The ISM index dipped to 49.1 percent last month, the worst number in years and evidence that the U.S. manufacturing sector was now in a recession even though the broader economy was not. (Anything below 50 on the index signifies contraction.) The good news was that forecasters expected an uptick this month, with economists surveyed by MarketWatch predicting a total of 50.2 percent. That would indicate only very modest expansion, but any expansion is good.
The actual number released today: 47.8 percent. The contraction is deepening. If it were to deepen further, the entire economy could be dragged into contraction as well.
There are two competing narratives for why this happened. There’s Trump’s, which is to blame anyone and anything except the trade war he initiated. That means blaming the Fed.
The wrinkle in that theory is that the Fed did lower interest rates two weeks ago, the second time since late July that it’s ordered a rate cut. Powell is doing what he can to counteract the economic slowdown caused by the exchange of tariffs and retaliatory tariffs between Trump and China. Trump’s attitude is that no matter how much the Fed cuts, it’s not cutting enough. If your business is suffering, take it up with Powell.
The other narrative, repeated ad nauseam by analysts in the reporting today on the manufacturing downturn, is that it’s the trade war that’s driving this. Of course it’s the trade war:
Many of the comments from survey participants point to Trump’s trade war with China, noting that the retaliatory tariffs are hurting business and undermining confidence, despite comments from administration officials claiming Americans have not been impacted by the dispute…
Total new orders for manufactured goods were at their lowest since 2012. Export orders, which feed into overall orders, fell to 41 percent, their worst month since March of 2009…
Of 18 industries surveyed, three experienced growth — miscellaneous goods, food and chemical products — and even they reported growth was weak to flat.
Although this is only the second straight month in which the index has been below 50 percent, it’s the sixth straight month that it’s declined. “[T]he warning signs here are clear enough. The trade war is wreaking havoc, to the point where the incipient upturn in manufacturing in China is not transmitting, at all, to the US,” said one analyst to IBT. “We have now tariffed our way into a manufacturing recession in the U.S. and globally,” another investment advisor told CNBC. More from MarketWatch:
“Chinese tariffs going up are hurting our business. Most of the materials are not made in the U.S. and made only in China,” said an executive at a food and beverages manufacturer.
“Economy seems to be softening. The tariffs have caused much confusion in the industry,” said an executive at a company that makes electrical equipment…
“Manufacturing weakness is close to dangerous levels. Historically, readings under 46 are consistent with recession,” said senior economist Chris Low of FTN Financial. “Manufacturing is a small part of the economy, but it is a vitally important one, producing income and multiplier effects, especially in the Midwest.”
The chief economist for the Japanese bank MUFG put it this way: “It couldn’t be more ironic that the trade tariffs done to bring factories back from overseas, are actually shutting down production at existing plants here in the U.S.” The news about American manufacturing shrinking comes a day after the WTO announced that it’s cutting its forecast for global trade growth from 2.6 percent to 1.2 percent, the weakest projection since the Great Recession. They could cut it further pending further trade war escalation and the outcome of the Brexit mess in the UK.
All of this helps explain Trump’s curious congratulatory tweet to China this morning on the 70th anniversary of the establishment of the PRC. Righties have been lashing him for that on Twitter today because the ChiComs are, after all, one of the world’s most loathsome regimes. But Trump has never had moral qualms about doing business with monsters, as his North Korea policy proves most vividly. He’s transactional, and he’s trying to get Kim Jong Un to agree to a particular transaction. The state of U.S. manufacturing makes it that much more urgent that he convince China to agree to a particular transaction too — the end of the trade war sometime over the next 13 months, preferably sooner rather than later so that the economy has time to regain steam before November. Some economists are already predicting that he’ll make a deal even if the differences between the old and new U.S./China trade relationship end up being cosmetic, simply in order to get past this in time for reelection.
That’s why he’s been uncharacteristically friendly-sounding to China throughout the process, up to and including something as small as this morning’s tweet. He just can’t afford to lash them like he does with most other rivals and enemies. They have too much leverage over his electoral fortunes by dint of the trade war, and the worse the economic forecasts look, the more leverage they have.