Recession Set To Materialize In Approximately In (9) Months (#GotBitcoin?)
Bond Yields Extend Drop Toward 2%. Recession Set To Materialize In Approximately In (9) Months (#GotBitcoin?)
Muted inflation, slowing job growth put multiple Fed rate cuts on investors’ minds.
The yield on benchmark U.S. government bonds hit new 2019 lows near 2% on Friday, a sign investors believe a slowing economy will spur the Federal Reserve to cut interest rates.
The yield on the U.S. government’s 10-year Treasury note, which falls as bond prices rise, dropped as low as 2.055% according to Tradeweb after an unexpectedly weak jobs report showed wage gains missing analysts’ expectations, signaling inflation remains muted. It finished the day at 2.085%, the lowest close since September 2017.
Investors watch the 10-year Treasury yield as a barometer for the health of the economy because it helps set borrowing costs for everything from mortgages to corporate loans. It tends to fall when investors are worried about economic growth, so its retreat from multiyear highs hit in November has rattled financial markets and sparked fears of a coming recession.
Few saw this coming late last year, as the 10-year yield soared to a multiyear high above 3%. Many had bet Trump administration policies like tax cuts and regulatory rollbacks would shake the U.S. out of its postcrisis torpor, accelerating growth and inflation and spurring regular rate increases in 2019.
Instead, trade tensions and tepid economic data have fueled recession fears, sparking a world-wide bond rally. Yields on 10-year bonds in both Germany and Japan were below zero Friday. Futures markets showed investors increasing bets on multiple Fed rate cuts this year.
Hopes that rate cuts would boost riskier assets climbed this week, with the Dow Jones Industrial Average soaring more than 1000 points in the sessions after Fed Chairman Jerome Powell said Tuesday that the central bank would “act as appropriate to sustain the expansion.” Major U.S. indexes all added more than 1% Friday, with the Dow Jones Industrial Average adding 263 points and the S&P 500 rising 1.1%.
Falling bond yields and low interest rates can make stocks more attractive to investors looking to beat the lowered returns offered by relative safe assets, like Treasurys. But a rapid decline in yields can also worry investors, since low yields typically suggest reduced confidence in the economic outlook.
The past two times the Fed has shifted to easing monetary policy—2001 and 2007— the blue-chip index was lower one year later. And yields on short-term Treasury bills currently exceed those on longer-term bonds, a phenomenon known as an inverted yield curve that typically presages a recession.
“The Treasury market has an opinion—the economy is looking to be in a severe slowdown in coming quarters,” said Doug Peebles, co-head of fixed income at AllianceBernstein. Mr. Peebles has been reducing his holdings of corporate bonds and buying short-maturity Treasurys in their place, he said.
The worries span the globe. The yield on 10-year German government debt Friday declined to record lows below negative 0.2%. Japanese government bonds of the same maturity traded below negative 0.1%.
About $11 trillion of bonds around the world, concentrated in Europe and Japan, carry negative yields, now accounting for about 20% of all debt world-wide, according to Torsten Slok, chief economist at Deutsche Bank Securities. Investors buying those securities effectively lock in losses, because the sum of their interest and principal payments is less than their purchase price.
Analysts worry negative yields could make it harder for developed economies to revive growth in a recession. The European Central Bank’s deposit rate is currently minus 0.4%, and policy makers just this year ended postcrisis bond purchases aimed at boosting growth and inflation.
Friday’s jobs report also signaled wage increases aren’t creating pressure for increasing prices. A measure of investors’ expectations for average annual inflation over the next 10 years, known as the 10-year break-even rate, has fallen to about 1.7% from about 2% in late April. Muted inflation tends to lift the value of bonds by preserving the purchasing power of their fixed payments.
The yield on the two-year Treasury note, which typically moves with expectations for central bank policy, fell to 1.813% following the report Friday, down from 1.881% Thursday.
Investors could be placing too much hope in Fed policy, and their record of predicting Fed behavior is poor, some analysts said. As soon as 2009, investors were betting the Fed would lift rates from their postcrisis levels near zero—bets that proved wrong for years, said Mr. Slok.
Their fears of economic contraction could also prove unfounded.
“The market is over-interpreting Powell,” said Krishna Memani, chief investment officer at OppenheimerFunds. “If the data softens, cutting rates makes sense [though] the likelihood of recession remains low.”
Yet many see mounting risks to the global economy, particularly from trade tensions between the U.S. and China, the world’s two largest economies. The International Monetary Fund in April cut its outlook for global growth in 2019 to 3.3% from estimates of 3.5% in January and 3.7% in October, citing the trade fight. That could drive yields lower still.
“Treasurys are an insurance policy” against declines in riskier assets and slower growth, said Jim Sarni, a managing principal and bond manager at Payden & Rygel. “We happen to be in a market where we need them.”
Dollar Weakens In Wake Of Jobs Report
Tepid hiring data bolsters case for Fed to cut interest rates.
The dollar fell against a broad range of currencies Friday, after a weak U.S. employment number bolstered the case for the Federal Reserve to ease monetary policy sooner.
The WSJ Dollar Index, which measures the U.S. currency against a basket of 16 others, was down 0.3% at 90.03 in late afternoon New York trading as the dollar slid against the yen, euro and other currencies.
Employers added 75,000 jobs in May, pulling back from two months of solid hiring, the Labor Department said Friday. Economists surveyed by The Wall Street Journal had forecast a gain of 180,000 new jobs.
Some investors believe the data has increased the likelihood of a Fed rate cut in coming months, a move that could hurt the dollar by making the U.S. currency less attractive to yield-seeking investors.
The “tide appears to be turning for the dollar as the Fed steps up dovish rhetoric and data weakens,” Bank of America Merrill Lynch analysts wrote in a recent note to investors.
The yield on the U.S. government’s 10-year Treasury note, which falls as bond prices rise, dropped to fresh 2019 lows Friday, reflecting growing expectations of a rate cut and worries over an economic outlook that has been clouded by standoffs between the U.S. and trading partners China and Mexico. Yields on German and Japanese debt also declined.
The global economy’s growth will be the weakest since 2016, while trade growth is on track to be the weakest since the global financial crisis more than a decade ago, the World Bank said earlier this week. The bank cut its forecast for global growth to 2.6% from 2.9% in January—and cut its forecast for growth in trade to 2.6% from 3.6%.
The euro was up 0.5%. The dollar fell 0.2% against the yen.
Freight Operators Slowed Hiring in May on Weaker Shipping Demand
Parcel carriers and warehouse companies continued adding jobs in a sign of the growing impact of e-commerce on logistics operations.
Logistics operators slowed their hiring in May amid signs of moderating freight demand across the broader American economy.
Courier and messenger companies that deliver packages to homes and businesses added 2,200 jobs last month, the sector’s strongest gain since January, according to preliminary figures the Labor Department reported Friday. Meanwhile, truckers and other transportation companies tied more closely to industrial output reported restrained payroll growth.
Warehousing and storage payrolls grew by 1,200 in May, extending a five-month expansion. But hiring since January has been slower than during the same period last year as some companies report difficulty recruiting staff in a tight labor market.
Trucking companies added 300 jobs and railroads cut payrolls by 1,100 jobs as transport demand softened amid slowing manufacturing growth and rising trade tensions. The Labor Department revised its earlier numbers to show the trucking sector added 100 jobs in April after earlier reporting truckers cut 500 jobs that month.
The gains for parcel carriers came as Amazon.com Inc. beefs up its delivery operations and pushes to narrow the shipping window for Prime members from two days to one. In May, the e-commerce giant said it would pay its employees to quit and provide help starting their own local package-delivery businesses.
Rival Walmart Inc. is expanding its next-day shipping options and adding free next-day delivery, while FedEx Corp. is hiring about 700 part-time delivery drivers, Reuters reported this week, highlighting the strong demand for so-called last-mile delivery as online sales surge.
Overall, the U.S. economy added 75,000 jobs in May, fewer than expected, suggesting employers were pulling back because of mixed economic signals. The May employment data were collected before President Trump announced last week he would impose escalating tariffs on imports from Mexico.
Hiring slowed sharply in the goods-producing sector, where employers added just 8,000 jobs last month, compared with 35,000 in April. Manufacturing payrolls grew by 3,000, while construction added 4,000 jobs. Retailers cut a net 7,600 positions overall, including some 12,700 jobs lost at clothing and clothing accessories stores.
Hiring is also slowing at trucking companies that expanded their fleets during last year’s freight boom. Trucking rates are softening and transportation demand remains muted heading into the seasonal shipping peak. Truckers ordered 10,400 big rigs in May, down 71% from May 2018 and the lowest monthly order volume since July 2016, according to research group FTR.
Schneider National Inc., a large trucking company based in Green Bay, Wis., said its spending on recruiting and training drivers outpaced growth in revenue in the first quarter. Now, “we have tempered our hiring because we got ahead of where we actually needed to be,” Chief Executive Mark Rourke said in an interview. “We’re trying to be mindful and look forward and be a bit more cautious.”
Imports At Southern California Ports Fell Sharply Last Month
Drop ahead of peak shipping season came as a retail industry group cut its forecast for import growth in the coming months.
Trans-Pacific trade tensions weighed on volumes at Southern California ports in May, prompting warnings that the yearlong tariff spat between the U.S. and China is rattling supply chains.
Combined inbound loaded containers at the ports of Los Angeles and Long Beach, the neighboring ports that comprise the largest U.S. gateway for seaborne trade, fell 6.3% last month from a year ago. The ports handled 48,256 fewer loaded import containers than they did in the same month last year.
Combined exports at the two ports also fell 7.4%.
The decline, in a month when maritime operators usually are gearing up for the year’s peak seasonal shipping volumes, suggested that importers are pausing orders for goods after accelerating imports for several months to get ahead of rising tariffs launched by Washington and Beijing.
“Escalating tariffs pushed retailers to order early, warehouses are brimming with inventory and carriers are managing their vessels to deal with reduced demand,” said Mario Cordero, executive director of the Port of Long Beach, where loaded import container volume fell 19.5% last month from same month a year ago.
“We are hopeful Washington and Beijing can resolve their differences before we see long-term changes to the supply chain that impact jobs in both nations,” Mr. Cordero said in a statement.
Last month, the Trump administration raised tariffs on $200 billion of Chinese goods, including furniture and automotive parts, to 25%. China responded with tariffs on $60 billion in U.S. goods. Washington has also threatened to impose levies on all remaining Chinese exports worth around $300 billion.
The Global Port Tracker report by the National Retail Federation and Hackett Associates released this week estimated that container imports into major U.S. ports overall rose 3% in May. The retail group also scaled back its projection for imports in the coming months, saying U.S. ports would see a combined 900,000 fewer inbound containers in June, July and August than had been forecast in May.
“With a major tariff increase already announced and the possibility that tariffs could be imposed on nearly all goods and inputs from China, retailers are continuing to stock up while they can to protect their customers as much as possible against the price increases that will follow,” NRF Vice President for Supply Chain and Customs Policy Jonathan Gold said in a statement.
IBM Cuts About 2,000 Jobs
Company continues to shift its business toward ‘high-value segments’
International Business Machines Corp. IBM 0.82% is cutting about 2,000 jobs in a round of layoffs this week, according to a person familiar with the matter, as the technology giant works to reshape its business.
“We are continuing to reposition our team to align with our focus on the high-value segments of the IT market, and we also continue to hire aggressively in critical new areas that deliver value for our clients and IBM,” a company representative said in a statement.
IBM had 350,600 employees as of Dec. 31, the fewest number of employees reported since 2005, according to securities filings.
The company currently has about 25,000 open job postings world-wide.
Several technology firms have made staff cuts this year, including Symantec Corp. and Oracle Corp.
In April, IBM reported its third consecutive quarter of declining revenue, as efforts to expand in cloud computing and artificial intelligence haven’t been enough to offset slower growth in equipment sales and services.
Treasury Yields Fall To Fresh 2019 Lows After Weak Jobs Data
Investors ratchet up bets for multiple Fed rate cuts this year.
U.S. government bond yields fell to fresh 2019 lows Friday, after the Labor Department said the economy added fewer jobs in May than economists had expected.
The yield on the benchmark 10-year Treasury note dropped to 2.085%, its lowest closing level since September 2017, from 2.124% Thursday. The yield on the two-year Treasury note, which tends to move with investors’ expectations for Federal Reserve interest-rate policy, settled at 1.853%, down from 1.881% Thursday.
Yields declined after the Labor Department said the economy added 75,000 jobs in May, marking the 104th straight month of gains, but one of the weakest since the recession ended. The jobless rate held steady at 3.6%, a near 50-year low. Economists in a Wall Street Journal survey had forecast a gain of 180,000.
“The Fed’s got to take notice of this,” said Larry Milstein, head of Treasury trading at R.W. Pressprich & Co. The decline in two-year yields suggests “you’re pricing in multiple easings in a short time.”
Fed funds futures, which investors use to bet on the direction of central-bank policy, late Friday showed greater-than 50% odds that the Fed will cut rates three times or more by the end of the year, according to CME Group data. That is up from less than 1% a month ago.
The drop in the two-year yield puts it close to a half percentage point below the lower end of the current range of 2.25% to 2.5% for the Fed’s benchmark overnight rate. The decline in short-term bond yields is another sign that investors are expecting the central bank to lower interest rates more than once in coming months.
The Labor Department data also showed the pace of wage gains slowed to 3.1% in May from 3.2% the month before, a sign inflationary pressures remain muted. Inflation poses a threat to the value of bonds’ fixed payments.
Inflation expectations have fallen sharply in recent weeks. The bond market’s proxy for the expected average rate of inflation for the next 10 years—the gap between yields on Treasury inflation-protected securities and conventional U.S. government debt maturing 10 years from now—stood Friday at about 1.7%, down from about 2% in late April.
Because trade tensions have been an important factor behind the decline in bond yields and the rise in expectations for lower interest rates, Fed officials may be reluctant to shift policy with the issue still unresolved, said Gautam Khanna, a bond manager with Insight Investments.
Instead, central bankers will be examining economic data for signs that the economic deceleration will be more than a transitory move, Mr. Khanna said.
“We’d need to see material weakness in underlying data for them to change their policy stance,” he said.
Some Investors Had Hunch Yields Were About to Fall
Drop in 10-year Treasury yield has been rapid and for many investors completely unexpected.
Almost nobody saw the nosedive in bond yields coming, but a few players were positioned well enough to profit. Some think there is more room for yields to fall further.
The drop in 10-year Treasury yields in recent months has been rapid and in many quarters completely unexpected. The 10-year Treasury yield settled Friday at 2.085%, down from 3.23% in early November, the biggest decline over a similar stretch since early 2012.
Yields on 10-year debt in Germany, Japan, Denmark and Holland have fallen into negative territory, and as much as 20% of the $55 trillion in global debt has yields less than zero, according to Deutsche Bank Securities. Investors who purchase such debt are effectively paying borrowers to hold their money.
Investors holding bonds before yields plunged have made money because bond prices rise when yields fall.
Mark Lindbloom, a portfolio manager at Western Asset Management, is one of the few who got it right. Last year the firm loaded up on long-dated Treasury debt relative to the benchmarks they use to track performance.
The firm held that position even as the Federal Reserve—and most economists—were forecasting rate increases this year and for U.S. government bond yields to be well north of 3%. His unconstrained fund has outpaced its benchmark index, according to Morningstar.
“We find ourselves worrying about the same issues yet again,” Mr. Lindbloom said, referring to low inflation, slow long-term growth and the reliance on central banks to boost economic expansion.
Few analysts saw the rush into government debt coming. In October, when yields on the 10-year Treasury were near their peak of around 3.2%, none of the more than 50 respondents in The Wall Street Journal’s monthly survey of economists predicted yields would dip below 2.75% by June 2019. The average forecast was 3.39%.
Steven Major, global head of fixed-income research at HSBC , was on the right side of the yield prediction game, even if he didn’t catch it completely.
He has long predicted that the Fed would maintain a “low-for-longer” stance given that higher levels of debt have left the U.S. economy more sensitive to changes in monetary policy. In the middle of December, Mr. Major predicted the yield on 10-year Treasurys would stand at 2.80% by June.
“It is still too early to conclude for sure that the Fed has over-tightened but the facts are pointing in that direction,” Mr. Major wrote in a March note, before bond yields took their latest leg down. “The global economy has become far more leveraged and therefore sensitive to rates,” he wrote.
The bond rally has led several banks to revise forecasts. Early in June, JPMorgan Chase revised its year-end prediction for the 10-year Treasury yield to 1.75%, from 2.9% in March.Bank of America , UBS , Goldman Sachs and HSBC have also cut forecasts.
Pacific Investment Management Co. added more longer-term U.S. Treasurys after the Fed indicated earlier this year that it would stop raising rates, said Scott Mather, the firm’s chief investment officer for U.S. core strategies.
The move paid off, with a number of Pimco funds, including its flagship Pimco Total Return Fund, showing strong gains in recent months. Since September, the firm has two of the top three taxable bond funds, according to Morningstar.
“This is not the market pricing in a high probability of recession,” Mr. Mather said. “If it was, credit spreads would be a heck of a lot wider,” he said, referring to the higher yields riskier corporate borrowers pay for debt compared with government bonds.
Mr. Mather said he believes yields will fall further over the next several years but doesn’t expect big moves in coming months, he said.
The stampede into bonds in Europe has been particularly dramatic, with yields hitting all-time lows. The yield on benchmark 10-year German government bonds, also known as bunds, fell to a record negative 0.259% on Friday.
That has investors moving to relatively higher yields in peripheral European countries such as Portugal and Spain, where rates are still positive.
“Everyone is trapped in the same position, everyone is trying to capture some level of income,” said Dickie Hodges, head of unconstrained fixed income at Nomura.
Mr. Hodges began buying up Portuguese government bonds early this year until about 15% of his $375 million fund was in 30-year Portuguese government debt. Rates on those bonds have fallen to 1.6425% from 2.9% at the start of the year.
Nick Maroutsos, co-head of global bonds at Janus Henderson Investors, is among the winners from the recent drop in government bond yields. For the past three or four months, he has been indirectly increasing his exposure to shorter-dated U.S. government bonds through interest-rate swaps and futures, betting that markets were wrong late last year in believing the Fed was preparing to raise rates.
His Janus Henderson Absolute Return Income Fund produced a 2.9% return in the year through March 31, compared with 2.1% for a benchmark index.
“Central banks, and the Fed is no different, they overpromise and underdeliver,” Mr. Maroutsos said, adding that he would use any selloff to increase his exposure to the bonds.
U.S. Added 75,000 Jobs in May as Hiring Slowed
Jobless rate held steady at 3.6%, a half-century low.
Employers tapped the brakes on hiring in May, signaling companies are taking a more cautious approach at a time of cooling global growth and trade tensions and underscoring a spring slowdown in the decadelong U.S. economic expansion.
The economy added 75,000 jobs in May, marking the 104th straight month of gains, but also one of the weakest monthly increases since the recession ended in mid-2009, the Labor Department reported Friday. The hiring slowdown was broad-based across industries, and the March and April payroll gains were reduced from previous estimates.
A bright spot was the jobless rate, which held steady at 3.6%, a half-century low.
The employment figures add to other data depicting an economy that is still growing, but is losing momentum after the first quarter of 2019 and last year.
Stocks and bonds rose as the report bolstered investors’ expectations the U.S. Federal Reserve will lower interest rates to support the economy.
Fed officials signaled this week they are paying close attention to the risks of a sharper-than-expected economic slowdown. A spate of weak recent data, including the jobs report, makes an interest-rate cut possible this summer—if not at their meeting on June 18-19, then possibly later.
After Friday’s report, the probability of a rate cut in June implied by futures markets rose to around 35%, from 20% on Thursday, according to CME Group. This means investors see a move as more likely, but it isn’t seen as the most likely outcome. Meanwhile, the probability of at least one quarter-point cut in July firmed to 80%.
“This looks like an economy that is having trouble bearing up further under the headwinds we’ve been facing for a while including the trade war,” said Martha Gimbel, economist at Indeed Hiring Lab. “Overall, it’s not an optimistic picture.”
One company feeling the impact of the trade disputes is NEMO Equipment Inc., a Dover, N.H., outdoor gear distributor. NEMO has added five employees this year to help fuel sales of tents, sleeping bags and pillows. But new and pending tariffs are dampening the outlook for hiring plans at the 29-person company, said Brent Merriam, the company’s chief operating officer.
The Trump administration already placed 25% tariffs on the camp chairs NEMO imports from China. The company sells the chairs to retailers, but will be unable to renegotiate already locked-in pricing with them, he said. NEMO’s profitability, in turn, is slated to take a hit, Mr. Merriam said.
If the administration approves another round of tariffs on items such as tents and sleeping bags, the outdoor-gear wholesaler will likely freeze hiring, he said. “Because we’re small and independent, we can’t absorb big costs to the business without making difficult trade-offs that ultimately can hamper our future growth.”
Forecasters generally expect U.S. growth to slow in 2019 due to the ebbing stimulus from tax cuts and government spending increases, a weakening global economy and the effects of President Trump’s trade policies on business investment, hiring and other activity.
Forecasting firm Macroeconomic Advisers, for instance, projected Friday—after the employment report was released—that the economy would expand at a 1.4% annual rate in the second quarter, down from a 3.1% pace in the first three months of the year. The firm noted “unexpected weakness in employment, hours and earnings through May” points to lower second-quarter consumer spending than earlier estimated.
The economy has sent mixed signals in recent months. The services sector, which accounts for 88% of U.S. gross domestic product, keeps expanding and consumers are spending briskly. But manufacturing output fell in the first four months of the year and the housing market has remained soft.
Trade remains a wild card. The U.S. boosted tariffs on $200 billion of Chinese goods to 25% in May, and Beijing retaliated with plans to increase levies on $60 billion in U.S. imports. The May hiring slowdown occurred before Mr. Trump announced last week he would impose escalating tariffs on imports from Mexico.
In May, the number of new jobs hardly grew in goods-producing sectors, such as construction, mining and manufacturing, which are more susceptible to trade tensions than others.
Peter Broer, chief executive of Lumitex Inc., which makes lights for keyboards, cars and medical devices, said he is becoming a bit more cautious about the global economy due to the trade dispute between Washington and Beijing.
The company imports materials and parts from China for use in its Ohio factory. He said the tariffs could raise the price of both and lower demand for products containing Lumitex lights.
“The business is healthy, but I discern some slowing,” he said. “We’re still hiring, but I’m keeping some flexibility.” For example, Lumitex recently added a third shift at its Ohio factory, but mostly staffed it with temporary workers.
One way companies can help keep the economy chugging is by pulling workers in from the sidelines—tapping the pool of people who previously had not been actively seeking a job, such as students, retirees and stay-at-home parents, as well as people who had given up looking when the labor market was weaker. More workers means more output, incomes and spending, key ingredients for economic growth.
However, May’s low unemployment rate did little to attract Americans off the sidelines and back into the job market. The share of adults aged 25 to 54 in the labor force—which filters out many people who are still in school or who have retired—fell to 82.1% in May. That was the lowest rate since September 2018. It had edged higher late last year, reaching 82.6% in January of this year, which had raised hopes that a strong job market was pulling in workers. But now those gains have largely retreated.
Companies aren’t raising wages at a much faster pace than even a year ago, a potential deterrent to drawing in more people weighing whether to seek a job. In May, private-sector workers saw average hourly earnings rise 3.1% from a year earlier, drifting down since hitting a postrecession peak of 3.4% in February. In May 2018, wages were up 2.9% from a year earlier.
The upside is inflation remains muted, meaning workers aren’t seeing hefty price increases eating into their pay raises, in turn helping stretch their dollars. Recession Set To Materialize,Recession Set To Materialize,Recession Set To Materialize,Recession Set To Materialize,Recession Set To Materialize,Recession Set To Materialize,Recession Set To Materialize,Recession Set To Materialize,Recession Set To Materialize,Recession Set To Materialize,Recession Set To Materialize,Recession Set To Materialize
The South’s Economy Is Falling Behind: ‘All of a Sudden the Money Stops Flowing’
Policies that once drove the region’s growth have proven inadequate in an economy shaped by the forces of globalization.
The American South spent much of the past century trying to overcome its position as the country’s poorest and least-developed region, with considerable success: By the 2009 recession it had nearly caught up economically with its northern and western neighbors.
That trend has now reversed. Since 2009, the South’s convergence has turned to divergence, as the region recorded the country’s slowest growth in output and wages, the lowest labor-force participation rate and the highest unemployment rate.
Behind the reversal: The policies that drove the region’s catch-up—relatively low taxes and low wages that attracted factories and blue-collar jobs—have proven inadequate in an expanding economy where the forces of globalization favor cities with concentrations of capital and educated workers.
“Those policies worked before, then they became fundamental constraints on the [South’s] long-term growth,” said Richard Florida, an urbanization expert at the University of Toronto.
Higher taxes and education spending aren’t a cure-all, as many northern states now suffering population loss have found. Nor is the South alone in its economic troubles: Automation and globalization have wiped out millions of good-paying factory jobs around the country, especially in the Rust Belt.
But these trends have fallen especially hard on the South, which is more rural than the rest of the country and has fewer big cities. In part because of its legacy of racial segregation the region has, relative to others, underinvested in human capital. Thus the South, the only region to have enjoyed such a dramatic rise in the postwar period, is the only one to experience such a retreat in the past decade.
In the 1940s, per capita income in the states historians and economists generally refer to as the South—Louisiana, Mississippi, Alabama, Georgia, the Carolinas, Virginia, West Virginia, Oklahoma, Arkansas, Tennessee and Kentucky—equaled 66.3% of the national average, according to historical data reconstructed by University of Kent economist Alex Klein and The Wall Street Journal. By 2009, that had climbed to 88.9%. That was the high-water mark. By 2017 it fell back to 85.9%.
Against the Northeast, the country’s wealthiest region, the South’s decline began sooner and has been steeper. The South’s per capita income peaked at 79.1% of the Northeast’s level, and has since fallen to 71.6%.
State of Income
Per capita income varies widely among individual states, with the South accounting for most of those in the lowest tier.
(Those numbers would look slightly better under the U.S. Census Bureau’s broader definition of the South, which adds in Texas, Florida, Maryland and Delaware, though the general trend remains the same.)
Rural Adams County in the southwest corner of Mississippi exemplifies the typical story of the South’s rise and fall. It once attracted thousands of higher-paid factory jobs, particularly in the 1930s, when a big tire and rubber plant arrived. But the major factories began closing in the 2000s; the tire plant shut down in 2001. “Friends and family that have been here for 20 years…were packing up and leaving,” says Chandler Russ, who grew up in Adams.
The income gains the county notched against the rest of the country from the 1950s to the 2000s have completely reversed.
The county population peaked in 1982 at 39,172, and has declined about 20% since. Factory jobs, 18.5% of the county’s total in 1992, were just 5% in 2017. Per capita income is now 56.8% of the national average.
Today Mr. Russ runs its economic development office, working to attract better paying jobs. It’s an uphill battle. A slim supply of college graduates makes it difficult to attract high-paying employers, which in turn gives the county’s smartest students little reason to stay. “Our brightest and best that go to college and get a good education don’t come back,” said Glenn Green, a prominent local Realtor. He has sold fewer pricier homes in recent years as the engineers, plant managers, and other higher-paid workers who used to staff the big plants have left.
Within the South, individual cities and states have had widely diverging experiences. So-called Sunbelt cities like Charlotte and Atlanta have attracted both wealthier white-collar workers and retirees from richer regions, and less-educated workers from poorer, rural areas. Thanks to these cities, the entire region rebranded itself as the New South.
And neighboring states such as Texas, with its own unique economy, often got lumped in. But unlike the rest of the South, Texas is relatively urban, with five major metro centers. It has a thriving tech sector and ample reserves of oil and gas which have boomed in recent years thanks to the fracking revolution.
“The ‘New South’ is a narrative that is more applicable to the urban centers,” says James Ziliak, an economist at the University of Kentucky specializing in poverty. Much of the region consists of smaller towns and rural communities whose fortunes rose, then often fell with that of a single local industry.
As the divide between rural and urban incomes widens nationwide, the South has been particularly affected, since a third of its population lives in rural areas, compared with under 20% for the overall U.S.
The South’s economy was historically poorer because it was heavily dependent on agriculture, one legacy of the dominance of cotton and slavery. In 1880, about 90% of southern workers were employed in farming, compared with about 66% nationally, according to Sukkoo Kim of Washington University.
To diversify and lure manufacturing, southern states, starting with Arkansas in 1947, began passing right-to-work laws that weakened unions and kept taxes lower than in the wealthier North. And they spent less, especially on education: an average of $1,869 per student in 2009 dollars, in 1960, compared with $2,741 nationwide, according to the Education Department. In part, this reflected the long shadow of slavery. In the Jim Crow era white taxpayers and politicians resisted spending that benefited blacks, according to historians.
Mississippi was an early adopter of this industrial push. In the 1930s, it passed the nation’s first state-sponsored economic development plan to encourage northern industries to move south, using low taxes, low wages and other incentives. Manufacturers flooded in. By 2009, per capita income had climbed to 76.3% of the national average, from just 30.3% in 1932.
The plan was particularly successful in Adams County, where, by 1960, farm labor declined to one of the lowest percentages in the state. Armstrong Tire and Rubber, later known as Titan Tire, was one of the first manufacturers to respond to Mississippi’s plan, opening a plant in Natchez in 1939. It became a linchpin in the community, the behemoth building’s outline visible above the tops of homes and businesses in its neighborhood. It eventually employed more than 1,000 white workers, and by the 1960s began hiring blacks, including Jessie Winston, now 108 years old, who checked the quality of tires coming off conveyor belts, and his daughter Helen.
The streets surrounding the tire plant were busy with passing cars and families and lined with fully occupied, brightly painted homes, the Winstons recall.
But in the 1980s, globalization and automation began eliminating the sorts of lower-skilled manufacturing jobs that the South had been so successful at attracting. The tire plant closed permanently in 2001 largely due to regulatory lawsuits and union negotiations that turned sour. This threw Mr. Winston and his daughter out of work. Other factory closures happened around the same time, devastating the county’s tax base.
“All of a sudden that [industry] money stops flowing through the economy,” Mr. Russ said. “It was alarming.”
The neighborhood near Titan’s gray and rusting plant is quieter now, there is less traffic, and empty homes with broken windows contrast with the well-kept lawns of the remaining residents and churches. The restaurants the Winstons used to frequent have closed. Mr. Winston continued a hair-cutting side gig and later worked at a bakery, making doughnuts and pastries. His daughter became a housekeeper for a local community college.
The federal government has tried ways to redress regional disparities. Huntsville, Ala., was a major recipient of federal missile and space research jobs and funding. President Trump’s tariffs are meant to bring factory jobs back to the U.S., including the South. After the Trump administration threatened 25% tariffs on auto imports, Toyota announced it was building a $1.6 billion assembly plant with Mazda Motor Corp. in Huntsville. But such moves have yet to eliminate the South’s income gap.
Many economists say the most effective way for the South to regain its momentum would be to invest more in education, which would over time create a more skilled workforce to attract employers. But Mississippi State University economist Alan Barefield notes that is difficult to reconcile with southern states’ historic desire to keep spending and taxes low.
As Adams County’s industrial jobs fled over the past decade, they have been replaced by jobs in the lower-paid leisure, hospitality and food sectors, which are now about a fifth of the workforce. Natchez leaders have also tried to draw tourism dollars, emphasizing its deeply Southern roots and proximity to the Natchez Trace Parkway, a series of trails formerly used by Native Americans. Foreign tourists now meander down the city’s waterfront path with an unobstructed view of the Louisiana coastline, and make their way through antebellum-style plantation homes with tall, imposing white columns.
But the dearth of college-educated workers has hampered its ability to attract high-paying white-collar information and professional and business services jobs, which made up less than 8% of the workforce.
So city leaders are doing their best with what they have. They encouraged its local community college, Copiah-Lincoln, to adapt its offerings to what potential employers may need. This is showing signs of working. Great River Industries, which makes fabricated metal products like industrial-sized vessels that hold chemicals, moved to Natchez in 2013 after the city pushed the community college to redesign its welding curriculum. The firm currently employs almost 300 and plans to hire more. A couple of other smaller manufacturers have also set up shop.
But Mr. Russ acknowledged that the city can’t depend on just a few manufacturers in a handful of product areas or it could go the way of the past again.
“There’s no visions of grandeur,” Mr. Russ said, and little hope of going back to the days of Titan Tire. “But what if we get 10 100-[person] plants that grow to 250 jobs over time?” he added. “You don’t take the beating when you lose one.” Recession Set To Materialize,Recession Set To Materialize,Recession Set To Materialize,Recession Set To Materialize,Recession Set To Materialize, Recession Set To Materialize,Recession Set To Materialize,