American manufacturers are slumping. What does that mean for the U.S. economy?
So just how bad is the slump in manufacturing? And is it enough to shatter the U.S. economy?
In a word, no. Economists say the manufacturing slump would have to get much worse and infect the rest of the economy to induce the first recession in more than a decade.
A closely followed barometer of U.S. manufacturing conditions fell in September to the lowest level since the end of the Great Recession in mid-2009. Executives blame the contraction on a slowing global economy and a U.S. trade war with China that’s resulted in steep tariffs.
“Not good,” said chief economist Scott Brown of Raymond James. “There’s some noise in the monthly numbers, but the trend is poor, consistent with anecdotal evidence that tariffs are having a bigger impact.”
The news was certainly worrisome. Several executives told the Institute for Supply Management, publisher of the report, that the U.S. trade war with China has raised the cost of supplies and disrupted business.
“Economy seems to be softening,” one executive told ISM.
“We have seen a reduction in sales orders and, therefore, a lower demand for products we order. We have also reduced our workforce by 10%,” said an executive at a plastics and rubber manufacturer.
Economists say the manufacturing slump underscores the damage caused by US.-China standoff. Manufacturers tend to rely heavily raw materials or partly finished goods made in China or other countries and they derive a large portion of their sales from exports.
“Simmering trade tension is the obvious culprit for the manufacturing weakness,” said AllianceBernstein senior U.S. economist Eric Winograd. It’s hard to find an economist who thinks otherwise.
Another temporary factor contributing to the weakness is an ongoing strike at General Motors GM, -3.66% that has entered its third week. Some 48,000 GM workers walked out and as many as 200,000 workers at parts suppliers have also been affected.
There’s some reason to cautious optimism, however.
For one thing, surveys in Europe and Asia appear to suggest the decline in manufacturing has bottomed out. The U.S. and China have ratcheted down tensions after they flared up in August. The GM strike is likely to end soon. And central banks in the U.S. and around the world are cutting interest rates in a bid to promote growth.
The much larger service side of the U.S. economy, meanwhile, is still growing at a solid pace, fueled by robust consumer spending and the strongest labor market in decades.
Service-oriented companies generate most of their sales in the U.S. and are less exposed to the global economy. Most Americans also work in service-oriented companies such as banks, retailers and hospitals. Only 8.5% of the U.S. labor force now works in manufacturing — a record low.
The ISM surveys reflects this divergence between manufacturing and services sectors. The firm’s services index stood much higher in August at 56.4%, with economists predicting just a slight decline in September. The latest report will be published Thursday.
“For now, spillover from weaker manufacturing into the broad economy has been somewhat limited,” said chief investment officer Jim Baird of Plante Moran Financial Advisors, “but the longer the downturn lasts, the greater the impact that it will have on sentiment, spending and the broad economy.”