American manufacturing is in recession.
On Thursday, regional manufacturing reports for October showed very slight improvement but made clear that the sector is in contraction. In September, all seven regional manufacturing purchasing manager’s indexes fell into contractionary territory.
The Empire State manufacturing index from the New York Federal Reserve for October was -11.36, improved from -14.67 in September, but still indicating contraction in the New York region. The Philly Fed’s index came in at -4.5 for the month, also an improvement from September’s reading but still pointing to a deceleration in manufacturing activity.
And the details of the latest regional indexes paint an even bleaker picture than the headlines, according to Pantheon Macroeconomics’ Ian Shepherdson.
For instance, new orders in the Philly Fed’s index fell to -10.6 from +9.4, the lowest since June 2012. Employment plunged to -1.7 from 10.2. And, shipments tumbled to -6.1 from 14.8.
Shepherdson wrote, “In short, a grim [Philly Fed] report, but it can be argued that the weakness in the sub-indexes represents something of a catch-up after overshooting relative to national ISM manufacturing index.”
- Pantheon Macroeconomics
The dollar’s rapid rise over the past year has slowed down a bit, but is still putting pressure on US exports, and by extension, manufacturers.
In a note to clients last week, Renaissance Macro’s Neil Dutta highlighted that in recent months, manufacturing inventories have run ahead of sales. And in the most recent national manufacturing PMI report, the share of survey respondents who said inventories were “too high” exceeded those who said they were “too low.”
Manufacturing has also been slammed by lower investment from the mining sector, which is having its own deep troubles due to lower oil prices.
On Wednesday, the Federal Reserve’s latest Beige Book, a collection of anecdotes from the Fed’s 12 national districts, noted that the energy industry had become weaker compared to the prior report.
A third reason for the manufacturing industry’s troubles is that global trade is generally weak as demand from China has softened.
Shepherdson thinks these conditions will persist, writing on Thursday that, “No one should be surprised from soft numbers in the industrial economy, regional or national. Just as the downshift in capex in the oil sector began to ease, the strong dollar and the slowdown in China’s industrial economy have bitten, hard, and likely will inflict more pain over the next few months.”
Dutta, however believes that US manufacturing activity will strengthen as the year closes out and into 2016:
“Trade is an important driver of manufacturing activity since trade is dominated by manufactured goods. Part of the weakness in trade is cyclical, given the slump in the global economy. Monetary policy has eased globally in response to soft growth and with a lag, this should boost activity.”
- Renaissance Macro