Will a Manufacturing Recession Lead to a Overall US Recession?

Jon C. Ogg

As much as the mainstream media has loved using the term “recession,” they are actually getting some economic data that finally may help to back up their case. That said, the United States is a services and materials economy, and the data generally is not considered as much of a true economic barometer as it had been 20 to 40 years ago.

The Institute for Supply Management (ISM) reported that economic activity in the manufacturing sector contracted during the month of August to 49.1%. The overall economy still managed to grow for the 124th consecutive month, but the ISM showed that new orders, production and even employment were contracting in the manufacturing sector. Also worth noting were that supplier deliveries were slowing and that the backlog of orders and inventories of raw materials were contracting. On top of customer inventories being too low, the ISM showed that prices were decreasing while both exports and imports were contracting.

It historically has been considered a recession when there are two consecutive quarters of negative economic growth. The media have been using “recession” along with any sort of slowing of late, although this report does represent a month of contraction.

As for the purchasing managers index (PMI) falling to 49.1% in August, that’s a drop of 2.1 percentage points from July alone. Individual readings that make up the overall index were shown as follows with the current readings being shown against July:

  • New Orders Index, 47.2% (down 3.6 percentage points)
  • Production Index, 49.5% (down 1.3 percentage points)
  • Employment Index, 47.4% (down 4.3 percentage points)
  • Supplier Deliveries Index, 51.4% (down 1.9 percentage points)
  • Inventories Index, 49.9% (a gain of 0.4 percentage point)
  • The Prices Index, 46.0% (a 0.9-percentage point increase)

As for the ISM’s overall view, August saw a notable decrease in business confidence and was an end of the PMI expansion that has been seen for the past 35 months. Orders are indicating a lack of demand at the same time that there were continued slower supplier deliveries.

As for the inputs, the supply chains are said to be responding better and companies are continuing to closely match inventories to their new orders. This was said to be a positive sign for future expansion. Still, a drop in overall prices for the third consecutive month is indicating lower overall systemic demand.

A lot of the contraction has direct ties to what is happening with U.S. trade with China during the tariff-led trade war. Adding insult on top of misery is the continued contraction seen elsewhere. The brief quote on the monthly drop said:

Respondents expressed slightly more concern about U.S.-China trade turbulence, but trade remains the most significant issue, indicated by the strong contraction in new export orders. Respondents continued to note supply chain adjustments as a result of moving manufacturing from China. Overall, sentiment this month declined and reached its lowest level in 2019.

The ISM tracks 18 manufacturing industries, and in August there were still nine industries reporting growth and seven industries reporting contraction. These are shown below:

  • Growth — Textile Mills; Furniture & Related Products; Food, Beverage & Tobacco Products; Wood Products; Petroleum & Coal Products; Nonmetallic Mineral Products; Machinery; Miscellaneous Manufacturing; and Chemical Products.
  • Contraction — Apparel, Leather & Allied Products; Fabricated Metal Products; Transportation Equipment; Primary Metals; Plastics & Rubber Products; Paper Products; and Electrical Equipment, Appliances & Components.

As to whether the manufacturing “recession” will spill over into the services sector, Credit Suisse had given many sector upgrades and downgrades of its own this morning. The firm’s own view was that a service economy is less prone to recession than a manufacturing economy (but the industrial economy is experiencing another contraction).