Manufacturing is in Recession and Trade and Housing are Faltering

By | September 9, 2019

Welcome to FTR’s “Monday Morning Coffee “ blog. The following article is designed to keep busy executives up to date with the latest economic data releases. Released every Monday, this blog promises to keep our clientele updated with the latest weekly economic news and developments, highlighting its impact on the transportation, freight, and equipment markets. Hopefully, this will be an informative addition to the fine body of work associated with FTR.


Coffee and Economic Review

Asian shares gained on Friday, joining a global trend as investors took heart from firm U.S. economic data and plans that a meeting between the U.S. and China in early October will bear fruit. MSCI’s broadest index of Asia-Pacific shares outside of Japan added 0.4% on Friday, putting on track for a 2.2% advance for the week. The Shanghai Composite Index edged up 0.1% on Friday. Global equity markets welcomed the news that the United States and China agreed on Thursday to hold high level talks early in October, raising hopes for substantial progress in de-escalating their long trade battle. Some analysts see the possibility of progress in the future talks. Others though caution that the difference between the two sides is still large and talks could continue well into 2020 and past the upcoming presidential election.

The S&P 500 and Dow industrials closed slightly higher on Friday as investors digested a mixed jobs report and bet on a Federal Reserve interest rate cut, while China’s stimulus plan helped ease some concerns about global growth.  U.S. job growth slowed more than expected in August, with retail hiring declining for a seventh straight month, but this was tempered by strong wage gains, which are expected to support consumer spending and keep the economy expanding modestly amid rising trade threats from trade tensions. Also, on Friday, Fed Chairman Jerome Powell said the labor market was strong and the central bank will continue to “act as appropriate” to sustain the economic expansion. He said the United Stated and the global economies are not likely to fall into recession. Earlier, China’s central bank said it would slash the amount of cash banks must carry as reserves, releasing a total of 900 billion yuan ($126.35 billion) in liquidity to shore up the economy. For the week, the S&P rose 1.8%, while the Dow rose 1.5%.

Amid increasing trade tensions and fears of recession, all eyes were on the payroll numbers, which showed employers added only 130,000 jobs in August. Hiring has slowed since the start of the year. The 12-month moving average is now at 173,000, compared to 235,000 in January. The U.S. trade deficit narrowed by 41.5 billion in July, as exports rose and imports were held back by a decline in capital goods imports, which echoes the weakness in investment data. The gain in goods exports is not likely to be sustained, as the ISM manufacturing new export orders slipped into negative territory in August. The trade war has been going on for a year now and the escalation has pushed up uncertainty to lofty levels. Business investment activity is starting to falter, and this is exhibited in the manufacturing sector, where the ISM manufacturing index went negative in August. New orders fell sharply and at 47.2, that series has tied the cycle low. Uncertainty will remain high, although the U.S and China will meet in October. Although tensions may be reduced, the probability of a comprehensive deal between the two parties before the election next year is low.

It is a tale of two economies, as the ISM non-manufacturing index rose in August, from 53.7 to 56.4. Business activity jumped 8.4 percentage points and new orders rose by 6.2 points. The big question is, are cracks starting to show in the consumer side? Hiring slowed, but wage growth remains strong, with year-over-year growth at 3.2%. So far, the consumer is steady, with car sales at 17 million, not much moved in recent months. Tariffs are about to hit the consumer and how they respond will be the billion-dollar question for the economy. With elevated risks for the consumer, the Federal Reserve will lower rates by a quarter of a percent in September. With mixed economic data, the Fed is in a quandary and their projections for the economy will be watched closely.

Next week, we get a look at small business confidence, two major indexes of inflation, retail sales and business inventories. Economic data has been decent, but downside risks are still high. The consumer is standing alone, manufacturing is in recession and trade and housing faltering. The chances of a recession in the next 12 months has climbed to 38%, according to the New York Fed. This is on top of the various yield curves, which have inverted. The ISM said the non-manufacturing is getting stronger. However, the HIS service sector index showed the slowest growth in three years. One thing is for sure, if the consumer cracks, we are in trouble.

Latest Data

The U.S. Economy:

Construction spending rose 0.1% in July, following a 0.7% decline in June. Private residential construction rose 0.6% in July, the primary positive driver for the month. Of the components of residential construction, spending on new single-family homes increased 1.4% m/m but remained down 8.5% y/y. Spending on multifamily homes advanced 1.1% in July and was up 5.7% y/y. Private nonresidential construction spending fell 0.8% in July. Of the components of private nonresidential construction, manufacturing structure construction spending rose 1.9% from June and is up 3.7% from July 2018. Commercial structure spending fell 3.6% from June, down 18.2% from a year earlier. Public construction rose 0.4%, breaking a two-month streak of declines. The biggest contributor to the public sector, highway and street construction is down 10% from its April peak. Federal money is needed to continue the overall positive trend. The outlook for construction is flat at best, with modest downside risks.

For the first time since the end of the energy rout, the U.S. manufacturing sector is declining. The ISM manufacturing index fell from 51.2 in July to 49.1 in August. It was the lowest reading since January 2016 and below the 50-level consistent with expansion. The index remains above the 42.9 level consistent with recession. The details were generally downbeat. New orders dropped sharply from 50.8 in July to 47.2 in August. Of the 18 manufacturing industries, three reported growth in new orders in August, nonmetallic mineral products, machinery and chemical products. 11 industries reported a decline in orders. Production slipped from 50.8 to 49.5. Only four industries reported growth in production. Employment fell from 51.7 to 47.4. Supplier deliveries improved falling from 53.3 to 51.4, still indicating slower deliveries. Inventories inched up from 49.5 to 49.9 but still indicates falling inventories. New export orders fell sharply from 48.1 to 43.3. Imports fell from 47 to 46.

The manufacturing index is in negative territory but that does not mean a recession is imminent. Even if the index stays in negative territory for a few months, the economy should stay in the positive zone. The manufacturing sector only accounts for 10% of GDP and 9% of employment. Manufacturing’s woes can be traced to several factors, starting with the trade war, Tariffs have increased input costs and squeezed profit margins and rerouted supply chains. The slowing of the global economy and the effects of a high dollar are also headwinds. Excess inventories are a problem that will be dealt with slowly. Manufacturing did fall for two consecutive quarters many times in the expansion, in 2013, 2015 and 2016. However, in all those times, the economy continued to expand.

Net exports will be a drag on third quarter GDP growth. The trade deficit fell from $55.5 billion in June to $54.0 billion in July. Nominal exports increased 0.6%, but that followed a 1.9% decline in June. Goods exports rose, driven by a 1.9% increase in capital goods, a 4.6% increase automotive goods and a 9.6% rise in consumer goods. Feed, food and beverage exports fell 2% and industrial supplies declined 3.8%. almost stalled out the last few months. Nominal imports fell 0.1%. Goods imports were almost unchanged. Trade has almost stalled out the last few months. The Trump administration is clearly bothered by the deficit with China. However, the impact of tariffs has only shifted the mix of imports away from China. The deficit with China has been lowered by $4 billion over the past year, but increased to the rest of the world by $10 billion. Trade tensions are hurting the manufacturing sector and the uncertainty is undermining business investment. Tariffs are about to hit the consumer. Whether this leads to recession remains to be seen.

U.S. August auto sales came in at a seasonal adjusted annual pace of 17 million in August, up 2% from August 2018. Sales in August were equal to the three-month average, reflecting the steadiness of the American consumer. August sales were slightly above the second quarter average of 16.9 million annualized units. The ongoing trade war and slowing global economy has not slowed the American consumer, so far. Strong labor conditions continue to support vehicle sales. Average vehicle prices are at an all-tie high, increasing more than 4% from last year, according to J.D. Power. Prices are rising faster than wages, making it more difficult for the marginal consumer to purchase vehicles. Sales are expected to track near 17 million for the remainder of the year.

The U.S. non-manufacturing sector continues to broaden. The ISM non-manufacturing index increased from 53.7 in July to 56.4 in August. The business activity index jumped 8.4 percentage points to 61.5. Of the industries surveyed, 14 reported growth in business activity. New Orders also jumped from 54.1 in July to 60.3. Only three industries reported a contraction in new orders. Employment was a soft spot, with the index falling 3.1 percentage points to 53.1. Supplier deliveries slipped from 51.5 in July to 50.5, still showing slowing deliveries. Inventories jumped from 50 to 55. The U.S. manufacturing sector may be in recession, but the non-manufacturing sector is doing fine. Anecdotes from the survey showed little concern about the trade war, Brexit, financial market volatility or other risks to the expansion. Generally, statements were upbeat about the outlook. Hard data still shows a decent consumer economy. Sentiment is fickle and there are higher risks. The odds that we can talk ourselves into recession is greater than deep imbalances develop in the labor market and result in a recession. Confidence is important.

Factory orders rose 1.4% in July, following a 0.5% advance in June. Nondurable goods orders advanced 0.8% in July, offsetting the 0.7% decline in June. Durable goods orders advanced 2.0%, following a 1.8% increase in June. Transportation orders rose 7%, pushing the headline number forward. The important core capital goods orders increased 0.2% from the month, following a 0.9% increase in June and the third consecutive monthly increase. Orders on this segment are down 0.6% from a year earlier and growth has been weak for about a year and poses a risk for business investment. Factory shipments were down 0.2%. Trend growth on this segment has decelerated sharply since the second quarter of last year. Manufacturing is struggling. Recent weakness can be attributed to an inventory adjustment, slower global growth and uncertainties surrounding Mr. Trump’s trade war. Uncertainty is undermining business confidence and investment plans. Even if some accord is reached with China soon, weakness in manufacturing is likely to persist.

Payrolls came in at 130,000 jobs in August, bringing the average per month growth to 158,000 so far this year, compared to 223,000 in 2018. Most of the growth was driven by gains in professional services, healthcare and government payrolls. Federal government payrolls increased by 28,000, including the hiring of 25,000 temporary Census workers. The unemployment rate held steady at 3.7%. Goods producers are struggling, adding only 12,000 jobs in August. Other aspects of the report was more positive. The average workweek increased slightly to 34.4 hours and average hourly earnings increased by 11 cents to $28.11, bringing the year-over-year gain to 3.2%. Household data told a similar message. The labor force increased by 571,000 and the labor participation rate improved to 62.3%, up from 63% in July. Although wages are holding up, employment growth has cooled. Other cracks have emerged in the labor front. An outplacement firm Challenger, Gray and Christmas reported a 37.7% increase in planned job cuts by U.S.-based employers in August from a year earlier.


A surge in exports drove Canada’s economy higher in the second quarter, but the surge masks the poor performance of the rest of the economy. Real GDP expanded at an annualized rate of 3.7% in the second quarter. Exports surged 13.4% higher from the previous quarter. Nonmetallic mineral shipments jumped 19% and aircraft and parts jumped 10% higher. Also helping the trade balance was a 1% drop in imports. While the trade picture improved, domestic demand contracted 0.7%. Falling nonresidential investment, down 6.4% annualized dragged on the domestic economy. Spending on equipment and machinery slumped sharply, off 4.3%. The drop mainly came from a decline from a large aircraft order that came in the first quarter. The 1.1% drop in spending on nonresidential structures did not help the investment category. Residential investment advanced 5.5%, snapping a streak of five quarterly losses. Household consumption increased a weak 0.5%. The quarter was strong, but weak consumption and investment does give cause for concern. The strength should keep the Bank of Canada from cutting rates at the next meeting. The trade war is causing damage to both the U.S. and Canadian economies. As export growth cools, the Canadian economy will also slow in coming quarters. If the U.S. economy slows dramatically, it will have a negative effect on the Canadian economy.

China’s factory sector shrank for a fourth consecutive month in August as trade tensions ramped up and domestic demand remains sluggish. The manufacturing PMI fell to 49.5 in August, down from 49.7 in July. Exports remain under pressure as orders fell for a 15th straight month, but the index did pick up to 47.2 from July’s 46.9 level. Factories continue to shed jobs, with the employment index dropping to 46.9, compared with 47.1 in July. Total new orders continue to fall, indicating domestic demand is soft, despite a series of growth measures over the year. The front-loading of exports to the U.S. ahead of higher tariffs supported trade and overall activity, but this effect will likely fade in coming months. The additional tariffs by Trump effectively covers all of China’s exports to the U.S.

Important Data Releases This Week

The August NFIB small business optimism index will be released on Tuesday, September 10 at 6:000 AM EDT. The index posted a broad rebound in July to a better than expected 104.7. We project a sight decline in August to 103.5.

The August producer prices for final demand will be released on Wednesday, September 11, at 8:30 AM EDT. Producer prices were soft in July, with a modest 0.2% increase but 0.1% declines for ex-food ex-energy core and mostly negative implications for personal consumption. For August, we look for a 0.1% advance for headline index and a 0.2% increase for the core index. This brings the headline index up 1.8% y/y and the core up 2.2%.

The August consumer price index will be released on Thursday, September12, at 8:30 AM EDT. The core rate sowed two months of increasing pressure, up 0.3% for two months in June and July and raised talk of higher inflation caused by tariffs. We see only a marginal effect, with the headline CPI up 0.1% for August and a gain of 0.2% for the core index. This brings the headline index up 1.8% y/y and the core 2.3%.

August retail sales will be released on Friday, September 13 at 8:30 AM EDT. Retail sales were stronger than expected in July, rising 0.7%. We project a 0.3% increase for August. Excluding autos and gas, sales should post a stronger 0.4% advance.

July business inventories will be released on Friday, September 13 at 10:00 AM EDT. We expect inventories to rise 0.2%, after no change in June. Growth in inventories has been in line with demand.

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About Steve Graham

Steve is one of the premier analysts in the transportation equipment industry. On a monthly basis Steve tracks and analyzes in detail the trailer and heavy-duty truck industry. Aside from following these two sectors he is also instrumental in helping our customers analyze the economy and its impact on transportation and transportation equipment.