U.S. Factories Contract As Does Small Business And Global Firms
Trade concerns cited as Institute for Supply Management’s manufacturing index falls to lowest level since January 2016. U.S. Factories Contract As Small Business And Global Factory Confidence Wanes (#GotBitcoin?)
U.S. factory activity fell in August, contracting for the first time in three years and providing the latest sign that a global manufacturing pullback is weighing on the American economy amid rising trade tensions.
New factory orders, employment and production all declined last month from July, according to Tuesday’s Institute for Supply Management manufacturing indexes, which are based on a monthly survey of purchasing and supply executives across the U.S.
The institute’s index of overall activity fell to 49.1 in August from 51.2 in the prior month. Readings above 50 indicate activity is expanding across the manufacturing sector, while those below 50 are a sign of contraction.
Factory activity contracted in August for the first time in three years.
The latest overall-activity reading marked the first contraction since August 2016 and was the lowest since January 2016, when it was 48.
Trade remains “the most significant issue” for those surveyed, said Timothy Fiore, chairman of the ISM’s Manufacturing Business Survey Committee.
“Respondents continued to note supply chain adjustments as a result of moving manufacturing from China,” he added.
The manufacturing numbers cover August, a month in which President Trump and China announced new tariffs on billions of dollars of consumer goods, which went into effect on Sunday, escalating the trade conflict.
Stocks fell on the weak manufacturing report. The Dow Jones Industrial Average lost more than 370 points, or 1.4%. The S&P 500 dropped about 0.9%, and the Nasdaq Composite fell 1%.
A decline in new export orders to the lowest level in a decade offers a strong indication that trade tensions are crimping manufacturers.
Other barometers of final demand fell steeply. Production declined for the first time since August 2016, and employment fell for the first time since September 2016.
Factors outside of trade also are weighing on the manufacturing sector. The 2017 tax cut’s stimulus effects have waned, the dollar has strengthened and the global economy is slowing.
The International Monetary Fund said in July a sharp deceleration of global trade, driven by trade tensions, was slowing the global economy more than it expected in the spring. It forecast global growth, adjusted for inflation, would fall to 3.2% this year, from 3.6% last year and 3.8% in 2017.
While government figures suggest the U.S. and the global economies continue to expand, Tuesday’s ISM report added to growing evidence of a deepening slowdown.
A separate index of U.S. manufacturing activity produced by IHS Markit clocked in at its weakest level in almost a decade, according to Tuesday data. The U.S. result followed IHS Markit reports showing factory activity also contracted recently in the U.K., Germany, Japan and South Korea.
Manufacturers Cut Spending as Trade War Dents Confidence
Uncertainty over tariffs, demand causes companies to delay investments, hiring plans.
U.S. manufacturers are investing less in their factories and workforces as the trade dispute with China makes it more difficult for executives to anticipate costs and demand.
The shifting contours of the tariffs that the U.S. and China have applied to each other’s goods are prompting some companies to put business plans on hold. Others are cutting back investments as trade volumes and economic growth slow around the world.
These companies are buying fewer machines for their factory floors and shortening shifts. The knock-on effect means lower sales for those suppliers and less pay for workers, contributing to slower U.S. economic growth.
“You have a cloud of dust out there, and you are trying to see clearly through it,” said Paul Reitz, chief executive of heavy duty tire maker Titan International Inc. “It’s tough to do.”
Mr. Reitz recently delayed buying new machinery for some of Titan’s six U.S. factories. He said sales could be flat or negative this year, down from the 10% annual growth he expected heading into 2019. He is considering reducing shifts or laying off workers.
Truck maker Navistar International Corp. NAV 4.06% said Wednesday that it expects to spend $115 million on capital projects this year, down about 25% from its previous forecast after truck orders slowed sharply in recent months. Caterpillar Inc. ’s capital expenditures dropped 16% in the quarter ended in June from that period a year earlier. And Illinois Tool Works Inc. said business uncertainty reduced demand for its welding, measurement and other equipment in the second quarter. The company spent $154 million on additions to its plants and new equipment in the first half of the year, down from $181 million in the first half of 2018.
Some manufacturers see benefits from rising tariffs. Wenger Manufacturing Inc., which makes equipment for producing breakfast cereals and meat substitutes, is getting more orders from customers in countries like Australia and New Zealand that are selling products in China without paying tariffs, said Dennis Funk, a vice president of the Sabetha, Kan., company.
Other companies aren’t changing course as the trade winds shift. “We don’t update our forecast on a tweet-by-tweet basis,” David Burney, financial chief for manufacturer and defense contractor Astronics Corp., told analysts in August.
White House spokesman Judd Deere said Mr. Trump is standing up to unfair trade practices that harm U.S. manufacturers.
“Talks with China are continuing, but there is no doubt that President Trump will continue to use every available tool to level the playing field for American workers and reduce barriers to the export of our goods and services,” Mr. Deere said.
Overall, manufacturers are investing less. U.S. imports of capital goods fell in July to the lowest level since 2017, according to the Census Bureau. That contributed to a narrower U.S. trade gap that month as manufacturers bought less machinery and supplies, the Commerce Department said Wednesday. New orders for capital goods posted their first year-over-year decline in three years in July.
The downturn in capital spending has meant less demand for the equipment IPEG Inc. makes for plastics manufacturers. Chief Executive Chris Keller said orders have softened since July as the trade war has intensified and concerns about the economy have grown.
“It creates uncertainty, and uncertainty does make people hesitate to invest,” Mr. Keller said.
The diminished orders also suggest manufacturing output, down 1.6% since December according to the Federal Reserve, will remain subdued. Capacity utilization at U.S. factories in July was the lowest in two years. Activity at U.S. factories shrank for the first time in three years in August, according to the Institute for Supply Management’s manufacturing index.
GHL International Inc.—which makes popcorn poppers, cat litter and other products—said tariffs on its goods made in China, such as water fountains for pets, have cut up to $200,000 from its profits each month. The company said it has delayed a $4 million investment in its factory in Cedarburg, Wis., that would add at least 40 jobs because of the uncertainty and reduced profits.
“You can’t play roulette. You can’t gamble with 30 years of work,” said John Lipscomb, chief executive of GHL, which was founded in 1989.
Neenah Inc., which makes envelopes, filter components and other goods, is seeing lower demand for its industrial products in the U.S. and lower sales in China as customers switch to local suppliers and the weaker yuan makes its products more expensive there, Chief Executive John O’Donnell told analysts last month.
The Atlanta-based company is cutting capital expenditures to about $30 million this year from $38 million in 2018 and spending mainly on maintenance and on products that will reduce costs over time.
Some executives say President Trump has exacerbated the uncertainty by making impromptu changes to trade policy. Mr. Trump said on Twitter on Aug. 30 that “badly run and weak companies” are blaming tariffs for their business failings.
Herb Kimiatek, president of Kimson Chemicals Inc., has a shipment of his products coming to the U.S. from China and doesn’t know how much of a tariff will be applied when they arrive. He thinks his products will face a tariff of either 25% or 30%.
Others say the shifting policies have left them unsure of which products will face tariffs and how much they’ll have to pay. Thousands of requests have been filed for exemptions from tariffs on products from China. About 23% of the earlier requests have been granted, according to the Office of the United States Trade Representative, and many are still pending.
Mpowerd Inc., which makes solar-powered lanterns in China, is paying U.S. tariffs on many of its products. That has delayed hiring and product launches as employees focus on negotiating price increases with retailers in the U.S. and look for alternative suppliers.
John Salzinger, a founder of Mpowerd, said the way Mr. Trump and the federal government have communicated policy changes has amplified his frustrations.
“Not just the increase but the way in which it has been deployed. I’d call it sloppy at best,” he said.
Small Businesses’ Faith In Economy Hits Low On Tariff Uncertainty
Firms’ economic confidence weakest in seven years prompting companies to put investments, hiring on hold; ‘It’s demoralizing’
Higher tariffs on Chinese imports are adding costs and uncertainty for small businesses and dimming their outlook for the U.S. economy.
Economic confidence among small firms fell in August to the lowest level since November 2012, according to a monthly survey of more than 670 small companies conducted for The Wall Street Journal. The portion of respondents that expect the economy to worsen over the next 12 months rose to 40%, compared with 29% in July and 23% a year ago.
The survey by Vistage Worldwide Inc., an executive coaching organization, was taken just after President Trump announced additional tariffs on Chinese imports, but before he ordered U.S. companies to start looking for alternatives to China. Forty-five percent of small firms said the tariff announcement would impact their business. Vistage polls firms with between $1 million and $20 million of annual revenue.
Some small-business owners support the tariffs, even if they are painful in the short run, and a majority say they are optimistic about their finances. Also, tariffs are just one factor contributing to changes in the economic outlook.
But business owners on both sides of the tariff issue say the uncertainty—about if and when the duties will be applied, how large they will be and how long they will remain in effect—is making it hard to plan and is hurting their businesses.
“It’s overwhelming. It’s exhausting. It’s demoralizing,” said Susan White Morrissey, founder of White + Warren Inc., a cashmere brand in New York. “My employees just want to know what to do. This is probably the first time in my career that I can’t give them the answers.”
White + Warren this year added five employees and boosted inventory to increase e-commerce sales, but the 30-person company is struggling to plan as the trade dispute heats up. Tariffs imposed this summer slashed profit on its ribbed cashmere hats made in China by 50%. Tariffs on the company’s cotton and linen sweaters were slated to take effect on Sunday, while tariffs on Chinese-made cashmere sweaters have been pushed back to mid-December.
“It’s hard enough to adjust to price increases, but it’s just more difficult when you are uncertain how policy will unfold in the future,” said Richard Curtin, a University of Michigan economist who analyzed the Vistage data. “For small firms that means being more cautious in your investment and hiring plans.”
Wiscon Products Inc., a precision machine shop in Racine, Wis., normally orders raw materials six months in advance, but these days it is having trouble getting customers to decide what they need in three weeks. One auto maker canceled a $2 million parts order destined for China because of escalating trade tensions.
The 75-year-old company has replaced about 40% of lost revenue through aggressive marketing and expects to end up stronger, with a more diversified customer base. Yet, it has put off plans to buy new machines.
“This is the strangest I’ve ever seen it,” said Wiscon President Torben Christensen, who has run the company for the past decade. “It’s busy. The economy is booming, but there is great uncertainty. A lot of it has to do with trade policy.”
On Friday, Mr. Trump rejected the notion that his trade policies were hurting the U.S. economy, instead blaming “badly run and weak companies” for any business setbacks and urging the Federal Reserve to cut interest rates
Some companies are grappling with higher costs being passed along by domestic suppliers.
Argosy Cruises, a Seattle tour-boat operator, recently postponed plans to replace two aging vessels after being told that the 500-passenger boat that cost $8.5 million two years ago would now cost about $1 million more. Boatyards blame tariffs for the price increase, said Argosy Chief Executive Kevin Clark, who also worries trade tensions are reducing the flow of Chinese tourists.
“There needs to be some kind of stabilization in the tariff situation and pricing,” Mr. Clark said. “I hate to sign a contract for the next two years without an element of certainty.”
Small businesses can be more nimble than larger companies, but they also have smaller cash cushions, making it more difficult to respond to economic challenges. Travis Luther, founder of Queen Anne Pillow Co., a Denver-based maker of high-end bed pillows, said larger competitors have accelerated purchases to get ahead of tariffs, something his six-year-old company can’t afford.
“That’s not a very healthy move for small companies or upstarts,” said Mr. Luther, whose company is already paying higher tariffs on Chinese-made cotton textiles used to make pillows in the U.S.
Some companies are relocating production. LumiGrow Inc., a 30-employee maker of LED lighting used in horticulture, is shifting to a factory in Malaysia just one year after it moved production to China from the U.S. to reduce costs.
Jay Albere, the Emeryville, Calif.-based company’s chief executive, supports tariffs but not quick shifts in trade policy. One shipload of LED lights was on its way from China when higher tariffs were imposed this spring with just a few days notice. “Just give me the ability to plan for it and make a smart business decision,” he said. “The lack of certainty is really, really hard.”
Some small-business owners say switching from Chinese suppliers isn’t an option. Charlotte, N.C.-based remodeez said other countries don’t have the know-how or infrastructure to produce its deodorizers. Even if it could find a new factory, the cost of switching at this stage of the 31-year-old company’s development would be debilitating given the investment it has made in China, it said.
The startup plans to absorb the cost of the tariffs rather than raise prices for the deodorizers, which typically retail for $9.99. “Today, we’re an impulse buy,” Chief Executive Jason Jacobs said. “Once you cross the $10 threshold, it’s a whole different retail psychology.”
Meanwhile, the higher costs are pinching cash flow and crimping expansion plans. “It’s not going to crush us,” said Mr. Jacobs, who previously founded two successful software startups. “But if this was having to put food on my table, I’d be done. The reason I can get through this is I don’t need a paycheck.”
Trade Disputes Curb Global Factory Activity as Confidence Wanes
The manufacturing activity slowdown has been exacerbated by the escalating trade war between the U.S. and China.
The fallout from an escalating trade war between the U.S. and China is rippling through the global economy, crimping growth in Asian industrial giants such as Japan and South Korea and hitting factories as far away from the front line as Germany.
Global industrial production fell in the three months through June, as did trade flows, both signs that the economy is slowing. A series of surveys of manufacturing companies in Asia and Europe suggests a rebound is unlikely over coming months as tariffs on goods moving between the global economy’s two largest players continue to rise. A similar survey in the U.S. on Tuesday is expected to send the same message.
Fresh signs of weakness in global manufacturing will put central bankers around the world on alert to provide further stimulus following a synchronized wave of cuts in interest rates over recent months. They worry that the longer the factory slowdown continues and the wider it spreads, the more likely it is to drag on other parts of the economy that remain relatively healthy.
Manufacturing activity in many leading economies has been slowing since early 2018, as factories touched full capacity after a long expansion and central banks raised their interest rates to cool demand.
However, the slowdown has been exacerbated by a series of trade disputes, which escalated Sunday when the U.S. imposed tariffs of 15% on Chinese goods including clothing, tools and electronics. A round of retaliatory Chinese tariffs also took effect, targeting imports of U.S. soybeans, crude oil and pharmaceuticals. Additional U.S. tariffs of 15% on $156 billion of Chinese-made smartphones, laptops, toys, videogames and other products have been postponed until Dec. 15.
Trade talks have mostly stalled since late May, when negotiators were believed to be close to a deal. Since then negotiators have sought, so far without success, to reach a limited preliminary arrangement that would have China committing to buying more U.S. farm products and the U.S. agreeing to ease off restrictions on China’s Huawei Telecommunications Co.
On Monday, Beijing said that it had lodged a complaint with the World Trade Organization over the Trump administration’s tariffs on $300 billion in Chinese goods.
The impact of higher tariffs is already being felt among China’s neighbors, which have seen exports to the world’s second-largest economy decline. South Korea said Sunday that its exports to China fell 21.3% in August compared with the same month a year earlier, driving an overall 13.6% decline in exports. And Japan said Monday that capital spending by the country’s manufacturers fell 6.9% in the April-June quarter, the first decline in two years, as companies grappled with a nearly double-digit decline in exports to China.
Both Japan and South Korea have said the effect is particularly pronounced in high-tech parts and materials purchased by factories in China, such as Japanese auto parts and South Korean semiconductors. The Chinese factories use those products to manufacture finished goods, some of which are exported to the U.S.
Manufacturers’ profits are falling. Kobe Steel Ltd. in August cut its profit forecast for the year ending March 2020 by 60% to about $95 million. It said that tech companies were expected to buy less aluminum and copper and that sales of hydraulic excavators were likely to drop in China.
Parcel company Yamato Holdings Co. took a special loss of nearly $30 million in July related to a Chinese affiliate that handles parcels at Chinese airports.
“There has been deterioration in the logistics market due to the U.S.-China trade friction, and uncertainty over the outlook for this market is growing,” a Yamato spokesman said Monday.
In China itself, August surveys of manufacturers sent mixed signals. One survey of purchasing managers that focuses on smaller, privately owned companies indicated a pickup in activity, while another that focuses on larger manufacturers pointed in the other direction.
However, even the more positive news contained in the first of these—the Caixin—contained a warning on trade, as new export orders declined at the fastest pace this year.
“China’s economy showed signs of a short-term recovery, but downward pressure remains a long-term problem,” said Zhengsheng Zhong, an economist at CEBM Group.
In a number of Asian economies, similar surveys of purchasing managers had a clearer message, pointing to declines in activity during August in Japan, Taiwan, South Korea and Indonesia.
That trend was replicated in Europe, where a drop in activity was most pronounced in Germany, the continent’s exporting powerhouse and a leading global supplier of machinery and equipment.
“Trade wars and tariffs remain the biggest concerns among producers, and the escalation of global trade war tensions in August encouraged further risk aversion,” said Chris Williamson, chief business economist at IHS Markit, which conducts the surveys.
The purchasing managers index for Germany’s manufacturing sector rose slightly to 43.5 from 43.2 in July, pointing to a contraction as it stayed below the 50.0 mark.
Outside the eurozone, the U.K. saw a sharp fall in its PMI to its lowest level in seven years as concerns about the way in which the country will leave the European Union added to global headwinds.
“Investment continued to peter out and heightened concerns about the U.K.’s political situation and the strength of the global economy acted as a drag on activity,” said Duncan Brock, group director at the Chartered Institute of Procurement and Supply.
Additional U.S. tariffs of 15% on $156 billion of Chinese-made smartphones, laptops, toys, videogames and other products have been postponed until Dec. 15, after the period when goods are typically imported for the holiday season.
Meeting in Jackson Hole, Wyo., last week, central bankers from around the world expressed growing worries about the impact of the trade war on their economies.
The U.S. Federal Reserve has already sought to cushion the U.S. economy against the risks from slowing global growth and rising trade uncertainty by cutting its key interest rate in July for the first time since 2008. With signals from the global economy continuing to point to weakness, it is likely to move again in September. The European Central Bank is also expected to cut its key interest rate this month, following a raft of other central banks.
Modest August Job Growth Shows Economy Expanding, but Slowly
Employers added 130,000 nonfarm jobs, jobless rate held steady at 3.7%.
U.S. employment grew modestly in August and unemployment showed signs of stabilizing at historically low levels, signs that a global economic slowdown isn’t driving the U.S. into outright recession but has dented the growth outlook.
The U.S. economy added 130,000 payrolls in August, the Labor Department reported Friday, and has averaged 156,000 new jobs a month over the past three. That was down from average growth of 190,000 a month in the eight years since employment started picking up after the last recession. The August number was propped up in part by the addition of 25,000 temporary Census workers by the U.S. government, while estimates of payrolls in July and June were revised down.
At the same time, the unemployment rate was unchanged at 3.7% in August for the third consecutive month. The jobless rate remains near a 50-year low, a sign of job security and plentiful work opportunities for millions of individuals. Still, its downward trajectory appears to have lost some momentum. At its August level, the jobless rate was little changed from 3.8% a year earlier. Between 2010 and 2018, by contrast, it fell on average 0.6 percentage points a year.
There were some bright spots in the Labor Department’s report. A survey of households showed the share of workers aged 25 to 54 working or seeking work increased sharply to 82.6% in August from 82% in July, a sign that prime-age individuals remain optimistic about their job prospects.
Meantime, pay is holding up after slowing a bit in the spring. Average hourly earnings climbed 3.2% from August 2018, enough to keep worker earnings well above the inflation rate. The pay measure has now been above the 3% threshold for more than a year after lagging for much of the expansion.
“Job growth was soft and is really consistent with the kind of economy we have,” said Joel Naroff, chief economist at Naroff Economic Advisors, Inc. “The important thing is that the wage increases, which had slowed, seem to be coming back. That points to the simple fact that the labor market really is tight.”
Investors have been shaken in recent months by signs the global economy is slowing. Earlier this week the Institute for Supply Management reported its closely watched gauge of U.S. manufacturing activity contracted for the first time in three years in August. The report—coming after data pointing to contracting factory activity in the U.K., Germany, Japan and South Korea—fueled fears that a manufacturing slowdown elsewhere in the world had reached the U.S.
Many business executives have said in conference calls with investors in recent weeks that uncertainty about trade between the U.S. and China is clouding their outlook.
Summit Brewing, a St. Paul, Minn.-based brewery with 80 employees, is pulling back on hiring to contain cost pressures that have cropped up due to global trade fights. It has left five positions unfilled this year in brewing, packaging and sales due to a recent 20% price increase for aluminum cans tied to tariffs.
Mark Stutrud, Summit Brewing’s president, said Summit has also deferred capital spending on some projects, including adding fermentation tanks to a research facility.
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