Trumponomics Delivers First Manufacturing Contraction In Nearly A Decade

• The U.S. manufacturing PMI (purchasing managers index) was 49.9 in August, below the neutral 50.0 threshold for the first time since September 2009, according to IHS Markit. Trumponomics Delivers First Manufacturing Contraction In Nearly A Decade

• New orders received by manufacturers dropped the most in 10 years, while the data also showed export sales tanked to the lowest level since August 2009, the data shows.

• The survey is an initial reading for the month of August. The final figure will be released Sept. 3.

U.S. manufacturer growth slowed to the lowest level in almost 10 years in August, the latest sign that the trade war may be exacerbating the economic slowdown.

The U.S. manufacturing PMI (purchasing managers’ index) was 49.9 in August, down from 50.4 in July and below the neutral 50.0 threshold for the first time since September 2009, according to IHS Markit.

Any reading below 50 signals a contraction. The survey is an initial reading for the month of August. The final figure will be released Sept. 3.

“Manufacturing companies continued to feel the impact of slowing global economic conditions,” Tim Moore, economics associate director at Markit, said in a statement Thursday. “August’s survey data provides a clear signal that economic growth has continued to soften in the third quarter.”

Manufacturing had been one of the big winners during the Trump administration, but the tit-for-tat tariffs in the U.S.-China trade war have taken a big bite from the sector. U.S. manufacturing activity slowed to a nearly three-year low in July, based on data from the Institute for Supply Management.

But this fresh survey showed new orders received by manufacturers dropped the most in 10 years, while the data also showed export sales tanked to the lowest level since August 2009.

Investors track PMI readings to get early indicators as to where the economy is headed. After the Markit reading, stocks fell and the yield curve inverted.

“The most concerning aspect of the latest data is a slowdown in new business growth to its weakest in a decade, driven by a sharp loss of momentum across the service sector,” Moore said. “Survey respondents commented on a headwind from subdued corporate spending as softer growth expectations at home and internationally encouraged tighter budget setting.”

Manufacturers continued to reduce their inventories this month, which was mainly attributed to concerns about the demand outlook, according to Markit.

The overall economy is still showing a slight expansion because of help from the service industry. U.S. overall business activity growth also fell to a three-month low as the seasonally adjusted IHS Markit Flash U.S. Composite PMI Output Index dropped to 50.9 in August, signalling a “renewed slowdown” in the rate of U.S. private sector business activity growth, Markit said.

There are several readings of manufacturing activities coming next week with the Dallas Fed sentiment data on Monday and Chicago PMI on Aug. 30.

Recession Spreads Across U.S. Economy

Economists lower third-quarter growth estimates after household spending nudged up 0.1% in August.

Consumers slowed spending and businesses cut back on investment in August, signs a wobbling global economy and rising tariffs are curbing U.S. economic momentum.

Personal-consumption expenditures, or household spending, edged up a seasonally adjusted 0.1% in August from July, the Commerce Department said Friday. The modest growth marked a sharp pullback from the first seven months of the year, when spending rose an average of 0.5% a month.

American consumers had been a bright spot in the economy. But weaker August spending showed consumers might be succumbing to some of the external headwinds that have shaken businesses and manufacturers for months.

Slowing global growth, fading effects from the 2017 tax cut and rising trade frictions are weighing on the U.S. economy.

“The domestic economy is not immune to all these headwinds,” said Lydia Boussour, U.S. economist at Oxford Economics. “The economy is gradually cooling.”

Consumer spending is the driving force behind the U.S. economy, accounting for more than two-thirds of total economic output. Another key source of demand in the economy, business investment, continued a stretch of weakness in August, according to a separate report Friday. Orders for long-lasting equipment and machinery, a proxy for business investment, fell 0.2% last month from July and 1.7% from August 2018.

Though some economists said Friday’s report exaggerated the extent of weakness among consumers, the pullback in consumer outlays and business investment bode poorly for third-quarter economic growth.

Economists lowered their estimates of third-quarter economic growth in the wake of Friday’s data. Macroeconomic Advisers’ closely watched model for gross domestic product showed growth slowing to 1.6% in the third quarter, down from a previous estimate of 2.2%. Pantheon Macroeconomics, meanwhile, cut its forecast for third-quarter consumer-spending growth to 2.9% from 3.6%.

Other economists pointed to evidence that consumers remain on relatively solid footing. Much of the slowdown in consumer outlays in August could be traced to lower energy prices, which magnified a pullback in spending on gasoline and other energy goods. Expenditures on services slowed only modestly, while outlays on long-lasting consumer goods such as cars and furniture picked up.

“Furnishings and household durables are something that consumers tend to spend on when they feel relatively confident,” said Sonia Meskin, a senior economist at Standard Chartered.

For Ann Wingrove, president of Frankfort, Ky.-based gift shop Completely Kentucky, demand is still solid. Her store’s sales have increased about 9% this year compared with last as more customers trickle in to buy pottery and gift baskets. But tariffs are creating uncertainty about the future.

“I’m very concerned about consumer spending and how these tariffs are going to affect that,” she said.

Completely Kentucky received notifications from one vendor, a Kentucky-based silk scarf artist, suggesting the gift store should make purchases before a 25% tariff for silk from China hits. If the scarf prices go up, Ms. Wingrove fears Completely Kentucky will have to raise prices and sell fewer scarfs.

“I’m heavily staffed now so I am very concerned if our sales drop, I will have to lay people off,” she said.

Other indications point to conditions supportive of consumer spending. Incomes grew 0.4% in August from a month earlier, led by a 0.6% jump in employee compensation. Annual inflation also remained low, undershooting the Fed’s 2% target.

Consumer sentiment, a measure of household sentiment released by the University of Michigan on Friday, rose to 93.2 in September, up from August’s 89.8, though it was down 6.9% from September 2018. That represents the largest year-over-year drop since April 2016.

Richard Curtin, the survey’s chief economist, said the September numbers showed a “slow erosion” while remaining “quite favorable.”

The outlook for consumers remained cloudy, as the Trump administration hit a new array of consumer products imported from China with higher tariffs at the beginning of this month.

Trade tensions are one reason businesses took a more cautious approach in the second quarter. Nonresidential fixed investment—which reflects spending on software, research and development, equipment and structures—fell at a 1.0% rate, compared with a 4.4% rise in the first three months of the year.

Updated: 10-1-2019

ISM Manufacturing Index Slumps To Decade Low As Trade War Hits US Factories

U.S. manufacturing activity slumped to its weakest pace in more than a decade last month, a closely-watched survey indicated Tuesday, suggesting broader economic growth could slow amid a protracted trade war with China.

The ISM manufacturing activity index fell to 47.8 points, the survey noted, down from 49.1 points in August and the lowest level since June 2009. A mark below 50 points typically indicates contraction, and follows similarly weak readings in Europe and China for the month of September.

The US factory activity slide followed a warning from the World Trade Organization on global commerce earlier Tuesday, with the international body cutting its global merchandise trade growth forecast to 1.2% from 2.6% for 2019.

“The darkening outlook for trade is discouraging but not unexpected. Beyond their direct effects, trade conflicts heighten uncertainty, which is leading some businesses to delay the productivity-enhancing investments that are essential to raising living standards,” said WTO director general Roberto Azevêdo.

“Job creation may also be hampered as firms employ fewer workers to produce goods and services for export.”

Very ugly #ISM manufacturing at 47.8 – lowest since 2009. New Orders, Production, Imports, Exports and Employment are all contracting. Not very surprising considering the global manufacturing outlook. Beware it is a coincident indicator and does not track so well GDP growth. pic.twitter.com/5zFNdyfsTs

— Christopher Nicolas Dembik (@Dembik_Chris) October 1, 2019

The employment component of the index fell 1.1 points from August to 46.3, the survey indicated, while the new orders reading edged up, to 47.3 from 47.2 points in the previous month.

The U.S. dollar index, which tracks the greenback against a basket of its global peers, pared some gains following the ISM release, but is still trading at a two-year high of 99.39.

Benchmark 10-year Treasury bond yields, meanwhile, slumped to 1.651% after trading as high as 1.75% during the early European session.

As I predicted, Jay Powell and the Federal Reserve have allowed the Dollar to get so strong, especially relative to ALL other currencies, that our manufacturers are being negatively affected. Fed Rate too high. They are their own worst enemies, they don’t have a clue. Pathetic!

— Donald J. Trump (@realDonaldTrump) October 1, 2019

The Dow Jones Industrial Average, meanwhile, pared earlier gains to turn negative on the session, falling 282 points to 26,635.36 points. the S&P 500 was marked 29 points lower at 2,947.95 points.

Updated: 11-16-2019

‘It’s Not the Economy Anymore, Stupid’

A polarized electorate is less swayed by how well the economy performs.

President Trump has presided over solid economic growth and much lower unemployment than economists would have expected a few years ago, a record he proudly touted in a speech in New York Tuesday.

Mr. Trump is counting on that record carrying him to re-election next year. Conversely, Democrats see hints of weakness, especially in manufacturing-intensive swing states, that could derail those plans.

Yet both could be working from an outdated playbook. Polarized politics mean that voters’ views of the economy are increasingly shaped by their party preference, rather than the other way around. And for some key voting blocs, noneconomic issues such as immigration, race relations and Mr. Trump himself have superseded economic concerns in determining their vote. Thus, absent a serious recession or spectacular boom, the economy may have little bearing on how Americans vote next year.

Last week’s elections offered a hint of that growing divide. Republicans were routed in state and local elections in northern Virginia and local elections in the Philadelphia suburbs of Chester and Delaware counties, prosperous areas where unemployment has hit decade lows. Last year, Republicans lost control of the House of Representatives despite heading into the midterm election with strong economic growth driven by their tax cut. Yet in counties disproportionately dependent on manufacturing, a sector hit hard by the trade war and global slowdown, Mr. Trump’s approval has risen, analysis of polling data by The Wall Street Journal has found.

To be sure, congressional, state and local elections may reveal little about the role of the economy in presidential contests. Ray Fair, a Yale University economist who has used economic indicators such as per capita income to predict presidential vote shares since 1980, said there isn’t enough data to conclude their predictive power has weakened in recent years. His model currently predicts Mr. Trump will win next year if consensus economic forecasts hold true.

Yet there are signs economic trends’ sway over presidential contests has weakened. Political scientists John Sides, Michael Tesler and Lynn Vavreck, authors of “Identity Crisis: The 2016 Presidential Election Campaign and the Battle for the Meaning of America,” have found that from John F. Kennedy through George W. Bush, consumer confidence and presidential approval were positively correlated. But that correlation disappeared under Barack Obama and has been absent during Mr. Trump’s three years in office. His approval rating has remained both unusually stable, and low relative to consumer confidence. “His approval numbers are 15 points lower than where you’d have expected them to be,” said Mr. Sides, who teaches at Vanderbilt University.

One reason is that “partisan divides have put people into parallel universes when it comes to understanding and interpreting the economy,” said Jonathan Rothwell, principal economist at Gallup. Republicans consistently rated economic conditions more poorly than did Democrats when Mr. Obama was president. Those attitudes flipped almost overnight with Mr. Trump’s election. In August, 84% of Republicans were satisfied with the economy compared with just 36% of Democrats, the largest such spread since years five and six of George W. Bush’s administration, according to polls conducted by NBC News and The Wall Street Journal.

“Each group has its own narrative about why GDP is up or down or why employment is high or low,” Mr. Rothwell said. Voters can easily find “the story that matches his or her political preferences” amid all the information available.

Mr. Trump’s ascendance in 2016 also marked a shift away from economics in voter priorities. Mr. Sides and his co-authors cite survey data to conclude that “race, ethnicity and religion” were more important than “economic insecurity” in driving support for Mr. Trump during the Republican primary. They also played a bigger role in the general election than in previous elections, they found. For voters who switched support from Mr. Obama in 2012 to Mr. Trump in 2016, “issues around race and immigration were more important than their own personal economic circumstances,” Mr. Sides said.

Polls suggest economics will again take a back seat next year. Just 11% of voters rank any economic problem as the biggest problem facing the country now, according to Gallup, the lowest level in at least 18 years, while 34% cite government or poor leadership.

This doesn’t prove the economy won’t matter at all. When the economy cratered in 2008, economic assessments of Republicans and Democrats converged. Mr. Sides noted neither Mr. Obama nor Mr. Trump have been tested by an actual recession that began under their watch. Mr. Rothwell predicted that party platforms that cater to partisan Democrats’ and Republicans’ noneconomic priorities are apt to turn off independents. “There’s room for a candidate to have a well-focused economic appeal to that group of people and do rather well.”

In theory, even if economic conditions don’t drive the national vote, they may do so enough in swing states to sway the election. An election model designed by Moody’s Analytics combines state and national economic data with political indicators such as the president’s approval to forecast the electoral college winner.

Yet after correctly predicting every election from 1996 through 2012 it wrongly called Mrs. Clinton to win handily in 2016. Mark Zandi, the firm’s chief economist, said the model didn’t capture how turnout trends in key industrial and Midwestern states would hurt Mrs. Clinton and help Mr. Trump. The model now incorporates turnout and predicts Mr. Trump will win if turnout is typical, said Mr. Zandi, “but I’d be surprised if it’s typical.”

Updated: 12-5-2019

Heavy-Duty Truck Orders Wane As Industrial Demand Declines

Orders fell by 39% last month as fleets extended a reversal in growth plans, slicing the backlog at production lines.

Order books for heavy-duty truck manufacturers are thinning out as a weaker U.S. industrial economy pushes fleet operators to put the brakes on plans to expand freight-carrying capacity.

Trucking companies in November ordered 17,300 Class 8 trucks, the big rigs used in highway transport, according to a preliminary estimate from industry data provider FTR. That was down 39% from November 2018 and a 21% decrease from October, providing a weak start for what is typically the busiest season for new-equipment orders.

The orders last month were the lowest for a November in four years, and analysts said they expect a backlog at factory production lines that has been dwindling this year to pull back even more. The October backlog was 129,000 units that were ordered but not yet built, according to FTR, less than half of last October’s record backlog of 304,500 units.

“We were living off this high backlog all year,” Don Ake, FTR’s vice president of commercial vehicles, said. “That’s why orders in 2019 were much lower” than last year, when fleets rushed to order new vehicles as freight volumes surged.

Truck-equipment makers have started scaling back production and laying off workers this year as demand for new trucks has weakened.

Daimler Trucks North America LLC said in October it planned to lay off about 900 workers at two North Carolina Freightliner plants as “the market is now clearly returning to normal market levels.”

Engine-maker Cummins Inc. cut its annual revenue forecast in October and the company last month said it plans to lay off about 2,000 workers early next year. “Demand has deteriorated even faster than expected, and we need to adjust to reduce costs,” the Columbus, Ind.-based manufacturer said in a statement.

Transportation data provider ACT Research, which reported similar figures for heavy-duty truck orders, said the November data “show that Class 8 net orders failed to sustain October’s encouraging start to the order season,” when truckers ordered 22,100 units, up 74% from September.

Weakness in the industrial economy and global trade tensions are weighing on transportation demand. U.S. factory activity contracted in November for the fourth straight month, according to the Institute for Supply Management.

Freight volumes and trucking prices have been on the decline. U.S. domestic freight shipments fell 5.9% in October compared with the same month last year, while truckload linehaul rates were down 2.5% year-over-year, according to Cass Information Systems Inc., which handles freight payments for companies.

“Right now the environment is highly uncertain, and fleets are being cautious,” Mr. Ake said. “Instead of placing big orders for the entire year they’re placing small orders for the first quarter.”

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