A Whiff Of U.S. Recession Is In The Air Again. Credit Trumponomics
Trade dispute between world’s largest economies felt far and wide. A Whiff Of U.S. Recession Is In The Air Again. Credit Trumponomics (#GotBitcoin?)
The U.S. economy has taken a turn for the worse — and it doesn’t look like things will get much better anytime soon.
A mountain of evidence in the past two weeks shows that key segments of the economy have slackened. Retail sales fell last month, business investment nearly dried up and manufacturers are growing at the slowest pace in nine years.
Don’t expect much good news in a holiday-abbreviated week. The trade deficit is likely to widen, consumer confidence could decline and household spending was probably tepid in April.
Whiff Of U.S. Recession?
“Call it scare-mongering if you like, but many of the data releases [last] week had the unmistakable whiff of a recession,” said chief U.S. economist Paul Ashworth of Capital Economics.
Mind you, Ashworth is not predicting the sudden onset of recession. Nor are other economists.
Yet They All Point Out The Obvious: The trade spat between the two largest countries in the world, the U.S. and China, is hurting the economies of both — not to mention the rest of the world.
The spillover is evident not just in updates on the economy, it’s also infecting stocks. After topping 26,500 at the end of April, the Dow Jones Industrial Average DJIA, +0.37% has lost about 1,000 points. And stocks are unlikely to make much headway as long as the dispute drags on.
“The dawning realization that U.S.-China trade tensions are not going to be resolved anytime soon continues to rattle markets,” said chief economist Douglas Porter of BMO Capital Markets.
What’s keeping the economy afloat despite trade and other headwinds?
The strong labor market, for one thing. Layoffs and unemployment remain near a 50-year low, and even if companies aren’t hiring as rapidly as they were last fall, they aren’t resorting to mass job cuts, either.
“The U.S. still has a rock solid labor market,” said chief economist Scott Anderson of Bank of the West.
The Federal Reserve, for its part, cast aside plans to keep raising interest rates this year. The result has been a sharp decline in the cost of borrowing for new cars, new homes and other consumer and business loans.
Still, most economists say that won’t be enough to keep the U.S. from slipping below 2% growth in the second quarter. They also expect the initial 3.2% reading for first-quarter gross domestic product to be trimmed to 3% or less.
What remains to be seen is how much the mounting problems in the U.S. economy reshape trade talks with China.
“The strength of the US economy in the first quarter was presumably one of the factors that emboldened President Donald Trump to take a tougher line with China in the trade dispute,” Ashworth contended. But the incoming data “would leave Trump in a more vulnerable position.” Whiff Of U.S. Recession?
Wall Street Isn’t Buying What Silicon Valley Is Selling
Some of the best-funded startups disappoint when they go public; ‘a tough pill to swallow’.
Silicon Valley is pumping out giant startups with expansive visions, but Wall Street isn’t sold.
It isn’t just Uber Technologies Inc. whose public performance has looked grim compared with its private fundraising.
Private investments in six of the 10 best-funded U.S. tech startups to go public since 2015 have fallen from the peak levels they hit in funding rounds before the companies’ stock debuts, according to a Wall Street Journal analysis of data from research firm Pitchbook.
Uber investors paid an average of $48.77 a share between December 2015 and October 2018 for a total of $8.6 billion—one of the largest fundraising hauls ever for a startup. Uber, which went public two weeks ago, now trades at about $40 a share.
Others whose per-share prices are lower as listed companies than at their private peaks include Snap Inc., online storage company Dropbox Inc. and business-software maker Cloudera Inc.
According to the Journal analysis, late-stage private investors in the six companies would have done far better investing in the broader stock market. The Nasdaq is up about 50% since the beginning of Uber’s fundraising round. In a seventh company, Pinterest Inc., the value of a 2015 private investment has gone up, but only by about half as much as the Nasdaq.
Uber rival Lyft Inc.’s stock is still pricier than its last private valuation. But its public debut has disappointed investors, with its stock down around 19% from its March initial public offering.
With Uber and Lyft, “there’s no profitability within sight even with binoculars and that’s been a tough pill for investors to swallow,” said Daniel Ives, a tech analyst at Wedbush Securities.
“It’s a totally different ballgame trying to get public investors around the valuations,” he said.
Over the past half-decade, venture investors have pumped tens of billions of dollars into the largest startups, betting that stock-market investors would look beyond companies’ heavy losses and embrace their visions of industry disruption—a position that so far looks increasingly dissonant.
Despite Wall Street’s apparent skepticism, the flood of cash continues. Food-delivery company DoorDash Inc. on Thursday announced new funding at a valuation of around $12.6 billion—nine times what it was a year ago. Last week, European food delivery company Deliveroo announced a $575 million investment from Amazon.com Inc. and others.
Every few days it seems, the Silicon Valley startup machine elevates some new company to a valuation over $1 billion, often aiming for a rich IPO some years down the line. Recent entrants include a company that makes luggage and another that handles drone delivery of medical supplies.
Startup investors—particularly early-stage venture capitalists—are betting on founders that they think have compelling visions of technology that could drive wholesale industry change. They expect that many of their gambles won’t pan out—but think of IPOs as a way to cash in on successful bets.
Public investors tend to look at projections for cash and earnings. They’re more inclined to fill their portfolio with financially healthy companies that will perform well in the foreseeable future.
That difference has long existed, though the balance has shifted over the years. Stock-market investors a generation ago were far more forgiving. The dot-com boom of the 1990s was propelled not just by venture capitalists betting on rapid adoption of everything online, but also by Wall Street, which poured money into stocks with little or no revenue like Pets.com and Webvan, which had hopes of profit but no track record.
Amazon is often pointed to as a model of how companies that lose money early on can then turn a profit. But its losses were modest by today’s standards. Its combined net losses over its first nine years totaled $3 billion, or roughly $4.5 billion adjusted for inflation, before it turned profitable in its 10th. Uber, 10 years old, lost $3.7 billion in the 12 months through March.
Today, companies are staying private for years longer, leaving it to private investors to fund their growth and make the risky early bets. Public investors tend to want something more predictable by the time companies begin trading.
Despite the rough market debuts of some startups, venture capitalists point out that many of the companies are still wild successes for early investors.
The stock-market discontent with Silicon Valley has largely been aimed at the best-funded startups. Overall, U.S. startups that went public since 2015 have performed well, with public valuations at IPO an average of around 90% above the last private-market valuations, according to PitchBook.
Shares in software companies such as Twilio Inc. and Okta Inc., which serve businesses instead of less-predictable consumers, have soared since listing. Zoom Video Communications Inc., which consumed a meager $160 million of venture capital before its IPO, is now worth around $19 billion, or roughly 19 times its peak private share price. Unlike Uber, Lyft, Snap and Pinterest, Zoom is profitable.
In marketing itself to stock-market investors, Uber has pushed a big-future narrative, saying that it hopes to eat into a big chunk of all transportation spending, and that profits today aren’t the priority. Like WeWork Cos., the shared-office-space giant that is valued at $47 billion as its loss last year exceeded its revenue, Uber compares itself to Amazon, kindling hope that it too will one day turn on the profit spigot.
“One of the hardest concepts for people in a public-company realm is where startup valuations come from,” said Eric Ries, a Bay Area entrepreneur who is CEO of the Long Term Stock Exchange. Mr. Ries has positioned his venture-capital-backed exchange—approved by the Securities and Exchange Commission the morning of the Uber IPO—as a way to let companies’ visions play a greater role, as longer-term investors would be more amenable to spending on experiments and new business lines.
One of the challenges for the better-funded consumer companies is that when they are considered a good bet, they often are swarmed by investors pushing up their valuations early on, before it is clear how long rapid growth can continue, and before paths to profit are fully ironed out.
That’s in part because there is more money than ever hunting for big hits. A record $132 billion of investment went into U.S. startups in 2018, a giant jump from $47.8 billion five years earlier, according to PitchBook.
In the past few years, that private-tech category has exploded with interest from global mutual funds and sovereign-wealth funds, which have poured into startups that are already well established.
SoftBank Group Corp. , whose chief executive, Masayoshi Son, has been on a frantic investment spree around the globe, has a nearly $100 billion tech fund and is planning to raise another. It has pumped billions into WeWork and sectors like food delivery and it is the largest investor in Uber and other ride-hailing companies.
Other big Uber investors include Tiger Global Management and Saudi Arabia’s Public Investment Fund.
For Uber, Snap and others, the investors were “betting the market will believe the narrative,” said Brent Goldfarb, a management professor at the University of Maryland who has researched market bubbles.
Since receiving their top-dollar private rounds, some of the better-funded companies’ visions of future expansion have been tempered. When Snap raised money in 2015 and 2016, it was still adding users rapidly, but since then, user growth has stalled.
Uber raised much of its late-stage capital haul in 2015 and 2016, before it pulled out of China, Southeast Asia and Russia and before its executive team was replaced. Its revenue has recently flattened after years of rapid growth amid increased competition.
The public markets could eventually warm to these new business models. Facebook Inc. had a disappointing public debut before going on to become one of the world’s most valuable corporations.
“It’s very hard to look at these things in a very narrow period of time,” said Roger Lee, partner at Battery Ventures, which invests in startups in various stages of maturity and has backed online retailer Wayfair and Groupon among other companies.
Thus far, late-stage private investors don’t seem deterred.
Few have more at stake in this area than SoftBank. Its initial investment in Uber is up about 20%—it bought shares from existing investors at a discount in late 2017—a modest return compared with others in its portfolio. It’s unclear how long the company plans to hold its Uber stake; it often holds stock of public companies for years.
Mr. Son has made clear his investment style is closer to that of a venture capitalist than a public-market investor looking at future cash flows.
“To SoftBank Group, vision matters most,” he told investors in February.
Ford To Cut 7,000 Jobs In Bid To Catch Up To Rivals
Restructurings are part of CEO Jim Hackett’s broader plan to reverse declining profits.
Ford Motor Co. F -0.34% said it is cutting 7,000 salaried employees, or about 10% of its white-collar workforce, part of Chief Executive Jim Hackett’s broader plan to reverse declining profits and catch up to competitors in the fast-changing car business.
Mr. Hackett said the cuts include some buyouts and layoffs that already have occurred, and the process will be completed by August, according to an email sent to employees Monday. The cuts will save about $600 million annually and are part of a broader, multiyear restructuring that will result in about $11 billion in charges.
The reductions will include 800 layoffs in North America, where Ford already has made about 1,500 voluntary buyouts, a company spokesman said.
Ford’s market share has slipped in key regions, and its profitability has fallen behind Detroit rivals General Motors Co. and Fiat Chrysler Automobiles NV. Mr. Hackett has said Ford’s cost structure has swelled in recent years.
Ford shares fell less than 1% midday Monday, trading at about $10.24 a share.
Ford is the latest car company to make deep job cuts as the industry ratchets up investment in costly technology bets, such as electric and self-driving cars. Many big auto makers are restructuring their car-manufacturing operations to funnel more money toward potential growth areas, while also preparing for an era of tougher tailpipe-emissions regulations in Europe and China.
Within the past year, several of the top car companies have revealed job cuts totaling as many as 30,000 positions globally.
Ford signaled last fall it had begun a global revamping of its workforce that would result in layoffs. Mr. Hackett took the top job two years ago and has been working on a turnaround plan that he has said will make Ford more nimble amid the changes buffeting the car business. Those include the emergence of driverless and electric-vehicle technology and new business models that could curb private vehicle ownership. Ford had about 199,000 employees globally last year, according to its annual filing. As of last fall, the company said it had about 70,000 salaried employees.
“To succeed in our competitive industry, and position Ford to win in a fast-changing future, we must reduce bureaucracy, empower managers, speed decision making, focus on the most valuable work, and cut costs,” Mr. Hackett wrote in the email.
The job-cutting moves come as auto sales in the world’s largest car markets—the U.S., Europe and China—begin to cool after years of heady growth, putting more pressure on car makers to make belt-tightening moves to preserve profitability.
GM in the past year has cut about 8,000 salaried jobs in North America and closed several factories, moves Chief Executive Mary Barra has said were necessary as GM shifts focus to future technologies and business models.
Volkswagen AG said in March that it would cut about 7,000 administrative positions over several years to reduce costs in core operations. Meanwhile, the German auto maker has earmarked tens of billions of dollars to develop new electric models in a push to become the global leader in battery-powered vehicles.
U.S. car sales, while still historically strong, have dropped from a record high in 2016, as rising prices have nudged some buyers to choose used vehicles. China’s car industry also posted its first significant sales decline in decades within the past year, a slowdown that his hit Ford harder than most of its competitors.
The company, which has a smaller presence in China than GM, has seen sales plummet 40% over two years. Buyers have turned away from Ford’s aging vehicle lineup, a problem it has vowed to improve with an onslaught of new models starting this year.
Mr. Hackett said the cuts outlined Monday will trim the company’s “management structure” by nearly 20%, and the reduced layers of bureaucracy would result in a “flatter and more agile team.”
Peter Cappelli, a professor of management at the University of Pennsylvania’s Wharton School of Business, said investors and analysts are likely to be encouraged by the cost-cutting move but the layoffs might not necessarily improve efficiency. Eliminating supervisors is a risky tactic because managers are typically a valuable tool for enacting change internally, he said.
“They are important for retention and the perception of the company,” Mr. Cappelli said. Ford will have to effectively communicate to the remaining workers about why and who they decide to let go, he said. “If you don’t have a credible story, everybody gets panicked,” he added.
The No. 2 U.S. auto maker by sales has seen its vehicle-development process get bogged down, which has allowed models to grow stale in showrooms without updates that draw buyers back, Mr. Hackett has said. The changes outlined Monday include a new group to better manage vehicle lines through their life cycles, the email said.
Ford shares have surged this year after falling for much of Mr. Hackett’s tenure. After more than a year of pressing Mr. Hackett for greater detail about his turnaround plan, some analysts have said the changes outlined in recent months show promise for boosting profitability.
Ford is shrinking its operations in Europe and South America by moving away from traditional retail car buyers to focus on sales of vans and trucks to commercial customers, which is generally a more-profitable business. It is eliminating several models and cutting thousands of factory jobs in those regions.
In the U.S., Ford is also phasing out car lines, such as the once-popular Fusion family car, while adding more-lucrative pickup-truck and sport-utility vehicles, such as a new Bronco rugged SUV slated to go on sale next year.
Negative Rates, Designed As A Short-Term Jolt, Have Become An Addiction
Europe’s central banks haven’t been able to wean the eurozone off cheap money, which distorts economies and leaves little ammunition to cushion a downturn.
For five years, European nations have been trying to jump-start their ailing economies with what was supposed to be a radical, short-term remedy—negative interest rates.
Instead, central banks haven’t been able to wean their economies off them. Increasingly, they appear to be a permanent feature of the landscape. No major bank that introduced negative rates during Europe’s debt crisis has turned main policy rates positive again.
“Overall, we are on a painkiller,” said Tamaz Georgadze, chief executive of Raisin GmbH in Berlin, which provides a platform for consumers and businesses to deposit through 77 banks in 25 countries, “and it’s very hard to get off it.”
Negative rates reverse normal lending costs. Commercial banks must pay to keep their money in central banks, rather than collecting interest on it. That means they should have an incentive to lend their money at low cost to other banks, businesses and consumers while charging some customers to deposit cash. In theory, that encourages people to borrow more, spend more and save less—stimulating the economy until negative rates aren’t needed.
The negative-rate policy’s ineffectualness is a sign of just how weak Europe’s economic engines are, and how vulnerable. The policy threatens pensions, creates the risk of real-estate bubbles and doesn’t fully quell the specter of deflation. European banks struggle with weak interest income and thin margins on loans, putting them behind American peers in profitability and making it harder for them to finance the economy.
…but savings rates have barely budged…
Public frustration is mounting in healthy countries such as Germany and Switzerland that don’t necessarily need negative rates, while those that do aren’t seeing much benefit. Profitless companies stay afloat, steering resources away from more efficient ones and weighing on productivity. Central banks’ inability to raise rates leaves them with little ammunition to cushion the next downturn with the conventional tool of interest-rate reductions.
Europe’s economic anxiety, along with other issues such as immigration, forms a backdrop to European parliamentary elections this weekend where far-right parties are expected to make gains at the expense of centrist parties. The results are being closely watched for signs of disunity within Europe.
Negative rates haven’t had the desired effect on consumers such as Nick Altmueller, 42, who works in marketing in Berlin. “I’m not spending much more money and I’m not saving much more money,” he said. “I’m just moving it around.” He spreads his roughly €50,000 ($55,800) in savings between mobile banks based in Munich and Bulgaria, chasing a few tenths of a percentage point in extra yield. “This has become normality for me.”
The low rates are producing counterproductive responses: Some banks report major depositors have asked to park their physical cash in vaults—where it avoids incurring negative rates it might when in the form of electronic deposits but also does no good to the economy. Some Europeans, their pensions tied to bonds, are saving more to secure stable retirement income as bond yields drop.
In Switzerland, some individuals are putting cash into real estate, prompting fears of overbuilding. “Holding cash,” said Swiss Bankers Association chief economist Martin Hess, “is simply more expensive than building an empty house.”
In one sign of how hard it has become to reverse rates, the European Central Bank, or ECB, which economists until recently had expected to raise rates toward zero this year, has reversed course and unveiled fresh stimulus via cheap bank loans. It is examining ways, if needed, to offset any negative-rate damage on banks—an indication it expects the rates to continue.
The ECB’s deposit rate will stay at minus 0.4% through 2021, projects Capital Economics, a consulting firm. It expects the Swiss to cut their rate to minus 1% next year from minus 0.75%. It expects Denmark, among the first to introduce negative rates in 2012, to lower its rate to minus 1% next year. By contrast, the U.S. Federal Reserve pays American banks 2.35% interest on their excess reserves
Central bankers can’t give up negative rates in large part because it could damp their economies further. The European Commission said it expects the eurozone’s gross domestic product to advance 1.2% this year, down from the 1.9% it said it expected six months ago and half the U.S. rate. Germany’s recovery ground to a halt late last year and improved slightly last quarter.
Even with low rates, companies are watchful on spending. Patrick Jany, chief financial officer at Swiss chemicals giant Clariant AG , said cheap money makes some investment projects appear attractive even if they aren’t. “For any company,” he said, “it’s very important not to succumb to the temptation of cheap money.”
Some central banks, such as the Swiss, exempt a certain amount of deposits from the negative interest rate, essentially creating a threshold beyond which banks pay a penalty they pass on to some big clients.
To avoid that, Mr. Jany said, his company has increased the number of banks it uses to spread deposits. When Clariant refinanced a bond recently, it received the new money a few days before it had to redeem the old bond. It negotiated with banks to deposit the money for a few days without charge.
Cheap credit is of little use for people without jobs. Unemployment rates are in double digits in Italy, Spain and Greece and nearly 9% in France. The under-25 jobless rate is 16% in the eurozone, damaging finances for a key spending demographic.
Meanwhile, inflation has weakened across Europe well below the annual 2% growth rates central banks deem optimal. Low inflation can hurt an economy when falling prices lead consumers and businesses to delay spending because goods will get cheaper if they wait.
Here’s how negative rates work. Commercial banks hold vast sums through deposits and other short-term holdings. They store some money—beyond what they need for operations or lend to other banks—with central banks. Normally, a central bank pays them interest on the deposits or holds them free of charge.
With negative rates, a central bank instead charges financial institutions to park cash. The banking institutions eat some of those costs and pass a portion along to large customers by charging them to deposit money. They also pass along benefits in the form of lower interest rates on borrowing.
Alternative Bank Schweiz AG, a small Swiss bank, in 2016 began charging customers for deposits—an interest rate of minus 0.125% for deposits up to 100,000 francs and minus 0.75% above that. Last year, it lowered those thresholds to 50,000 francs for checking accounts and 75,000 for savings. Larger banks have shielded individual depositors while charging negative rates to large clients such as pension and hedge funds.
“Banks and the economy are realizing that this is the new normal with negative interest rates,” said Alternative Bank CEO Martin Rohner, while bank clients “are increasingly becoming aware that this is a fact of life.”
Europe’s negative rates have had positive effects, such as lower exchange rates, which make a country’s goods and services relatively inexpensive and thus more attractive for other countries to buy.
That helps export economies such as Germany and Switzerland. The Swiss franc is still strong, but economists think it would have been stronger without subzero rates.
Another benefit: Negative rates—along with central-bank purchases of bonds to inject money into economies—depressed government bond yields through Europe, keeping Italy and other fragile euro members from crumbling under high debt loads while reducing borrowing costs for businesses.
The ECB estimates these policies will add about 2 percentage points to inflation-adjusted GDP in the eurozone from 2016 to 2020. ECB President Mario Draghi in March called negative rates “a powerful instrument in enhancing, fostering the recovery and converging to price stability and achieving our objective.”
Thanks in part to the ECB’s ultra-easy policies, Bernd Supe-Dienes, managing director at Dienes Group, a knife and cutting-systems company near Cologne, Germany, secured financing under 2% on a 20-year fixed-rate mortgage to build a factory for a subsidiary.
But negative rates have failed to do one big thing they were supposed to do: Spur spending durably and stimulate growth and inflation across Europe.
One reason is that big investors such as insurance companies and pension funds are limited in how much risk they can take with their money. They can’t borrow more at today’s rates and invest heavily in instruments such as infrastructure and loan products that would tend to spur capital spending, create jobs and help economic growth, without setting aside more money for regulatory requirements.
“You have almost this contradiction,” said George Quinn, CFO at Zurich Insurance Group AG . He said regulators asked him several years ago: “What’s it take to get you guys to move away from your more traditional holdings of government bonds and buying more of the riskier assets?” The problem, he said, is that regulations either prevent it or make moving into riskier assets too expensive.
Negative rates have also failed to accomplish the other big goal: Discourage saving. At Alternative Bank, despite negative interest rates, the number of depositors increased last year, and deposits rose 2% to 1.3 billion Swiss francs ($1.3 billion).
The rates gave a short-term jolt to automobile and apartment purchases, said its CEO, Mr. Rohner, but once that happened people tended to “go back to the steady state of their consumption.”
After seeing no change in his expected pension for years, Mr. Altmueller of Berlin started investing €75 a month in a private pension two years ago. “I’m starting to really think about investing in the stock market,” he said. “It looks like the only thing where you can get a little return.”
Big institutions and individuals are finding creative places to put their cash and avoid negative rates. Banks including UBS Group AG received some requests, even recently, from big institutional and wealthy private clients to withdraw cash from their accounts and hold it in physical notes in their vaults as a way around negative interest rates. For very big amounts, this has generally not been possible, while for smaller amounts it has been done. Money kept in cash limits the effectiveness of negative rates.
The dilemma of negative rates was illustrated by Swiss National Bank Chairman Thomas Jordan at the bank’s annual meeting in April, when he described two letters he received.
One was from a family business owner in northwestern Switzerland who folded after struggling with competition from countries with weaker currencies. For businesses like it, a devaluation of the Swiss franc caused by negative rates is a good thing—helping them compete with other countries.
Another letter complained that “minus interest” meant years of rising pension contributions. “You can’t have your cake and eat it,” Mr. Jordan said. “You can’t have higher interest rates and a weaker Swiss franc at the same time.”
Swiss commercial banks have paid over seven billion francs ($7 billion) to deposit money at the SNB since 2015, even though the SNB has exempted a large amount from negative rates. Eurozone banks pay about seven billion euros ($7.8 billion) annually to eurozone central banks.
That seems unlikely to change soon. “I am convinced that we will at some point return to positive interest rates,” Mr. Jordan said. “I cannot tell you now when exactly that will be.”
Poor Manufacturing Orders Point to Slower Economic Growth
Sharp drop in Boeing orders drags down overall measure of U.S. factory sales.
The U.S. economic slowdown widely forecast for the first quarter may be arriving in the second, driven by faltering industrial activity.
Orders for so-called durable goods—manufactured products designed to last at least three years, such as cars, appliances and commercial aircraft—tumbled 2.1% from the prior month to a seasonally adjusted $248.4 billion in April, the Commerce Department said Friday. The government also said such orders grew less than previously estimated in March, painting a weaker picture of U.S. factory demand than anticipated.
Much of the decline owed to the volatile civilian-aircraft component, which dropped 25% from March following a decision by global aviation authorities to ground Boeing Co.’s 737 MAX airliner after a pair of fatal crashes. The company didn’t log any commercial orders for 737 planes in March or April, the first months without a sale of its best-selling aircraft in seven years. Boeing in April cut production of the MAX by a fifth, likely putting it behind Airbus SE this year as the world’s biggest plane maker.
But the aircraft sales were just one piece of a broader picture. The new data follow others showing recent declines in factory output and business activity broadly, suggesting the economy is losing momentum after expanding at a robust 3.2% annual rate clocked in the first quarter. Research firm Macroeconomic Advisers lowered its estimate of second-quarter growth to a 1.7% pace from 1.9% in the wake of Friday’s report.
Though manufacturing accounts for a small share of gross domestic product, the sector is highly sensitive to shifts in demand, making it a bellwether for the broader U.S. economy. Though the U.S. job market remained strong in April—with unemployment falling to a half-decade low of 3.6%—spending at U.S. retailers fell, showing some consumer hesitation as the second quarter began.
Many forecasters had projected economic growth to slow from last year’s pace, which was spurred by a strong labor market, tax cuts and federal spending increases. They expected some of those effects to wane, while the lagged impact of the Fed’s four interest-rate increases last year ripple through the economy. The U.S. trade fight with China is also clouding the economic outlook.
“We’ve been expecting the economy to slow over the course of this year for some time, mainly because of domestic factors,” says Andrew Hunter, senior U.S. economist at Capital Economics. “But I think the downside risks have really increased over the past few weeks with the escalation of trade tensions.”
Boeing isn’t the only big manufacturer seeing softer sales. Harley-Davidson Inc. said on April 23 that U.S. retail sales of its motorcycles fell 4% in the first quarter, extending a long decline in its biggest market. And tractor maker Deere & Co. on May 17 said it would cut production by 20% this year to reflect lower demand from farmers facing the steepest downturn for the agricultural economy in decades.
The Federal Reserve said last week that industrial production—the broadest measure of output from factories, mines and utilities—fell in three of the first four months of 2019. Factory production alone is down over the period. A report Thursday showed activity in U.S. manufacturing and service sectors falling to a three-year low in May and noted an uptick in uncertainty weighing on business confidence.
The durable goods report Friday showed a closely watched measure of business investment—new orders for nondefense capital goods excluding aircraft—slipped 0.9% last month and was revised lower for March. That left the year-over-year gain in the category at 1.3%, the smallest since January 2017.
Many economists say the outlook for capital investment is unlikely to improve in the near term given the Trump administration’s decision this month to increase tariffs on goods imported from China. While the full impact remains unclear, economists say the levies could disrupt complex business-supply chains and drive up prices for at least some consumer goods.
“My suspicion is that businesses are holding off on key investment decisions due to uncertainty surrounding the trade negotiations,” said Stephen Stanley, chief economist at Amherst Pierpont Securities, in a note to clients. “Now that negotiations have broken down, there is further reason why firms might be inclined to sit on their hands for a while.”
U.S. Factory Activity Slowed in May
ISM’s manufacturing index fell to lowest reading since October 2016.
U.S. factory-sector growth slowed in May as manufacturers confronted renewed trade tensions, and manufacturing activity in other major economies deteriorated.
An index of factory activity produced by the Institute for Supply Management fell to 52.1 in May, the lowest reading since October 2016. Readings above 50 indicate activity is expanding, while those below 50 are a sign of contraction.
“We’ve got some pretty strong headwinds here as we close the quarter,” said Timothy Fiore, chairman of the ISM’s Manufacturing Business Survey Committee, pointing to higher tariffs on Chinese goods and the threat of tariffs on Mexican imports starting June 10.
May’s reading fell slightly short of economists’ expectations. The index has slipped amid uncertainty around new tariffs that the Trump administration has considered imposing on imports. It was as high as 58.8 six months ago.
Separately, figures from a series of foreign purchasing managers indexes—which measure manufacturing conditions based on surveys of companies—indicate a broader slowdown in recent months, as trade tensions drag on businesses across global markets.
JPMorgan ’s global manufacturing PMI slid in May to its lowest reading since late 2012 as production stagnated and new orders declined.
“That really speaks to just how much weakening we’ve seen in the global environment in the last year,” said Chad Moutray, the National Association of Manufacturers’ chief economist.
European economies are particularly struggling. The IHS Markit PMI index for the eurozone ticked down to 47.7. Austria’s manufacturing PMI fell to a four-year low of 48.3 in May as firms reported the first fall in output since early 2015. Germany, which relies relatively more on exports to drive growth than other large economies, saw its PMI decline slightly in May to 44.3, one of its lowest readings in seven years. The U.K. saw a steep decline in PMI last month as companies weigh political uncertainty surrounding Britain’s exit from the European Union.
A private purchasing managers index in China held steady in May, although earlier official data showed growth cooling sharply.
The Caixin China manufacturing purchasing managers index remained unchanged from April at 50.2, Caixin Media Co. and research firm Markit said Monday.
China’s official manufacturing PMI for May, released last week, fell sharply into contraction territory because of weakening overseas demand, according to data released by the National Bureau of Statistics.
In the U.S., the ISM’s new-orders index rose in the May report, while a gauge of inventories dropped. Its backlog-of-orders index contracted for the first time since January 2017.
“Growth has definitely tapered off,” Mr. Fiore said, adding that the issue around Mexico would be much more severe, given the two countries’ integrated supply chain and the short notice at which President Trump threatened to impose across-the-board tariffs on Mexico.
Increased tariffs on $200 billion of Chinese goods took effect in early May.
“The sector can’t thrive when it’s being hit by new taxes at random every few weeks,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a note to clients Monday.
The U.S. manufacturing sector struggled at the start of the second quarter, and factories are on track for their weakest showing this year since 2016.
A separate measure of U.S. manufacturing activity fell to a 10-year low in May. The final reading of the IHS Markit U.S. manufacturing purchasing managers index for May was 50.5, the lowest level since September 2009.
Orders for durable goods—manufactured products designed to last at least three years, such as cars, appliances and commercial aircraft—tumbled 2.1% in April from the prior month, according to the Commerce Department. Industrial production was down 0.5% in April, according to the Federal Reserve.
U.S. manufacturers face higher costs for many components and metals because of U.S. tariffs on goods from China and a strong dollar that makes U.S. exports more expensive.
Though manufacturing accounts for a small share of gross domestic product, the sector is highly sensitive to shifts in global demand, making it a bellwether for the broader U.S. economy.
U.S. economic growth remained robust in the first quarter, and households spent at a slower but still solid pace in April. That, coupled with a strong labor market, suggests consumers can help extend an already decadelong expansion amid signs economic momentum is easing.
Still, household sentiment fell at the end of May from earlier in the month as consumers worried about renewed trade tensions.
Consumers said increased tariffs on imported goods would lead to higher consumer prices, denting their optimism, according to the University of Michigan’s May surveys of consumers.
Retailers have said trade tensions and tariffs could lead to customers holding back on purchases.
“In light of a little bit of the uncertainty that we’ve got going forward, particularly on the tariff front and what impact that might have overall on the consumer, I think we are being a little bit cautious on the sales outlook for the back half of the year,” Lee Belitsky, chief financial officer of Dick’s Sporting Goods Inc. said during an earnings call last week.
Lagarde Says U.S. Is at Risk of Losing Global Leader Role
The incoming European Central Bank head warns of U.S.-China trade war risks and urges President Trump not to push for lower interest rates.
Christine Lagarde, the departing head of the International Monetary Fund who is set to take over as president of the European Central Bank, said in an interview that the U.S. risks diminishing its role as a global leader and warned of dire consequences of its trade war with China.
“I was brought up as a citizen of this world. The risk I see is that the United States is at risk of losing leadership. And that would be just a terrible development,” Ms. Lagarde said in a “60 Minutes” program that aired Sunday.
Ms. Lagarde also warned President Trump against pushing the Federal Reserve for lower interest rates because it could spur inflation. “When the unemployment rate is at 3.7%, you don’t want to accelerate that too much by lowering interest rates,” she said. “Because the risk you take is that then prices begin to go up. You have to be very careful. You know, it’s like navigating a plane.”
She said she would tell Mr. Trump: “Market stability should not be the subject of a tweet here or a tweet there. It requires consideration, thinking, quiet and measured and rational decisions.”
The White House didn’t immediately respond to a request for comment.
Ms. Lagarde, who made the comments in interviews in September, said the U.S. has been a force for good, fostering the principles of rule of law, democracy, free markets and respect for the individual.
She urged policy makers to work to end the trade war between the U.S. and China, which she said is seriously affecting the global economy. “If you shave off, you know, almost a percentage point of growth that means less investment, less jobs, more unemployment, reduced growth.”
Finance ministers and central bankers who gathered in Washington for the IMF’s fall meetings this past week said the biggest risks to the global economy are trade-related uncertainties. Global economic growth has shrunk this year to its slowest pace since the 2009 recession, the IMF said.
Ms. Lagarde, in the interview, lamented both the U.S. and the U.K.’s retreat from international ties, saying that the U.K.’s attempt to leave the European Union in particular has caused her “great sadness.”
“International trade, connections, movement of people and movement of capital has taken hundreds of millions out of poverty. Now, some people in the advanced economies might say, ‘Pooh. What do I care?’” she said.
She added: “What can walls do about pandemics? What can walls do about terrorism? What can walls do about climate change and destruction of the environment? This is not the answer to the global questions and issues that interconnect, whether we like it or not.”