Written by Steven Hansen,
Manufacturing growth has historically been the “canary in the coal mine” for economic trends. The question is what a dead canary means today – because manufacturing is flirting with contraction.
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One reason to question manufacturing’s canary role is that its contribution to GDP has declined from 14.5 % in 2000 to less than 11.5 % in 2018.
Manufacturing employment has declined from 13 % of total employment in 2000 to less than 9 % today.
And the percent contribution to total compensation to employees for manufacturing has declined from over 15 % in 2000 to just over 10 % in 2017 (the last year data is available from the BEA).
In this week’s Federal Reserve’s Industrial Production, manufacturing’s year-over-year growth declined to 0.4 %. The trend lines generally match between GDP growth and manufacturing growth but currently, the trends are very different.
GDP may be the problem – and the way it measures economic growth. One of the best coincident indicators shows a similar trend to manufacturing.
In fact, I am not aware of any coincident index that confirms the upward trend of GDP.
What I have found interesting in the June Federal Reserves Industrial Production release was the contraction of capacity utilization in the manufacturing sector.
Seasonally Adjusted Capacity Utilization – Year-over-Year Change – Seasonally Adjusted – Total Industry (blue line) and Manufacturing Only (red line)
Capacity utilization tells you even more than production. When capacity utilization is contracting year-over-year it is likely that:
- inflation pressures have evaporated;
- shift work has decreased;
- investment is down;
- employment growth is slowing;
- overtime is shrinking.
Economic Forecast
The Econintersect Economic Index has a long term decline which began in July 2018 – and continued this month (July 2019). Our forecast is approaching closer to the zero growth line. There currently is a disconnect between GDP and the Econintersect Economic Index. Because inventories rise and trade falls going into economic slowdowns [which increases GDP] – one can suggest that GDP is a lagging indicator to the underlying economy.
The fundamentals which lead jobs growth are now showing a slowing growth trend in the employment growth dynamics. However, we expect jobs growth over the next six months to exceed the growth needed to maintain participation rates and the employment-population ratios at the current levels.
Economic Releases This Past Week
The following table summarizes the more significant economic releases this past week. For more detailed analysis – please visit our landing page which provides links to our complete analyses.
| Release | Potential Economic Impact | Comment | ||||||||||
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June Retail Sales | rate of growth on the low side of values seen in the last two years | Retail sales improved according to US Census headline data. The three-month rolling average improved. There was a downward adjustment of last month’s data. Although the unadjusted data declined this month, the real test of strength is the rolling averages which marginally improved. This month’s data underwent the annual revision. Please consider that this data is not adjusted for inflation.
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| June Import and Export Prices | n/a | Year-over-year import and export prices declined. Import and export pricing declined and is now the lowest in the last 12 months Import Oil prices were down -6.5 % month-over-month, and export agricultural prices were up 2.7 %.​
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| June Industrial Production | very small growth | The headlines say seasonally adjusted Industrial Production (IP) was unchanged month-over-month. Our analysis shows the three-month rolling average declined. There was generally downward revision to the last 6 months of data. The best way to view this is the 3-month rolling averages which declined. Industrial production remains in a downtrend. Note that manufacturing is barely in expansion year-over-year.
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| May Business Sales and Inventories | slow growth | Headlines show final business sales data (retail plus wholesale plus manufacturing) improved. However, the rolling averages marginally declined. Inventories remain very elevated. Inventories remain at recessionary levels. Our primary monitoring tool – the 3-month rolling averages for sales – declined. As the monthly data has significant variation, the 3-month averages are the way to view this series. Overall business sales are better than the low point in 2015 – but is below average for the values seen in the last 2 years. | ||||||||||
| June Housing Permits and Completions | shows residential construction slowing | The headline residential building permits and construction completions slowed relative to last month. This sector is contracting year-over-year. In summary, the rolling averages say this sector continued to slow this month. We consider this report worse than last month.
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| June Leading Indicators | indicates a slowing economy | The Conference Board Leading Economic Index (LEI) for the U.S declined this month – and the authors say “As the US economy enters its eleventh year of expansion, the longest in US history, the LEI suggests growth is likely to remain slow in the second half of the year”.
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| Surveys | relatively high consumer optimism | Empire State Manufacturing Survey – The Empire State Manufacturing Survey index improved and returned to expansion. Overall this survey remains below values seen in the last 2+ years. The report is better than last month but key elements remain in contraction.
Philly Fed Manufacturing Survey – The Philly Fed Business Outlook Survey significantly improved. Key elements remained in positive territory. Although the survey index significantly improved, the key element sales were mixed. Overall, I do not consider this survey much better than last month.
Beige Book – The consolidated economic report from the 12 Federal Reserve Districts (Beige Book) stated: “Economic activity continued to expand at a modest pace overall from mid-May through early July, with little change from the prior reporting period“. The previous report stated: “Economic activity expanded at a modest pace overall from April through mid-May,“. The bottom line is that there appears to be little change from last month. Michigan Consumer Sentiment – The preliminary University of Michigan Consumer Sentiment for July came in at 98.4, up from the June final of 98.2, and down from the May final of 100.0.
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| Rail Counts | Definitely not positive news | Rail so far in 2019 has changed from a reflection of a strong economic engine to contraction. Currently, not only are the economic intuitive components of rail in contraction, but the year-to-date has slipped into contraction.
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Links To All Of Our Analysis This Past Week
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