The decline of US manufacturing in the cacophony of regional and national indices, which started in mid-2014, is a sight to behold. Today we got two national indices for April. Both added more gloom to the scenario.
Of the national manufacturing indices, Markit’s PMI, which is based on surveys of purchasing managers, had been the more positive one – if that’s the right word. But it too has steadily been losing ground since mid-2014, when it hovered around 57 (above 50 = expansion).
In April, the index dropped to 50.8, from 51.5 in March on a seasonally adjusted basis, which as the report put it, “signaled the slowest improvement in overall business conditions” since September 2009.
Output volumes compared to March were “close to stagnation,” with the “weakest rise” since October 2009. But at an annual rate, output actually fell 3% — so an actual decline in output:
Anecdotal evidence suggested that subdued client demand, uncertainty about the economic outlook, and lower energy sector capital spending had all acted as a drag on manufacturing production in April.
Reduced demand for exports hit new orders. The backlog of work declined for the third month in a row as weak new orders couldn’t keep up. And “the latest fall in unfinished business was the sharpest since September 2009.”
As manufacturers are trying to tackle their bloated inventories — after a nationwide buildup to crisis levels — destocking “is very much in evidence as companies often reported weaker than expected demand.” Stocks of purchases fell for the fifth month in a row. Post-production inventories also dropped.
And inflation is working itself back into manufacturing. These “renewed input cost pressures” were triggered by higher raw material costs. Yet manufacturers lamented that they have not been able to pass on the rising costs to their customers. Instead, “factory gate charges decreased further, reflecting squeezed pricing power….”
The report summarized it this way:
The April PMI data suggest there’s no end in sight to the current downturn in manufacturing activity. The survey indicates that factory output is dropping at an annualized rate of approximately 3%, and factory headcounts are being culled at a rate of around 10,000 per month.
Rather than reviving after a disappointingly weak first quarter, the data flow therefore appears to be worsening in the second quarter, raising question marks over whether GDP growth will improve on the near-stalling seen in the first three months of the year.”
So this has been the more positive of the two PMI reports until recently. The Institute for Supply Management’s PMI already took the trip into contraction mode.
After registering above 53 in mid-2015, and around 58 during the glory days in mid-2014, the index zigzagged lower. It entered contraction last October, hit a low of 48 in December, and stayed in contraction for five months, until March when it suddenly surged 2.3 points to 51.8. The US manufacturing recession was declared over.
But now it has dropped again, this time to 50.8, just a hair away from falling into contraction once again. New orders dropped 2.5 points to 55.8; order backlog dropped to 50.5; production dropped 1.1 points to 54.2. And destocking has kicked in. The Inventories Index dropped 1.5 points to 45.5. Raw materials inventories contracted for the 10th month in a row, and at a faster pace than in March.
While the Employment index rose to 49.2, it still indicated that employers were shedding jobs.
And the index for input prices soared 7.5 points to 59.0, based on an increase in raw materials prices, confirming other indications about rising inflation pressures deep in the bowels of the economy.
By now, after decades of offshoring, manufacturing employment is down to only 9% of the US workforce and accounts for only 12% of the US economy, which is largely driven by consumer spending and services. But manufacturing jobs are well-paid, and the sector feeds secondary sectors. So weakness in manufacturing spreads gradually through the rest of the economy. When manufacturing sinks into this sort of quagmire, it becomes, as the Dallas Fed had put it, a “prelude to recession.”
On paper, slow economic growth might look OK-ish, but in the US, where there’s significant population growth, it’s toxic. That’s why the numbers are hushed up. Read… Why this Economy Feels Even Lousier than the Lousy GDP Print