The “R” word – recession – got uttered a lot this week. The stock market swooned after an “inverted yield curve” in the bond market.
That’s considered an indicator that a recession is on the way. The U.S. government is paying more to buyers of its 2-year-bond than its 10-year notes. Essentially, it’s a sign of concern about the economy’s short-term prospects. (CLICK HERE to read a more detailed explanation from The Washington Post.)
For manufacturing, there have been indicators of economic concern for a while now.
First up, the U.S.-China trade war isn’t ending soon. The two sides had been trying to negotiate ways to alleviate trade disputes. However, the two nations appear to have settled in with no end of the conflict in sight.
Moreover, other trade fights may yet occur that would be a drag on the economy. The U.S., for example, still is studying whether to levy tariffs on imported vehicles.
The Trump administration said in May that vehicle and vehicle parts “are being imported into the United States in such quantities and under such circumstances as to threaten to impair the national security of the United States.”
That set off a 180-day countdown to reach an agreement with the European Union and Japan. Without a pact, the U.S. may take additional action. Tariffs – a levy on imported goods – would be a strong possibility. Tariffs are paid by importers, who often pass the cost onto customers. Tariffs are not payments from one country to another.
Additional tariffs, if implemented, would take place amid cooling vehicle sales in the U.S. At this month’s Management Briefing Seminars in northwestern Michigan, forecasters discussed the prospects of a profit and sales squeeze for automakers and parts makers.
More generally, there are other signs of concern for the manufacturing economy.
The Institute for Supply Management’s manufacturing index, known as the PMI, is considered a barometer of where the manufacturing economy is headed.
In July, the PMI reached its lowest level in 35 months. The index, known as the PMI slipped to 51.2 percent, barely into positive territory. The last time it was lower was August 2016, the same time the PMI indicated manufacturing had contracted. The PMI has weakened for four consecutive months.
Not So Shallow
Machine tool orders slid 13 percent in the first half of 2019, the Association for Manufacturing Technology said in a monthly report issued Aug. 12. The McLean, Va.-based group said the year-to-date comparisons will get tougher because a year ago the business was running at robust rates. By the end of the third quarter, machine tool sales may be down 20 percent or more compared with 2018.
AMT said it originally expected a machine tool downturn to be short but shallow. It still expects a recovery in 2020. But the downturn won’t be that shallow.
To be sure, the economy has a way of defying forecasters from time to time for both good or ill. Still, there is enough uncertainty that manufacturing can’t rest easy.