The Manufacturing Economy Officially Reaches Contraction Territory

Following the past six months of declining figures, the manufacturing economy has officially slipped into contraction, according to the August 2019 Manufacturing ISM® Report On Business®. The current Purchasing Managers’ Index (PMI) of 49.1% is below the 50% benchmark, signaling contraction for the first time since January 2016, when the index registered 48%.

Driving the PMI down are sharp declines from several key metrics. New orders shrunk 3.6% in August, while employment took an even bigger hit, falling by 4.3%. New exports also decreased by 4.8%, in conjunction with the ongoing trade war with China and tensions with other U.S. trade partners. Production (1.3%), Supplier Deliveries (1.9%), and Imports (1%) all fell, as well, while prices and order backlogs grew.

All told, concern is looming large over the manufacturing economy after this report. Industry executives have begun planning for contraction, but insight suggests the pace of recession may be alarming even for economic bears:

“While business is strong, there is an undercurrent of fear and alarm regarding the trade wars and a potential recession.” Chemical Products

“Incoming sales seem to be slowing down, and this is usually our busiest season. Concerns about the economy and tariffs.” Furniture & Related Products

“Business is starting to show signs of a broad slowdown.” Machinery

With every benchmark of the manufacturing report now contracting, industrialists are battening down the hatches for potential recession. Economic headwinds blow strong and political tensions remain a deciding factor in the future of the manufacturing economy.

Trade wars continue to cause concern

The trade war with China is perhaps the biggest contributor to the stifled manufacturing economy. Companies have blamed trade directly for the 10,488 job cuts in August, and many smaller companies are outspoken about the harm they’re doing to the economy at large. With no end to the tariffs in sight, the job toll is likely to rise in coming months. President Donald Trump has also made clear his intent to continue putting pressure on China, despite new evidence showing the effect of strained trade on American manufacturing.

An impending hard Brexit is also weighing down global trade, causing U.S. manufacturers to rethink supply chains, distribution, and materials sourcing. European companies bracing for Brexit have also shifted to conservative import/export stances, making it difficult for American companies to maintain order volumes and margin.

An impending worldwide recession

Evidence of recent contraction in the U.S. manufacturing economy is mirrored across the world in other developed nations. It’s one of many red flags appearing, signaling global recession. And while manufacturing is expected to fluctuate up and down in the fourth quarter of 2019, it’ll ultimately enter 2020 still in contraction territory. If and when it does, the implications for the broader economy will be severe.

Long-term manufacturing contraction isn’t unexpected ― especially at the tail-end of a 10-year economic expansion. How fast the contraction occurs and what peripheral factors affect the greater U.S. and the global economies are what dictate the trajectory of looming recession. An easing of the trade war, renewed trade partnerships with other developed countries, and a canceled Brexit could just as easily create optimism, even for the contracting manufacturing economy.

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