Manufacturing has plunged into recession and is threatening to pull down other sectors. As measured by the Federal Reserve, manufacturing output shrank over two straight quarters this year. That’s the common definition of recession.
A separate, widely followed index drawn from purchasing managers showed September’s contraction in manufacturing was the steepest since June 2009, with production, inventories and new orders all falling.
And after adding nearly half a million jobs in the prior two years, manufacturing employment has stalled.
Instead of healthy job growth, layoff announcements have spiked this year, especially in battleground states like Pennsylvania and Michigan. Friday’s jobs report for September showed a slight drop in total factory jobs.
Manufacturing today accounts for only about 10% of economic activity, and so far, the overall economy and employment in the U.S. are still growing. The pace has slowed considerably this year. The faltering industrial sector has started to crimp businesses in the transportation and warehousing sectors. There are growing worries of spillover effects in the larger services sector and broader economy.
Energy-related investments, a strong dollar and lackluster demand for American goods in emerging economies are weighing against American industry. But analysts and business leaders say the single biggest restraint on manufacturing this year has been President Donald Trump’s use of tariffs and his trade wars with China and other countries.
Of utmost concern has been Trump’s confrontation with China, the world’s second-largest economy. Many American firms have major operations there — both manufacturing, such as smartphones, and sales, such as motor vehicles. And U.S. companies rely on China for a big chunk of their sales and profits.
U.S. businesses have put off spending on major equipment and buildings as they’ve sought to look through the fog of a swirling trade conflict and off-and-on negotiations.
China and the U.S. are scheduled to resume high-level talks Thursday and Friday in Washington, but expectations for a breakthrough are low, and Trump is loading up more tariffs to take effect next week.
Jim Springer, chief financial officer of Industrial Nut Corp. in Sandusky, Ohio, doesn’t need the Fed and economists to tell him that manufacturing is in recession. He can see it in his 111-year-old business making locknuts and other fasteners.
Springer, 58, remembers when orders took off at the end of 2016. Sales surged 30% in 2017 and went up another 14% last year, to just shy of its record-high sales of $20.25 million in 2006.
It’s been downhill since the first quarter, however, as the company’s largest customers, such as Caterpillar Inc., started to scale back. Sales at Industrial Nut are expected to fall about 10% this year, and Springer says tariffs are a big culprit. They’ve hurt the company both by making raw materials more expensive and by slowing sales in China for companies like Caterpillar, and those effects have trickled down to parts suppliers like Industrial Nut.
“The magnitude of the loss we’re seeing from tariffs far outweighs the benefits of the tax cuts,” Springer said, referring to the move to shave the U.S. corporate tax rate to 21% from 35% starting in 2018.