Big companies like Caterpillar, which makes construction equipment, and Fastenal, which is the largest fastener distributor in North America, have reported disappointing earnings in recent days. While the overall U.S. stock market has surged more than 20 percent so far this year, Caterpillar stock is up less than 4 percent.
But the biggest warning sign arrived last week when the Federal Reserve reported that U.S. manufacturing was in a “technical recession” the first half of 2019.
The widely held definition of a recession is when output shrinks for two consecutive quarters. According to the Fed’s U.S. industrial output data, that’s exactly what happened: Output fell for the January through March quarter and again in the April through June quarter.
U.S. manufacturing has hit a rough patch, and it’s the latest cautionary sign for Trump that expanding the trade war is biting at home, including in the blue-collar sector he promised to revive.
Despite the warning signs — which have caught the attention of Fed Chair Jerome H. Powell and the Democratic presidential candidate Sen. Elizabeth Warren (Mass.) — many economists and manufacturing experts are shrugging this off. Take a look at the chart below showing the Fed’s industrial output data that qualifies this as a technical recession for manufacturing. Yes, the line has fallen into negative territory. But it’s barely negative. It’s much less than what was seen in the Great Recession or even during 2015 and 2016, when the sector was in bad shape after oil prices crashed.
“I don’t see a manufacturing recession. Spending is down a little bit as people are uncertain. They don’t know if they should spend more money to produce more goods if Trump goes forward with more tariffs,” said Tom Jones, managing partner at Concord Financial Advisors in Chicago, which helps manufacturing companies secure financing. But, he added, “overall, we have seen fewer distressed companies” than a few years ago.
What Jones is seeing on the ground in the Midwest is echoed by other experts. Lakshman Achuthan, co-founder of the Economic Cycle Research Institute, says he would not even call this a true manufacturing recession.
He looks at the latest Fed data and sees more proof that the overall U.S. economy is slowing this year (as was widely expected) but that it’s still growing. He says the key data to watch is whether hiring goes negative, as it did for manufacturing in 2016.
“We wouldn’t call this a manufacturing ‘recession’ until manufacturing employment clearly starts falling,” Achuthan said.
Goldman Sachs told its clients last week that although manufacturing wasn’t doing well, it makes up only a small share of the U.S. economy (about 10 percent) and should not be read as the canary in the coal mine that it once was.
There are also reasons for optimism. A number of manufacturing indexes hit their lowest levels in June — shortly after Trump increased tariffs on China and threatened tariffs on Mexico. But several indexes have climbed a bit in July. Fresh data out Thursday also shows a jump in purchases of large manufactured goods (known as durable goods) in June.
The biggest takeaway here is that U.S. manufacturing is clearly slowing. Whether it rebounds or falls into a widely felt recession depends a lot on what happens with Trump and his trade war. Caterpillar, among others, warned this week that tariffs are causing its costs to rise, ultimately harming profits. Sales to China have also been hurt.
As Alan Tonelson, author of RealityChek blog, which closely watches manufacturing and trade data wrote, “Domestic manufacturing remains in a state of uncertainty and sometimes outright confusion and turmoil — and the threat of much more widespread China tariffs and increases on current China tariffs will greatly limit clarity going forward.”