posting. Analysts now say recent increases in the rates at which mills are running have been an overreaction to customers, mostly distributors, who replaced inventory last quarter rather an indication that demands has increased among manufacturers.

Earlier last quarter, steel orders improved from historically low levels earlier in the year, helped by rising demand from the auto industry trying to boost manufacturing to replace cars junked in the "Cash for Clunkers" program. However, demand from the automotive and auto parts sectors appears to have slowed this month. So, the market for steel continues to pale in comparison to levels seen during much of last year.

Well well well. Cash for clunkers is no longer stimulating auto demand and with all those clunkers now in the scrap yards the demand for replacement parts has dried up. Who could have predicted this? I did. And I'm not even a government economist. I wish I was as smart as the economists now giving advice to the Obama administration. I could be getting a lot of money for saying really dumb things. Unfortunately it is not in my constitution to say things I know are dumb. Oh. Well.