LONDON (Reuters) - U.S. manufacturers are experiencing the most marked deceleration in business activity since 2015 and before that the great recession of 2008, according to a raft of data from the federal government.
The resilience of the U.S. manufacturing sector compared with its counterparts in Asia and Europe, despite the increase in trade tensions with China and heightened business uncertainty, has puzzled some observers.
But careful analysis of the data on new orders, employment, hours worked and prices for U.S. manufacturing, as well as business surveys, paints a consistent picture of lost momentum since the middle of 2018.
For all that the White House is highlighting the relative strength of headline economic data and the resilience of the U.S. equity market, manufacturing has been hit hard over the last nine months.
The extent of the manufacturing slowdown gives the White House a strong incentive to reach a trade agreement with China and avoid a further escalation of the tariff war.
Every manufacturing indicator tells a story of slowing growth:
Government data is consistent with the survey of manufacturing businesses conducted by the Institute for Supply Management (ISM), which has also chronicled a sharp deceleration in activity since the end of August 2018.
The ISM purchasing managers’ index slipped to 52.8 in April, down from a cyclical high of 61.3 in August, and the lowest reading since October 2016.
The ISM’s new orders index slumped to just 51.7 in April, from 64.5 in August, and not much above the 50-point threshold dividing expanding activity from a contraction.
Business investment in structures, equipment and intellectual property products grew at an annualised rate of just 2.7 percent in the first quarter of 2019, down from 11.5 percent at the same point in 2018.
Manufacturers, wholesalers and retailers have reported a big, and probably unplanned, increase in inventories of raw materials, work in progress and finished products as the supply chain has filled up since last summer.
The ratio of inventories to sales had risen to 1.39 in February, from just 1.33 in June 2018, and the highest for 18 months, which is likely to act as a drag on new orders until the overstocking has been reduced.
Freight growth is slowing as the manufacturing expansion cools, with movements by road, rail, barge, pipeline and air up by just 2.9 percent year-on-year in January-March, down from 8.5 percent in April-June 2018.
U.S. manufacturers are not immune to the global slowdown in business investment spending and trade that has hit their counterparts in Europe and Asia.
In 2017 and early 2018, the sector benefited from the resumption of oilfield drilling, tax cuts, a rise in defence spending and the replacement of some imports by domestic production because of higher tariffs.
Since the middle of 2018, however, the sector has been hit by the same slowdown in business investment and loss of momentum that has affected manufacturers in other countries.
The overhang of unplanned inventories as well as relatively weak indicators on new orders suggest the slowdown will last at least a few more months until stocks have been reduced to more comfortable levels.
Since manufacturing and freight transportation are energy-intensive, the slowdown in output growth and cargo moves is likely to weigh on oil and energy consumption growth in 2019.
Distillate fuel oils, used to move freight by road, rail, sea and air, as well as by manufacturers, farmers, oil drillers and miners, have seen relatively subdued demand growth so far this year.
Further escalation of the tariff war would increase the risk of pushing the U.S. manufacturing sector (at least) into recession over the next six months.
BlackRock Chief Executive Larry Fink has predicted the stock market could see a “melt up” with huge inflows into equities as the U.S. economy re-accelerates, but that would almost certainly require a trade deal.
For its part, the White House has at times seemed anxious to reach a deal and unleash a renewed rally in equity prices, but the manufacturing slowdown may be hard to reverse in the short term.
On its own, however, a trade deal will probably not be enough to resolve business uncertainty and prompt a renewed surge in manufacturing activity.
Businesses need a period of stability and confidence that U.S.-China disputes will not flare again with more battles over tariffs, investments and security issues before they begin investing heavily again.
The risks to the economic outlook therefore appear skewed to the downside: an escalation of the trade war would probably push the economy into recession, but a deal might not lead to a sharp acceleration of growth immediately.
Downside risks and sluggish manufacturing growth increase the likelihood that the Federal Reserve will cut interest rates later in 2019 as an insurance policy against a deeper and more prolonged slowdown.
The sluggish manufacturing outlook will also increase the political attractiveness of a big, new infrastructure bill for the White House and Congress to get the sector growing rapidly again before elections in 2020.
John Kemp is a Reuters market analyst. The views expressed are his own.
- Fed rate cut likely if U.S. manufacturing continues to slow (Reuters, May 2)
- U.S. economy loses momentum despite impressive headline growth (Reuters, April 26)
- U.S. economy hits soft patch, putting Fed on alert (Reuters, April 28)
Editing by Dale Hudson