Economic Warning Signs Starting To Become Apparent
A key economic statistic that rarely gets widespread public attention is showing that the manufacturing sector has been in recession for four months now.
While the economic indicators that most people pay attention to such as Gross Domestic Product growth and the monthly employment report continue to be mostly positive, the manufacturing sector of the economy is sending warning signals that could indicate an economic downturn is closer than many may think:
Manufacturing activity continued to lag in November amid a decline in inventories and new orders, according to the latest ISM Manufacturing reading released Monday
The reading came in at 48.1 vs. an expectation of 49.4 and the previous month’s reading of 48.3.
Though the level is usually reported as a simple number, it actually denotes the percentage of manufacturers planning to expand operations. A reading below 50 represents contraction; November was the fourth straight month below the expansion level.
Stocks fell on the report, with the Dow Jones Industrial Average off more than 200 points in late morning trading.
New orders slumped to 47.2, down 1.9 percentage points from October’s 49.1. Inventories, which are a key input for gross domestic product, came in at 45.5, down 3.4 points from the previous month.
The numbers come amid speculation about the pace of U.S. growth.
Recession worries have ebbed from earlier in the year, when the Treasury yield curve was inverted and flashing what has been a reliable 12-month recession indicator for the past 50 years. GDP growth has averaged around 2.4% in 2019, with the third quarter coming in at 2.1%. However, most forecasters expect the fourth quarter to come in under 2%.
The report shows that manufacturing “is stuck in a mild recession with little prospect of a real near-term revival. This will weigh on job growth and capex over the next few months, to the point where we are not ready to rule out a further [Federal Reserve] easing in January,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a note.
Manufacturing is considered a reliable bellwether for how the rest of the economy is doing, though it accounts for only about one-fifth of GDP.
Nearly all of the key ISM indicators were at contraction levels in November.Employment was at 46.6, down 1.1 point for the month, while export orders fell 2.5 points to 47.9 as the U.S. and China continue to look for a resolution to a trade dispute that began more than a year and a half ago.
Supplier deliveries was one of the few metrics in expansion, rising 2.5 points to 52.
The main reason for the American manufacturing slowdown, of course, is the President’s trade war. In addition to making the cost of raw materials such as steel and aluminum, these policies have resulted in previously reliable markets for finished goods to be closed off to American competition as China and other nations retaliate for the tariffs that the President has placed on China and other nations over the course of the past year-and-a-half. Ironically, this news also comes in the wake of promises that the President made during the course of the 2016 campaign that he would help bring about a revitalization of American manufacturing, claiming that existing businesses would build new factories and that American manufacturers would begin moving back to the United States. Neither of these things has happened. Instead, we’ve seen many manufacturers, including iconic American brands such as Harley-Davidson, announce plans to move some manufacturing overseas so they can avoid the impact of the trade war while simultaneously taking advantage of having manufacturing overseas to cater to consumers in other nations.
As noted, manufacturing is not as big a part of the economy as it used to be, so the immediate impact of this downturn in the sector isn’t entirely clear. Nonetheless, the fact that this key index has fallen for four consecutive months and done so relatively unnoticed by those outside financial markets and the manufacturing industry itself could be a strong indication that the broader economy is in far weaker shape than some of the more well-known statistics are indicating. Additionally, the fact that this manufacturing recession is continuing notwithstanding the fact that the Federal Reserve Board has been on a track whereby it is lowering interest rates in an ostensible effort to revive what many had perceived to be a somewhat stagnant economy.
Of course, it’s worth noting the potential political impact of this manufacturing downturn:
President Donald Trump won over Rust Belt states in 2016 on pledges to revive American manufacturing, arguing that tariffs would ultimately help win fairer policies for the sector. Select factories benefited from those measures in 2017, but the support was only temporary.
A spate of manufacturing companies has over the past two years requested relief from those tariffs, which have raised costs for importers and disrupted global supply chains. Manufacturers shed 2,000 jobs in September, with those losses concentrated in swing states like Pennsylvania, Ohio, Michigan, and Wisconsin.
“We doubt the gap will close anytime soon, absent a resolution to the trade war,” said Ian Shepherdson, the chief economist at Pantheon Macroeconomics.
If the current situation in manufacturing continues, it could imperil the President’s chances of repeating wins in states like Wisconsin, Michigan, and Pennsylvania, that were crucial to his Electoral College win three years ago. This is one reason why Democrats would be smart to select a candidate that can appeal to the working-class voters in the Midwest, many of whom supported the Obama/Biden ticket in 2008 and 2012 only to vote for the President in 2016.
As it stands it has always been clear that we are currently closer to a recession than we have been in the past. The current economic expansion recently entered its 125th month, and while it looks like it will remain healthy enough to stay positive for the rest of this year and, in all likelihood, well into this year. That being said, it’s seemingly inevitable that we will start seeing signs of a slowdown at some point, especially if the President allows this idiotic trade war to continue as he has promised. If it happens just as we’re heading into an election year, though, it could be bad news for the President and his party.
I doubt that any of Trump’s Chumps will decide to stop supporting him due to drawing any connection between Trump’s actions and what happens. Anything that goes wrong, it’s always the fault of this (pick one) “Democrats, feminazis, innalechualls, ferrners, (racist term used to describe black people), (other racist term used to describe Hispanics)”….NEVER due to their god Trump.
What Trump does is give these people is a nice warm bath of continual self-pity, and they’re not going to give that up for the world. Anyone who is willing to draw the link between Trump’s incompetence and his effects on the U.S. economy has already realised he’s an idiot and dropped him.
There’s an article up a Forbes that calls Trump the most fiscally irresponsible president in history.
@Teve: But they are silent on the GOP enablers in Congress?
One will get you a 100 if Dennison, his enablers, his apologists, and his cult don’t blame any recession or slow down on impeachment.
@Kathy: Either that or Obama.
One of the hallmarks of a cult is that the group teaches, or implies, that its supposedly exalted ends justify whatever means that are deemed necessary, often leaving it’s adherents in the position of accepting what they previously found reprehensible.
Are Republicans acting as cult members when they accept huge deficits and trade wars? Or were they simply lying, about fiscal responsibility and free trade, all this time?
Seems obvious to me that the most promising path to economic growth, job creation and wage increase lies in assisting our businesses to recover the market share they have lost to foreign competitors. Where is the flaw in the reasoning? If Trump is going about it the wrong way, what’s the right way? Do we simply accept the trade imbalances resulting from the excessive tariffs imposed on our goods by certain governments?
The suggested analysis is, of course, anathema to the “woke.” They are obsessed by a seething, rancorous hatred of “corporate profit” and “income inequality.” They deny wanting to “seize the means of production.” No, they just yearn to control the distribution of the fruits of the economy, thus to bring upon us the blissful equality enjoyed by the Soviet Union.
Some urge that a satisfactory measure of economic growth can be obtained by returning to levels of taxation imposed while Europe and Asia were still trying to recover from the devastation of WWII. I won’t pretend to understand this reasoning.
Everything Trump Touches Dies.
@andros:
A smart person could look at the current situation, critically, and see the flaw in that reasoning.
Due to Trump’s tarriffs we have LOST market share. Trump’s tarriffs have required a $28B bailout of farmers; well over twice the bailout that saved the auto industry. I’m sure you endorsed the auto bailout, correct? Trump’s tarriffs have cost your imaginary Middle Americans ™ between $800 and $1700 a year.
Based only upon Trump’s track record to date, he will negotiate a trade deal that does nothing beyond the status quo (see NAFTA 2.0) and then declare victory. So the tarriffs, in the end, will have been for naught.
Apparently you are not a smart person.
@Daryl and his brother Darryl:
No, no. You got it all wrong. Nothing, absolutely nothing, has changed since the 1950s. All exports are good, all imports are bad, and there’s no such thing as global supply chains. Trade wars are good and easy to win.
@grumpy realist: And what Trump gives the LEfties is an equal warm bath of pitying moaning…
The partisan hard core are not the issue (any more than any of the Left Proper commentators here would go Republican), it’s the not-very-political flippers who vote Pocketbook.
As Trump is already not popular in key battleground states. Changing 1-5% of the vote gets you victory. On the 5-7% more even a crushing one.
Going on about the Partisans is a silly sterile indulgence.
@andros:
American businesses, such as Harley Davidson, mentioned above, are moving production overseas to neutral countries in Trump’s trade war, so they can avoid the tariffs and retaliatory tariffs. This trade war is making things worse for American workers, although American companies can do fine.
So, doing nothing would literally be better than what he is doing.
A different, untried approach (which could turn out to also be worse than doing nothing) would be to tie tariffs to worker rights and pay. This would mean that American workers are not competing against cheap labor overseas — or at least not as cheap. In theory, this helps build the economies of our trading partners also, by boosting wages there.
And, in theory, this might mean that waves of refugees from Central America would be more likely to settle in Mexico, which would help preserve the purity of our bodily fluids.
This is roughly the Elizabeth Warren approach. It hasn’t really been tried before — there was a fig leaf or two in previous trade deals but little enforcement. It might have unforeseen consequences. But, it’s not known to just make things worse.
Applying it uniformly, so there is no safe-harbor neutral country with cheap labor, and getting the right balance of carrot and stick will be hard.
@Lounsbury:
Electorally, you are correct. Trump has 40-45% of the vote baked in. The Democratic nominee, whoever that is, has at least 49%, and probably more. The remaining 6% aren’t so much swing voters in the traditional sense as they are people who may or may not vote depending on circumstances. A recession would be enough to drive many to the polls to vote against the incumbent.
More to the point on the economy, it’s clear that the trade war has slowed manufacturing and hurt the economy overall. Between the tax cuts and the recent rate cuts by the Fed, the pain has been kicked down the road so far, and we’ve avoided a substantial slow down. It looks like that is going to change in the next 3 to 6 months. The only question left is whether we actually enter recession or narrowly avoid one.
Let’s see – 1.2 trillion fiscal stimulus (budget deficit); low interest rates and quantative easing by the Fed; low unemployment and high corporate debt: when you factor all this together (all of which is unsustainable even in a midrange timeframe) and you get 2% GDP growth one has to conclude that the economy is running on fumes. Buckle up.
@andros:
Well, since you asked…
1. To the extent that US businesses have lost market share to foreign competitors, it’s because those competitors have much lower labor costs. You can’t do anything about the cost of living in a prosperous nation. The only legal way for US producers to reduce labor costs is to automate — which does not create jobs. (I’m assuming you’ve ruled out “more illegal immigrants” as the answer.)
2. The actual growth opportunity sectors for US jobs and wages are in those services where offshore labor cannot compete. Construction, auto repair, health and elder care, warehouse operation, etc. The current administration has done nothing for those sectors.
3. Profits do not automatically translate into job creation. The fraction of profits that goes into the pockets of executives and shareholders is at an all time high, while reinvestment lags. This hurts the economy in three ways: by increasing wealth inequality (which leads to inefficiency, because no, it does not trickle down), by failing to expand business, and by driving a “price war” on dividends that makes future reinvestment more difficult. Owners and investors are extracting rents instead of fostering economic growth the way you would like them to.
As for your absurd caricature of the economic views of the commentariat here… Not wanting another Gilded Age does not make one a communist, or even a socialist. Or even a liberal. Why do you want another Gilded Age?
@Daryl and his brother Darryl:
And a lot of the auto industry bailout money was paid back.
The $28B Trump farmer bailout due to the Trump tarriffs, that money is gone…
OT: NYT is reporting that Kamala Harris has dropped out of the race.
@andros:
That’s the first honest thing you’ve written since you first started posting at OTB.
@Jen:
Saw that. I liked her…but the winnowing is good.
@DrDaveT:
“Why do you want another Gilded Age?”
I suspect it is similar to the reason that many people have fantasies about the Middle Ages. They never see themselves as the serfs, just the lords. Even though nearly everyone back then were serfs.
@DrDaveT:
By denying the truism that most (if not all) corporations seek to grow, you place yourself beyond the pale of rational debate. And how do they grow? by investment, and investment funds flow from profit. They will end up where the prospects of return are most favorable. We need to make that the USA.
Sneering at “trickle down economics” is poor substitute for reality-based analysis.
@andros:
Trump got everything he wanted: his deficit-busting tax cuts, control of both houses of Congress for his first two years, an utterly servile party, a compliant Fed so why aren’t we getting the promised 3, 4, 5% annual growth he promised? Why are 40% of American workers still in low-pay jobs? Why hasn’t his trade war worked given that it was ‘easy’? Why is the manufacturing sector down?
Don’t mean to shock you but Democrats are much better at running the economy. Everything good in the economy now is a direct continuation of trends started under Obama. It’s not a 3 year expansion, it’s a 10 year expansion. At the same time, everything that’s going wrong, is Trump policy.
You culties elected Cliff Claven, a barstool know-it-all. But a malignant, crooked Cliff Claven. So not just a barstool know-it-all but a dive bar barstool know-it-all.
@andros:
So this is mostly nonsense, but I think you have kind of a point you were trying to make. Unfortunately, you’re wrong. Completely, 100% wrong.
Trump has raised tariffs on imports from countries were we had a trade surplus. Countries that had been slowly but consistently lowering tariffs have increased tariffs in response to Trump’s actions. Also, the idea that trade imbalances are bad…is not a given. And Trump’s tariffs are paid by Americans, so it’s not clear how we’re better off after that tax increase. Finally, Trump’s actions have not reduced the trade imbalances, but instead have harmed domestic producers.
That puts a lie to the entire idea that Trump has a plan beyond tariffs. He’s literally too old and stupid to understand international trade, so he repeatedly does stupid shit which is harming the suckers who voted for him
@Moosebreath: @DrDaveT:
It’s a bit like past lives regression where everyone was a former princess or king and no one had a past life involving patching the cracks on the Sphinx. In fantasy play everyone’s a warrior.
As I’ve pointed out before, there’s no verifiable data to suggest that “Obama-Trump” voters exist in any significant number, much less that there are “many” of them. While there’s certainly a lot of Republicans willing to lie about having voted for Obama, the real data suggests that the voters Clinton lost from the Obama coalition either stayed home or voted third party. Trump’s support was the same or declining from previous Republican candidates.
Yet despite having had this pointed out several times, you keep repeating the Republican lie. Why is that, Doug?
@andros: The problem with your ideas is that you ignore completely the possibility of the other side (foreign country) retaliating. Furthermore, if we put tariffs on X, they (FC) retaliate with tariffs on, say, soybeans. US farmers can’t sell much at that price, so they cut production. FC goes looking for soybeans elsewhere, which encourages other countries to increase production. Which shifts source of soybeans for FC to other countries like Brazil.
Result: We’ve managed to lock ourselves out of the market and even if the tariffs were dropped, the market isn’t going to come back immediately, if at all. Result: even higher trade deficit with FC in the future.
@Daryl and his brother Darryl:
¿Porqué no los dos?
@andros: Not a communist, but rather a boring leftish-centrist (in the UK, I would be a LibDem) CPA-turned-accounting professor.
Investment in new projects does not comes out of profits. Investment comes out of financing, which can come from one of the three places: free cash flow, new debt, or new capital.
The issue with corporations currently is that many of them are taking the cash associated with profitability and using it to pay dividends rather than adding it to free cash flow to be used on project financing. In other words, the profits are being accumulated in the hands of shareholders rather than be spent on capital projects that have a stimulative effect on the macro economy.
This has the effect not only of hindering macroeconomic growth but also the ong-term growth of the corporation itself. Think of what happens to someone’s retirement account when they have to take a distribution to fund their children’s college education or put a downpayment on a house. Removing those gains from the account moves the person back towards their initial investment and costs them years of future compounding growth that they will not ever be able to get back.
My god! Has even accounting grown its own right-wing branch? What next? Mathematics? Logic? You’d think that the servile followers of business men would want to take just the slightest interest in how business actually works.
@Gromitt Gunn:
So all profits are paid as dividends, rather than being put to expansion? And dividends aren’t invested? You shouldn’t be allowed to set foot in a classroom.
@andros:
US corporations are sitting on record amounts of cash yet business investment is flat. Explain, professor? How many more tax cuts will it take?
@andros:
Granted, not all companies are paying dividends instead of funding new projects or investing in R&D. Some are just sitting on billions in cash.
I’ve little doubt most of you know full well it is frivolous to deny the link between profitability and economic growth. Like squids, you are squirting ink to conceal your anti-business bias.
The Prof proposes that “financing,” not profit, drives expansion. Are we to suppose the availability of financing doesn’t depend on profitability, current or projected? And what is the source of funds provided by banks and the like? Some of it is borrowed from the government, but the rest comes from investment–investment made with a view to return.
What do you suppose the analysts are talking about, when they speak of “growth stocks” and “income stocks”? The former don’t pay dividends, but put profit into growth. And even dividends are commonly reinvested.
So why isn’t the rate of investment higher? What do you expect, when the leading Democratic nominees are threatening crippling levels of taxation?
I gave you one chance to prove you’re not just a troll. You failed.
@andros:
In other words you don’t know, but you’re pretty sure the problem is not the current POTUS or the GOP Congress but some future Democrat who may or may not win and in any event would be unlikely to get a tax increase. Scapegoating is your go-to because you haven’t a clue.
Obama with a tax increase got seven hot years. Trump with a huge tax cut and slashing of regulations won’t make it to four. Your faith is false.
IOW (Obama + Tax Increase + regs) = (Trump + Tax Cut + regulation cutting.)
I didn’t realize Democrats were so powerful, they don’t even have to be in power in order to exert their power!
@DrDaveT: My guess is that you lost him at
either there, or at “Gilded Age.”
@andros:
By attributing volition to abstract entities, you invite others to question your sanity. Corporations are not sentient; they do not have volition. The people who control them do, and those people have diverse motives. At present, the people controlling US corporations prefer (relative to times past) to extract rents rather than growing the businesses. This is a question of fact; you can easily look it up (the way I did) using public data.
No, by re-investment. Your house does not get bigger just because I gave you $1000; you have to turn around and spend that $1000 on home improvement. As opposed to, say, a trip to Cancun.
This is not rocket science.
Sneering at trickle-down economics is the only reality-based position left. The empirical evidence is in, and it’s overwhelming. Continuing to believe in trickle-down is the intellectual equivalent of continuing to believe that the earth is only 6000 years old. (Yeah, it sucks that the world doesn’t actually work the way we think it ought to.)
@andros:
No, just more than in the past. Sheesh.
@andros:
Ah, the venerable “don’t confuse me with facts” argument. How quaint.
It is particularly amusing to note that you are arguing against Adam Smith, among others. Profitability is a necessary, but not sufficient, condition for economic growth. Nobody is against profitability of firms; sensible people are against extraction of rents by ownership.
For the record, let it be noted that the House Choir has failed to articulate a rationale for sustained economic growth.
Like shooting birds on the ground.
You can always identify a Trumpist when they use the same basic argument that he always does: “I know you are but what am I?” Bravo…
@David M: To paraphrase Mr Burns on Homer Simpson, “I’m beginning to think that andros was not the brilliant tactician I thought he was…”
Apple only has a paltry $200 billion cash on hand. They wanted to expand, but gosh darn it they just couldn’t afford to! Fortunately the tax cut happened and they spent all of it on expanding and Creating Jobs. They totally didn’t spend literally every penny on share buybacks.
@andros: There’s got to be easier ways to make money than doing this…. aim higher.
@andros:
So, quail hunting? They release a bunch of birds directly in front of the hunter, who then shoots them. Dick Cheney was a big fan of this “sport” and he still managed to shoot someone in the face.
He was a big man about it though, he apologized. Not Cheney, the guy he shot in the face.
Anyway, could you get your smarter friend to start posting here? Or maybe your smarter friend’s smarter friend? We need a conservative or two in the commentariat, but you’re not quite cutting it.
I mean no offense, there are lots of things I don’t do well.
In this country Special Education Teachers are severely undervalued but, they do get paid for their services and their students actually learn and with time mostly become independent, useful, contributing members of society.
But you aren’t SE teachers. And Andros will never learn. He is immune to facts, immune to logic, immune to intellectual growth. What little capacity he has for thinking has been filled with dreck by the talking heads at FOX. All He Ever Needed to Learn He Learned at FOX.
Besides, you aren’t getting paid for this shit and the time you wasted with him is gone forever. It could have been used for something productive like counting the socks in your drawer or measuring the sticks in your yard.
@Moosebreath: Having just returned from a cruise on the Danube, when we passed a castle, I’d make a similar observation to my fellow passengers.
@OzarkHillbilly: Indeed! I’ve done Special Education during my career and one category of students who have almost insurmountable troubles are the one’s whose learning disability is *don’t want to be here*.
I used to get fair numbers of those in Community College, too, but most of them finally got what they’re in school for and did remarkably.
@OzarkHillbilly: The precise set of reasons that I gave him one shot, and then summarily dismissed him.