New confusion erupted across economic circles this week as a prominent measure of U.S. manufacturing “unexpectedly fell deeper into contraction,” posting the weakest reading since the end of the last recession. The global economic slowdown and the U.S.-China trade war are weighing increasingly on a number of economies, Bloomberg said this week.
The Institute for Supply Management’s factory index fell to 47.8 in September, the lowest since June 2009, the report said. It added that the “figure missed all estimates in a Bloomberg survey that had called for an increase from August’s 49.1.”
The group’s production gauge slipped to a 10-year low while the employment measure also dropped to the lowest since January 2016. Bloomberg called that “a worrying sign before a jobs report Friday that’s forecast to show private payroll growth remains subdued.”
The second straight PMI reading below 50 – the line separating expansion and contraction – extends the drop from a 14-year high just over a year earlier and raised concern about a recession even after two straight interest-rate cuts from the Federal Reserve.
Recent manufacturing data “make you worried that this could spread from the manufacturing sector to the services sector,” Torsten Slok, chief economist at Deutsche Bank AG said. “When the employment report comes on Friday we will have an even better idea on whether this is just a manufacturing issue or whether this is something that not only continues to deteriorate but is also spreading.”
Bloomberg reported that just three of 18 industries reported growth in September, the lowest total since April 2009. Contracting industries were led by apparel, leather and allied products; printing and related support activities; and wood products. The only expansions reported were in miscellaneous manufacturing; food, beverage and tobacco products; and chemical products.
ISM’s measure of new orders, considered a leading indicator of downturns, edged up slightly to 47.3 from an August reading that matched the weakest of this expansion. However, the production index declined to 47.3, while the inventories gauge fell to 46.9, the lowest since late 2016.
ISM’s trade gauges showed American producers struggling with headwinds from abroad as well as the effects of a resurgent dollar. The measure of export orders, a proxy for overseas demand, fell to 41, the lowest level since March 2009, while the imports index remained in contraction, the report noted.
While manufacturing makes up just over a tenth of gross domestic product, its slower growth combined with cooler business investment and economic growth puts the longest-ever American expansion in a more precarious position. It also could have negative political impacts for the administration, Bloomberg said.
Shortly after the report, the president renewed his attacks on the Fed and Chairman Jerome Powell, saying they “allowed the Dollar to get so strong,” hurting manufacturers. Fed officials “don’t have a clue” and are “pathetic,” he tweeted.
The pullback in the employment gauge, to 46.3 from 47.4, comes amid economist projections that the main monthly Labor Department report Friday will show limited manufacturing payroll growth. Economists forecast a 3,000 gain in factory employment for a second month.
Elsewhere, reports this week showed that China’s factory sector contracted for a fifth month in September, and that the euro area’s manufacturing slumped as German factories experienced their worst month since the depths of the financial crisis.
In addition, the International Monetary Fund, already projecting a 3.2% growth pace this year that would be the slowest since the financial crisis, will release an updated estimate later this month as policy makers from across the world gather in Washington for the fund’s annual meeting.
The manufacturing report was “quite weak, consistent with significant export-led weakening in manufacturing continuing,” Jim O’Sullivan, chief U.S. economist at High Frequency Economics Ltd., said. But it may still be too early for alarm, as “so far at least, the less-export-oriented non-manufacturing parts of the economy have remained reasonably solid,” he wrote.
However, Bloomberg sees another hit for manufacturing in the offing. The United Auto Workers union called its first national strike against General Motors Co. since 2007 midway through the month, halting production at the carmaker’s dozen assembly plants and 22 stamping, powertrain and parts factories. In addition, the work stoppage has spilled over to suppliers including American Axle & Manufacturing Holdings Inc., which has temporarily laid off staff.
However, not all economic news was bad this week – a separate U.S. manufacturing purchasing managers’ index showed improvement on Tuesday. The gauge from IHS Markit rose to 51.1 from 50.3, with employment at the best reading since May and new orders up from the prior month. Analysts expected a level of 51, equal to the preliminary reading, the report said.
So, we will see. Although there is broad agreement that the increasing global trade tensions are weighing significantly on economies around the world and that one or more major trade breakthroughs would be extremely welcome, but breakthroughs still seem unlikely given how deeply all sides are committed to current policies. These are continuing standoffs producers should watch closely as they continue, Washington Insider believes.
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