Updated: Jul 26
The manufacturing sector continues to contract. The ISM® Purchasing Managers Index® (PMI®) for manufacturing has been below 50 for eight month in a row, and in June was at its lowest level since May 2020 during the very beginning of pandemic recovery. (A value below 50 indicates that more firms than not report contracting business activity. I discuss this here.)
Manufacturing industrial production has been flat to slightly down since December of last year, after moderate growth in 2022.
Weighing on manufacturing have been higher borrowing costs, upward wage pressures, lingering disruptions to supply chains, and weak demand as consumers have shifted toward service consumption after the boom in purchases of physical goods during the pandemic.
As a result of weaker production activity, manufacturing employment has softened considerably, falling in two of the past three months, even as the economy overall has continued to add jobs at a (too?) healthy pace.
Nearly all sub-sectors of manufacturing have seen a steep downshift in hiring since last fall, with the sharpest effects in nondurable goods, particularly in industrial supplies like chemicals and plastics, as well as paper and printing. The only major category still experiencing robust employment growth is the motor vehicle sector, where demand and production are moving upward as auto sales recover from very low 2022 levels.
It would be nice if we could find signs that the manufacturing recession is bottoming out. Unfortunately, more detailed indicators within the ISM® Purchasing Managers Index® paint a pretty pessimistic picture. Notably, forward-looking indicators of current and backlogged orders are among the most negative measures. In particular, a far greater number of firms have been reporting a falling backlog of orders compared with those reporting an expanding order book. (Separate Commerce Department data on new factory orders also show weakness.)
If we want to look really hard for positive news in the ISM® Report on Manufactures®, then in addition to a somewhat less widespread decline in new orders in June, inventories have been moving in the "right" direction, with a substantial proportion of firms reporting that their own inventories and those of their clients are contracting, potentially setting the stage for future production. But this is pretty weak evidence that the manufacturing environment is set to improve.
And at this point, the recent flatlining of manufacturing production is nothing like the decline in output that we might expect if the overall US economy slows sharply or enters a recession later this year or in 2024. In a typical US downturn, industrial production drops 4-9% from peak to trough (it fell much further during the two very severe recent recessions). So manufacturing activity could decline more significantly if demand drops off in coming months.
How large a role might manufacturing itself play in causing a US recession to begin? Perhaps not very much. Manufacturing represents a relatively small 11% share of US GDP and an even smaller 8% of total US employment. What happens in manufacturing is important for these industries and their workers, but it is not a dominant force in the overall US economy.