Is this the manufacturing recession of 2019?

The year so far has seen increasing focus on a sector of the economy that has been shrinking in relative terms for quite some time. Actually in the credit crunch era it has in some places shrunk in absolute terms as this from my home country illustrates.

Production and manufacturing output have risen since then but remain 7.1% and 3.1% lower, respectively, for July 2019 than the pre-downturn peak in February 2008.

This means that it is now a little over 10% of total UK GDP and so it is completely dwarfed by the services sector which is marching on its way to 80%.Thus we have a context that the current concern about a recession is odd in the sense that we have in fact been in a depression as output more than a decade later is below the previous peak.Yet there is much less concern over that.

We learn more from the detail of the breakdown from the official analysis of the period 2008-18.

The recovery of the manufacturing sector from the 2008 recession has been heavily dependent upon four out of the 24 industries; manufacture of food, motor vehicles, other transport equipment and repair of machinery………..Without the positive impact of these four industries, the Index of Manufacturing in Quarter 4 (Oct to Dec) 2018 would still be below its lowest value during the 2008 recession.

There is always a danger in any analysis that excludes the things that went up but we do learn that there has been quite a shift. Also a lot of the sector has been in an even worse depression than the average. Then we have the situation where two of the fantastic four currently have problems to say the least.

However caution is required as I so often observe and today it is highlighted by this.

The pharmaceutical industry was a strong performer during the recession; at the industry’s highest point in April 2009 the industry had grown by 22% since Quarter 1 (Jan to Mar) 2008. However, the industry would steadily decline from this point over the decade and would finish in Quarter 4 (Oct to Dec) 2018 23% below its Quarter 1 2008 value, though some of this decline is due to business restructuring.

Something looks wrong with that and if I was in charge I would be looking further as to whether this is/was really like for like. For newer readers I looked because in recent times the pharmaceutical sector has been a strength in the data albeit with erratic swings.

The United States

If we now switch from an underlying issue of depression in some countries to the more recent one of recession well this from the Institute of Supply Management or ISM yesterday upped the ante.

Manufacturing contracted in September, as the PMI® registered 47.8 percent, a decrease of 1.3 percentage points from the August reading of 49.1 percent. This is the lowest reading since June 2009, the last month of the Great Recession, when the index registered 46.3 percent.

This seemed to catch out quite a few people and led to some extraordinary responses like this on CNBC.

“There is no end in sight to this slowdown, the recession risk is real,” Torsten Slok, chief economist at Deutsche Bank said in a note Tuesday after the report.

I agree on the recession risk but “no end in sight”? That applies more to the problems Deutsche Bank itself faces. If we switch to the detail there are some clear things to note which is that is showed a more severe contraction and that the “Great Recession” klaxon was triggered. Furthermore the trade war influence was impossible to avoid.

ISM®’s New Export Orders Index registered 41 percent in September, 2.3 percentage points lower compared to the August reading of 43.3 percent, indicating that new export orders contracted for the third month in a row. “The index had its lowest reading since March 2009 (39.4 percent).

The news reached the Donald and his response was to sing along with “It wasn’t me ” by Shaggy.

As I predicted, Jay Powell and the Federal Reserve have allowed the Dollar to get so strong, especially relative to ALL other currencies, that our manufacturers are being negatively affected. Fed Rate too high. They are their own worst enemies, they don’t have a clue. Pathetic!

So far this has not reached the official output numbers. Here is the August announcement from the Federal Reserve.

Manufacturing production increased 0.5 percent, more than reversing its decrease in July. Factory output has increased 0.2 percent per month over the past four months after having decreased 0.5 percent per month during the first four months of the year.

Putting it another way the output level in August was 105.2 which was the same as March. So according to the official data the only impact it has picked up is an end to growth if we try to look through the monthly ebbs and flows.

The World

There is a survey conducted on behalf of JP Morgan which yesterday told us this.

National PMI data signalled deteriorations in overall business conditions in 15 of the countries covered. Among the larger industrial regions, growth was registered in both the US and China. In contrast, Japan saw further contraction while the downturn in the euro area deepened. The rate of decline in the eurozone was the fastest in almost seven years, mainly due to a sharp deterioration in the performance of Germany.

They showed a slight improvement to 49.7 but there is the issue of the US where JP Morgan thinks there has been growth whereas the ISM as we have just observed does not. Here is the Markit PMI view on a possible reason.

Divergence is possibly related to ISM membership skewed towards large multinationals. IHS Markit panel is representative mix of small, medium and large (and asks only about US operations, so excludes overseas facilities)

Financial markets hit the ISM road and were probably also influenced by this from Bloomberg.

Results were disastrous for leading Asian automakers such as Toyota Motor Corp. and Honda Motor Co., which each suffered double-digit declines that were worse than analysts expected. While a fuller picture will emerge Wednesday when General Motors Co (NYSE: GM). and Ford Motor (NYSE:F) Co. are due to report, the poor performance suggests that overall deliveries of cars and light trucks could come in worse than the 12% drop anticipated by analysts, based on six estimates.

Comment

There are various strands to this of which the first is the motor industry. In the credit crunch era it has seen a lot of support ranging from “cash for clunkers” style operations to much cheaper credit. In the UK it is often cheaper to buy via credit that to pay up front which is part of the theme that has seen this according to the Finance and Leasing Association.

 Over 91% of all private new car registrations in the UK were financed by FLA members.

That seems to be wearing off so we were due something of a dip and that has been exacerbated by the diesel crisis where buyers have understandably lost faith after the dieselgate scandal and the ongoing emissions issue.

Politicans are regularly on the case which was highlighted in the UK by the “march of the makers” claim of former Chancellor George Osbourne. Whilst there was some growth it was hardly a march and now we have President Trump pushing manufacturing as part of MAGA but more latterly giving it a downwards tug with his trade war.

Then there is the issue of green policies which have to lead to less manufacturing but get deflected onto talk of more solar panels and windmills and the like. On that road the depression theme returns.

 

12 thoughts on “Is this the manufacturing recession of 2019?

  1. Shaun I think there are two main factors at work.
    In the US its very political. As well as the impeachment move, the Fed is stocked with Dems and ( as I have remarked previously) if Trump loses the ‘economy’ he will face an uphill task of getting re-elected.
    For the rest, the uncertainty created by the remorseless ‘climate emergency’ hype, in particular on the future of the ICE, but also on rising energy costs, is inevitably having an effect on growth in western nation’s economies.
    China, India and to some extent Russia must be happy, albeit with two of them suffering from trade and other pressures from the US.
    Overall a recipe for global recession/depression.

  2. Hello Shaun,

    re; “sharp deterioration in the performance of Germany”

    this is the one to watch, if Germany cannot make the money , who else will fund the EU project? Finland?

    interesting times

    Forbin

    • forbin,

      I don’t think its just Germany albeit you are correct the figures aren’t good and worse for Germany is the more reliance on manufacturing, where as the UK and US the largest contributor to GDP is the service sector.

      Lets face it but for lower interest rates and QE there probably wouldn’t have been any growth in both Europe and the UK.

      However to pick up on the topic of this thread I think this is the manufacturing recession of 2019 and that in itself suggests the economies are contracting because manufacturing slowdown is the precursor to a consumer slowdown.

      With regards to what Shaun said here:
      “Then there is the issue of green policies which have to lead to less manufacturing but get deflected onto talk of more solar panels and windmills and the like. On that road the depression theme returns.”

      This is something I highlighted recently which would contribute to a further slowdown, the greenies bandwagon will further hit manufacturing, but solar panels will have a counter effect but on balance I think the former will have a bigger impact.

      However more EU legislation is on its way now which will ensure electrical appliances must last longer and be easier to repair. This will also have an impact on less goods manufactured. This topic is close to my hear because 18 months ago I set out to change my washer and did a lot of research. Currys told me most the washing machines aren’t made to last and hover and the like tend to break down after a year, the reason why is the manufacturers want you on maintenance contracts. At one time Bosch was quite a good brand but I was told they don’t last the way they did. What I did end up buying was a top of the range AEG which was guaranteed 5 years, I was tempted to buy a Miele which have a very good reputation but decided on the AEG. However the new legislation will have an impact of further slowdown in manufacturing further down the line.

      This is an article on the legislation:
      https://inews.co.uk/news/consumer/right-to-repair-eu-household-appliances-what-new-rules-mean-639109

      Lets face it guys consumerism has peaked in my opinion and was bound to do sooner or later its a new world now and the future is uncertain evolution is taking is happening before our eyes and economists cannot predict how all this will pan out.

      I said lately only a world war and wiping out quite a percentage of the population would cause havoc but later on the world would return to growth.

      Not a nice thought but has anyone else got a better solution?

  3. The pharmaceutical industry has a problem in so much that fewer patented new drug are coming along compared to the number dropping into generic prescribing. A very significant number of the generics we are prescribed are actually manufactured in India ( even if the packet has a uk address on it ) where they are much cheaper. This is one of the reasons why the threat that Brexit will cause us to run out of medicines puzzles me. Some do come from the EU but from my experience with the industry that definitely isn’t most of them.

    • The ones that don’t come from India mainly come from China, who supply something over 90% of drugs used in the US. Frightening thought.

  4. Hi Shaun

    Great article as always.

    So is the mythical ‘imputed rent’ a greater contributer to GDP than manufacturing?

    thanks

  5. If Donald’s worried about the exchange rate he could always push for oil to be paid for in Euros instead of dollars. Yeah, thought not.

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