Blog: Manufacturing Slowdown in Hot Economy

Blog: Manufacturing Slowdown in Hot Economy

While GDP grows and inflation settles, manufacturing supply executives report slowing demand. Will that spill over into the wider economy?
Many charts of historical economic data include stripes to indicate months where the economy was in recession. That’s useful because it enables even non-specialist observers to see that some trends change direction at the start of a downturn. Since the starts and ends of recessions are declared only after looking back over six month (or more) or data, seeing something (such as new housing starts) improve would provide a heads up that the worst is over. Or seeing some indicators (such as the manufacturers new orders) turn for the worse could give businesses time to plan for softening demand.

At present, consumer demand is anything but soft, and according to the U.S. Bureau of Economic Analysis, the economy grew at a 4.9 percent annual rate in the three months ending in September 2023. Inflation, which had been running at rates not seen in a generation, has started to cool, though prices remain at a level much higher than were seen just a couple of years ago. The unemployment rate is well below what many economists would contend is full employment.

One area of softness is manufacturing. And that could have major implications.

Manufacturing does not drive the U.S. economy today the way it did in the 1960s or before. In terms of the value added to the GDP, manufacturing contributes only 11 percent, less than real estate and on par with combined retail and wholesale trade. But manufacturing is concentrated in specific parts of the country—or more exactly, individual manufacturing industries are concentrated regionally—which makes small slowdowns in specific sectors particularly hard felt.

More on economic indicators: Gas Prices Stabilize

One example of this effect was in the years between 2014 and 2016, when oil flooded the international market and prices crashed by more than two-thirds over the course of 18 months. For motorists and businesses that consume a lot of oil—airlines and freight-hauling companies, to name two—the resulting price relief was welcome and contributed to healthy GDP growth. But for the oil and gas industry and the parts of the country that depend on them, the oil price crash was a small-scale catastrophe.

Due to the spread of the oil and gas industry to parts of the country that have reserves in shale formations, the pain from the drop in oil production was felt in places such as Pennsylvania and Ohio, that might not have considered themselves to be oil country. And the knock-on effects, such as the reduced need for pipeline steel and equipment to support new drilling, were felt throughout the industrial Midwest.

2015 and 2016 were not recession years in the United States as a whole, but there were many places where those years were hard.

One of the key leading indicators for the economy as a whole is the Manufacturing Purchasing Managers’ Index (PMI) compiled by the Institute of Supply Management (ISM), a professional organization based in Tempe, Ariz. ISM surveys purchasing and supply executives to determine the conditions of their businesses, asking specifically about such factors as new orders, inventories, and prices. If new orders are down or inventories are growing, that is an early signal of an economic slowdown.

The survey result is reported as a so-called diffusion index, with the number of managers reporting decreases subtracted from the number reporting increases, and the balance point set at 50 percent. ISM reported on January 3, 2024, that the December PMI registered at a level of 47.4 percent, the 14th straight month where the index indicated a contracting manufacturing sector.

ISM identified 16 industries that were in contraction in December:

• Printing and related support activities;
• Apparel, leather, and allied products;
• Plastics and rubber products;
• Machinery;
• Nonmetallic mineral products;
• Textile mills;
• Petroleum and coal products;
• Paper products;
• Wood products;
• Fabricated metal products;
• Computer and electronic products;
• Miscellaneous manufacturing;
• Furniture and related products;
• Electrical equipment, appliances, and components;
• Transportation equipment;
• Chemical products.

The length and breadth of this contraction in the Manufacturing PMI is alarming. The previous two times manufacturers reported bad conditions for so long were during the post-Dot-Com recession of 2001 and 2002 and the Great Recession that followed the Global Financial Crisis of 2008. Considering how much emphasis the Biden Administration has put on reviving the U.S. manufacturing sector, such results should be considered disappointing.

More for You: 5 Countries with the Largest Nuclear Power Plants

However, while the contraction is broad, it isn’t particularly deep. Every recession since the 1970s has seen the Manufacturing PMI drop below 45 percent, a level this downturn hasn’t reached. And the verbatim responses reported by ISM sound downright upbeat for 2024. “We are seeing stronger demand from our American Automotive OEM customers now that the United Auto Workers strike has been resolved. Looking at a very strong first quarter of 2024,” reported a manager in the primary metals industry.

“We are forecasting a somewhat strong year for 2024,” reported another purchasing manager in the fabricated metal products industry. “We’re currently mildly optimistic for how next year will play out.”

It remains to be seen whether the growing optimism in manufacturing is warranted. It’s also uncertain whether there may be localized impacts where contracting industries are concentrated. But turning around manufacturing would be one way to ensure the broader economy doesn’t fall into recession in the coming year.

Jeffrey Winters is editor in chief of Mechanical Engineering magazine.
 

You are now leaving ASME.org

Error gathering Member Benefit

There was an error retrieving member benefit information. Non-member information is shown.

OK