Tags: manufacturing | growth | economy | slow

Manufacturing Joins Other Signs Growth Slowing Down

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Friday, 01 March 2019 03:21 PM Current | Bio | Archive

INDICATOR: February Manufacturing Activity and Consumer Sentiment

KEY DATA: ISM (Manufacturing): -2.4 points; Orders: -2.7 points; Employment: -3.2 points/ Sentiment: +2.6 points

IN A NUTSHELL: “Again, we see that a segment in the economy, this time manufacturing, continues to grow but at a more restrained pace.”

WHAT IT MEANS: Yesterday’s report on fourth quarter GDP growth made it clear that the economy is settling into a more normal, moderate growth pace. That downshift was confirmed today as the Institute for Supply Management reported its Manufacturing index declined in February to its lowest level since November 2016. That said, manufacturing has been booming for over two years, so a moderation should not be surprising. Indeed, the index level still points to solid activity and the details generally support that view. While new orders are expanding more modestly, that index is nowhere near the low hit in December. What seems to be occurring is that firms are retaining the high level of demand but not expanding on that level. Production, which has also eased, is still solid and the percentage of firms reporting a drop in output remains fairly low. And backlogs are building faster, even as inventories are growing. The one warning sign is that hiring is fading as a growing percentage of firms indicate they have lower payrolls. That seems to point to minimal job gains in the February employment report, which will be released next Friday.

The insanity in Washington took its toll on consumer confidence, but that is slowly starting to change. The University of Michigan’s Consumer Sentiment index rose in February, led by a sharp increase in expectations. However, the reading on current conditions declined and that is an additional warning that the economy could be slowing.

The government released some data on January income gains but still doesn’t have the numbers on spending. Here too we see a cautionary flag appearing. Income fell in January for the first time in over three years. That was largely due to the ups and downs of dividend payments, which had soared in December. But more importantly, while we don’t have the January consumption figures, there was a sharp drop in household spending in December. Given the government shutdown in January and the softening of vehicle sales, we are not going into this year with much spending momentum.

MARKETS AND FED POLICY IMPLICATIONS: Sometimes good enough is actually good enough. Politicians like to brag about robust growth, but economists like to see steady, decent growth so bubbles don’t form. We were never going to get ten years of 3% economic growth, not matter what some claimed. Growth nearer to trend is good enough and that is where we are. I will let the politicians fight over that, but you will not get a lot of disagreement from most economists on that point. The tax cuts, brutal winter weather, government shutdown and assorted other crazy events have led to significant volatility in the numbers. Even so, the state of the economy is becoming clear and it is what most of us thought it would be: Good not great. But the risks remain to the downside. Trade mistakes could crater growth. Rising wages could push up business costs and create disappointing earnings gains, hindering the equity markets. The inability to find highly productive workers could limit supply, forcing up prices. And the Mr. Powell could decide to rethink once again. So, my outlook is for trend growth this year, but I remain concerned about how we are going to get through 2020 without a significant slowdown.

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.

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Again, we see that a segment in the economy, this time manufacturing, continues to grow but at a more restrained pace.
manufacturing, growth, economy, slow
Friday, 01 March 2019 03:21 PM
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