A Manufacturing Recession Is Here. Now What? (#GotBitcoin?)
With the U.S.-China trade war sapping demand, companies have limited options for protecting profits. Plus, more industrial insights. A Manufacturing Recession Is Here. Now What? (#GotBitcoin?)
The escalation of U.S.-China trade tensions has pushed the American manufacturing sector to the brink of a recession and there’s little to stop it from falling over the edge. A preliminary IHS Markit gauge of factory activity released this week came in at 49.9 for August, just below the dividing line that separates an expansion from a contraction.
A regional index from the Federal Reserve Bank of Kansas City showed manufacturing order volume slumped to the weakest level since 2016, with more than half of firms surveyed expecting negative impacts from the 10% tariffs the U.S. will levy on $300 billion of Chinese goods in two stages. China retaliated on Friday with its own one-two punch of tariffs on $75 billion of American products including soybeans, automobiles and oil. President Donald Trump vowed to respond … again. So it would seem to be a better use of time to move beyond debating whether there will be a slowdown and instead think about how industrial companies are going to respond to a slowdown that’s already here and will likely get worse.
The most obvious move is to cut expenses, which will inevitably translate into layoffs. Deere & Co., Emerson Electric Co., 3M Co. and DuPont de Nemours Inc. are among those that have said they’ve stepped up cost-cutting efforts. This is tricky for several reasons. First, many big manufacturers have already aggressively cut costs after slumping oil prices brought about the so-called industrial recession in 2015 and 2016. Perhaps this prepared them to more profitably weather the next downturn; perhaps it left them with less fat to cut if margins are pressured by price cuts to spur sales. But the bigger issue is that layoffs, particularly in the manufacturing sector, are going to be political dynamite.
President Donald Trump built his campaign on revitalizing hiring at U.S. factories, and manufacturing employment is up by about a half million since he took office. He’ll be wont to relinquish those gains as he seeks re-election, especially if job losses start to affect the strong consumer demand that’s kept U.S. growth afloat. It’s much harder to issue puffball press releases about firings than it is to expound on hiring commitments, exaggerated or not.
So what about share buybacks? Some companies may already be too loaded up on debt after years of low-interest-rate borrowings. Honeywell International Inc. and Eaton Corp. are among those that have alluded to the ability to unleash billions of purchasing power to prop up earnings per share in a recession. Democratic presidential candidates including Senators Elizabeth Warren, Kirsten Gillibrand and Bernie Sanders have all criticized buybacks and proposed ways to incentivize companies to share their wealth more directly with employees. Some of these proposals have clear holes and obviously not all buybacks are evil, but public opinion is negative on this issue and any manufacturer that announces a big repurchasing push should expect backlash. The Business Roundtable sees the writing on the wall, at least as far as optics are concerned.
Member CEOs including 3M’s Michael Roman, Honeywell’s Darius Adamczyk and Stanley Black & Decker Inc.’s Jim Loree signed their names this week to an updated statement of purpose that said companies have a commitment to serve all stakeholders, not just shareholders. It was mostly fluff and there were no hard commitments behind the nice-sounding words. Still, it’s the latest sign that capitalism in its most unbridled, bloodthirsty form is being rethought.
And maybe that’s a good thing for investors, too: Bloomberg News’s Cameron Crise took a look at the GS Total Cash Return index, a collection of 50 stocks that return a well-above-average amount of cash to shareholders. He found that while those stocks have historically been winners, they’ve barely outperformed the S&P 500 in the aggregate over the past five years, with the lag over the past four months one of the most extreme since the index started in 2010. The political climate is arguably causing this industrial slowdown; it may also kneecap companies’ ability to protect their earnings from the associated damage.
Majority of Economists Say Manufacturing Sector in Recession
Forecasters’ estimates for economic growth in the second half of 2019 also ticked lower.
U.S. manufacturing is in recession, two-thirds of economic forecasters said in a survey, and overall growth in the second half of 2019 is expected to further slow.
In a Wall Street Journal economic survey conducted in recent days, 65.3% of private-sector forecasters said the manufacturing sector was in recession, or two or more consecutive quarters of contraction.
Forecasters’ estimates for economic growth in the second half of 2019 also ticked lower, with U.S. economic output to grow, on average, at a 1.82% pace in the third quarter and a 1.77% rate in the fourth quarter. Those figures are down from a September survey predicting 1.92% and 1.81% growth rates, respectively.
Respondents largely cited the uncertain trade picture, weak global growth and U.S. political developments in their comments on the economic outlook.
“It’s a laundry list of ‘shocks’ that are coming one after the other: global growth hiccups, Boeing Max fiasco, IPO market fizzle, GM strike, election cycle swoon and getting compounded by the impeachment drama,” said Georgia State University economist Rajeev Dhawan.
Manufacturing data is closely watched not just for what it says about factories, but for the signal it sends about demand in the wider economy. U.S. factory activity contracted for the second straight month in September and hit a 10-year low, the Institute for Supply Management reported earlier this month.
New orders for durable goods—products designed to last at least three years, such as computers and machinery—were down 4.2% in August from a year earlier, the Commerce Department said last month.
“But factory employment is still among the highest we’ve seen in more than a decade, so it’s premature to say it is in recession,” said Bernard Baumohl, chief global economist at the Economic Outlook Group, in the survey.
Chad Moutray, the National Association of Manufacturers’ chief economist, said manufacturing business leaders are pushing for greater certainty on trade, including a reworked trade agreement with Mexico and Canada and a bilateral trade agreement with China.
Manufacturing makes up a relatively small slice of GDP, accounting for about 11% of total output and about 10% of total private employment. A contraction in the sector doesn’t necessarily mean the 10-year-old expansion is about to end.
Manufacturing Sputters as Broader U.S. Economy Slows
A loss of momentum in U.S. manufacturing aligns with weakening factory output overseas.
U.S. manufacturing production fell in September, adding to evidence that slowing global growth and trade frictions are weighing on the economy.
Manufacturing output, the biggest component of industrial production, fell 0.5% in September from a month earlier, the Federal Reserve said Thursday. Production at factories was in part dragged down by a strike at General Motors , but showed broad-based fragility.
Overall industrial production, which includes output at factories, mines and utilities, dropped 0.4% in September and declined 0.1% from a year earlier, the first year-over-year decrease since 2016. Mining production pulled back, helping further drag down demand for manufactured parts.
Industrial production has cooled this year, dragged down by manufacturing.
For some manufacturers, the tight labor market is curtailing growth.
Brett Novosat, president at machine shop L.L. Brown Inc., said revenue is down about 5% to 10% this year as the Enola, Pa., company has struggled to replace workers who have left. Demand for metal parts is still strong, he said, but his 26-person company can’t find new workers to meet that demand.
“If I could find three, four, five machinists I would hire them right now,” he said. “We are at a limit this year for what we could do with the employees we have.”
Coatings maker PPG Industries Inc. said Thursday that it saw a notable weakening in industrial production which sent sales volume in its industrial unit down 6%.
Weakness in the U.S. economy this year has largely been contained to manufacturing and business investment, but signs suggest the slowdown could be spreading. Employers are still hiring, albeit at a slower pace than in 2018. Consumer spending has been solid, but data released earlier this week showed September was a soft month for retailers.
“The risk is that the longer the weakness in the industrial complex remains in place, the greater the risk that this diffusion takes hold across other sectors,” said Gregory Daco, chief U.S. economist at Oxford Economics.
On Thursday, the Commerce Department reported home building fell in September. After the figures were released, forecasting firm Macroeconomic Advisers kept its estimate of third-quarter gross domestic product growth at a 1.3% annual rate, down from a 2% annual pace in the second quarter.
Still, the U.S. economy is in growth mode.
“We have a situation where consumers generally are doing pretty well,” said Gus Faucher, chief economist at PNC Financial Services Group.
Federal Reserve policy makers cut interest rates this year with the goal of cushioning the economy against a slowdown in manufacturing and global growth. They will meet later this month, and a rate cut is seen on the table.
The U.S. is a service-oriented economy, meaning manufacturing accounts for a small share of gross domestic product. But the manufacturing sector is highly sensitive to swings in global demand, making it an important indicator of broader economic shifts.
One factor that weighed on manufacturing last month will likely be temporary. The GM strike accounted for a 0.7% decline in production of durable, or long-lasting, goods. That included a steep 4.2% decline in the output of autos and related parts.
“With a tentative deal in place, auto production should rebound in November and December as GM looks to make up for lost output,” Mr. Faucher said.
Still, other forces pushing down factory production, including trade tensions and slowing global growth, offer few, if any, signs of abating.
The loss of momentum in U.S. manufacturing aligns with weakening factory output overseas.
The manufacturing output index in Germany, a key export economy in the eurozone, fell to 101.5 in August from 105.8 a year earlier, Organization for Economic Cooperation and Development figures showed.
Surveys of purchasing managers across the globe pointed to deepening declines in factory activity in September. The U.S. wasn’t immune. The Institute for Supply Management’s survey of supply-chain managers showed manufacturing activity contracted for the second straight month to its lowest level since 2009.