The Institute for Supply Management released its widely-followed index of manufacturing activity today. The data show that the US manufacturing sector contracted in June for the first time since July 2009. Given economic weakness elsewhere in the global economy, we should see this as a troubling sign.
Of particular concern is the drop in new orders, where the New Orders Index dropped 12.3% in June to a recessionary 47.8%. All of the major subindices I follow, new orders, production and employment, declined.
About a year ago I correctly predicted that the US manufacturing sector’s growth had already started its cyclical descent, calling the peak in early March. What we have witnessed since then has been a steady decline in the growth in that sector, arrested to a degree by policy stimulus in the US. With the global growth slowdown all around us and policy stimulus very muted, it is likely that the downward trend in the US manufacturing numbers will continue. In fact, we can’t discount the view of the ECRI that the US has just started a recession.
I should note however, that respondents in the ISM survey generally had an upbeat tone. Below are the responses ISM highlighted:
- "Business is still strong, with some nagging question whether it will be sustained." (Machinery)
- "The economy and general business seem to be getting better even though recent data say otherwise." (Fabricated Metal Products)
- "Significant raw materials price correction underway." (Plastics & Rubber Products)
- "Local labor market shows no signs of slowing down. Competition for technical services/skilled craft remains tight." (Petroleum & Coal Products)
- "Overall demand signals from sales forecast are trending down in all regions." (Computer & Electronic Products)
- "Although our shipments are up year over year and from prior month, we can feel some head winds, especially from Europe. We are watching our expenses very tightly and being cautious." (Apparel, Leather & Allied Products)
- "Business continues to exceed forecast in all markets." (Primary Metals)
- "Economy seems to be slowing slightly due to concerns in Europe; however, production has not changed a great deal." (Transportation Equipment)
- "Business has started to show signs of slowing." (Furniture & Related Products)
- "Slowing world economies, particularly China, are reducing 3Q and later orders and drastically dropping some raw material prices." (Chemical Products)
My conclusion: The US economy is at stall speed, on the verge of tipping into recession. Without the prospect of policy stimulus and with continued slowing in Europe, China, Brazil and many other large economic areas, the outlook is not rosy. We will need to see the incipient housing rebound cause increased residential investment, see firms increase capital expenditures and hiring and the resulting increase in income lead to increased housing formation for a virtuous circle to take hold. In my view, the key missing link here is private sector investment in human and physical capital because that’s what would increase incomes, GDP and housing formation all at once. And given businesses are relatively flush with cash, it is not unreasonable to think this could happen. I continue to lean the other way as businesses show no sign of either increasing capital investment or hiring. Therefore, I expect the numbers to worsen until we get recession either this year or next.