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Has U.S. Manufacturing Fired a Warning Shot?

AngelaRoberts

Written by Angela Roberts

Sep 5, 2019

In a year of dramatic stock volatility, trade struggles, profit worries, bond mayhem, and endless recession timelines, it’s easy to become immune to the various “dire” economic warnings that arise each week. But sometimes one indicator takes you by surprise.

The Institute for Supply Management’s Manufacturing Index fell to 49.1 in August, the lowest level in three years. A reading under 50 suggests a contraction, while a reading above 50 indicates an economic expansion.

Manufacturing at a Glance - ISM Table - August 2019

Why does this matter?

The ISM Manufacturing index, which is also referred to as the Purchasing Managers Index (PMI), is a carefully watched indicator that surveys business activity “in the trenches” of America’s industrial sector. It assesses changes in production, backlogs, employment, and inventory by directly querying the purchasing managers of more than 300 manufacturing firms that contribute to U.S. Gross Domestic Product. This includes hallmark industries like food and beverage, chemical products, transportation equipment, paper products, plastics and rubber, primary metals, machinery, and computer and electronic products.

Last month, these entities unilaterally reported a contraction in demand, consumption, and business confidence that should not be taken lightly. The overall reading was weaker than forecasted and surprised most analysts.

The Index carries great weight with investors because it is seen as a glimpse into supply chains where prices, production, distribution, and consumer demand emanate. As a result, the PMI as an indicator may not only yield the first signs of economic trouble, but can also often provide a firsthand glimpse into the course of future growth, sentiment, and market trajectory.

PMI data is also a component of Gross Domestic Product and one of several data points that affect monetary policy decisions.

While this latest reading seems unexpected for an economy that is still technically expanding, it accurately reflects the sentiment of those responsible for the acquisition of the goods, services, and supplies needed to run America’s foremost industries. If we envision the economy as a machine, purchasing managers oversee the procurement of the fuel that powers the engine and the oil that greases the gears of economic growth.

Respondents to the August survey echoed the degree of economic anxiety that the data revealed:

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

“The market for large building structures is slowing.” (Nonmetallic Mineral Products)

“Slowest month (July) this year so far in sales.” (Transportation Equipment)

“While business is strong, there is an undercurrent of fear and alarm regarding the trade wars and a potential recession.” (Chemical Products)
“Late planting of the corn and soybean crops has increased uncertainty over the final acres and yields. This is leading to volatile markets.” (Food, Beverage & Tobacco Products)

The August Manufacturing ISM “Report on Business” suggests an across-the-board contraction as new orders, production, employment, inventories, backlog, new order exports, and imports all fell. This shows signs that the U.S. economy is indeed shrinking and that the trade war is taking a toll on the U.S. manufacturing sector. It suggests a downturn at America’s factories and industries. And it echoes all those voices that are putting heavy odds on a recession starting sometime in 2020.

Perhaps the greater concern is that the PMI is a highly predictive benchmark. In a recent Bloomberg feature, Gregory Daco, Chief U.S. Economist at Oxford Economics, reminded us: “What’s important here is that it’s not just the current conditions that have deteriorated quite sharply but also the forward-looking components.”

It is precisely those “forward-looking components” that should worry all of us.

Slumping PMI data portends negative sentiment for Friday’s job report. It can also be indicative of impending factory slowdowns, layoffs, market contractions, collapsing business sentiment, and pronounced economic anxiety.

The bottom line is that if President Trump’s “Made in America” revival is indeed falling short, it will quickly spread to the broader economy and beyond. It will likely impact the dollar, the Fed, jobs, wages, and financial markets around the world—significantly accelerating the global slowdown.

So in the rush to diversify your assets into a reliable hedge or a safe haven, don’t forget that the entire world “speaks gold”—and the precious metal is up over 25 percent on the year. Yes, I did say 25 percent. The question is: Where will your portfolio be next year?

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