The Dallas Fed's manufacturing survey paints a bleak picture of the post-coronavirus U.S. economy - and sends a strong signal that the worst is yet to come.
On Monday, the Federal Reserve Bank of Dallas released its monthly Manufacturing Index. The gauge of factory activity crashed much faster than expected and carved out an even lower bottom than the one we saw during the 2008-09 Great Recession.
The sharp and sudden plunge was largely due to the coronavirus pandemic as local factories shuttered their doors and sent workers home. The report was so shocking that it’s hard to dispel the near certainty of a deep recession beginning this year.
Texas may have been the first casualty as far as data releases go, but it won’t be the last as coronavirus establishes a strong foothold in America.
The Dallas Fed’s general business activity index of manufacturing plunged to -70 in March from a reading of 1.2 in February. That’s the lowest level on record and much worse than the projected reading of 6.2.
Factory output all but disappeared in March, as the production index crashed to -35.3 from 16.4 in June. New orders fell to their lowest levels since March 2009. Capacity utilization and shipments also collapsed to levels last seen in early 2009.
On the Dallas Fed’s scale, zero is the cut-off point between expansion and contraction.
The report is based on data collected between Mar. 17-25, making it one of the first to fully quantify the impact of coronavirus on the economy.
It took less than a month for coronavirus to wreak havoc on Texas’ manufacturing industry. The following chart provides a quick summary of just how quickly things turned:
A closer look at the numbers reveals that regional factory activity was on the way down long before coronavirus was in the picture. That’s because the U.S. is a post-production economy where factories contribute less and less to national GDP.
This collapse is also reflected in the share of total employment devoted to manufacturing. In the 1950s, a majority of U.S. workers were employed in manufacturing. That figure fell all the way to 9% in 2004 before recovering slightly post-recession.
As manufacturing jobs disappeared, low-end services occupations took the reigns. Along the way, real wages stagnated or declined as the menace of inflation squeezed middle-class America.
Coronavirus appears to be hastening this process. As the economic fallout of the novel disease unfolds, it could take producers months or even years to fully recover.
Although mainstream economists are predicting a depression-era economic collapse in the second quarter, they’re also banking on a swift recovery once the virus passes.
There’s good reason to believe that the post-crisis recovery won’t be so swift and that American life could change forever. That’s the view of Larry Dignan, editor-in-chief of technology publication ZDNet.
Some of the long-term effects of coronavirus are tied to social distancing – something Mark Zandi of Moody’s has called “economic distancing.”
Coronavirus is affecting traffic, the movement of people and goods and the very nature of work.
Dignan says the aftermath of coronavirus could see a semi-permanent shift to remote work, a decline in commercial real estate and a major overhaul of supply chains. Travel expenses will likely fall and so could home values.
Long-term, the biggest threat facing the U.S. (and global) economy is an astronomical debt bubble that’s growing out of control. This debt bubble, aided by ultra-loose Federal Reserve policy, could stretch financial institutions to their limits as businesses search for low-interest-rate liquidity during the crisis.
Coronavirus is already causing a liquidity crunch among major banks. In response, financial institutions have asked their clients to take out new loans instead of relying on revolving credit lines with low interest rates.
Sectors tied to retail, tourism, aviation and other discretionary spending have the most to lose from a protracted downturn. Airlines are already begging for a bailout as global flights are halted. In the United States alone, at least $65 billion could be at stake in the second quarter if life doesn’t return to normal.
Against this backdrop, it could take up to three years before the U.S. economy fully recovers from the impact of the virus, according to consulting firm McKinsey & Company. Even with a full recovery, the economic impact on the United States could exceed anything since the end of the Second World War.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.
Last modified: September 23, 2020 1:47 PM