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Nasty Manufacturing Downturn Signals Possibility of U.S. Recession Within 2 Years

Last Updated September 23, 2020 1:19 PM
Sam Bourgi
Last Updated September 23, 2020 1:19 PM
  • ISM manufacturing PMI contracts in November for the fourth straight month.
  • Investor Charlie Bilello says four straight sub-50 readings for manufacturing PMI elevates recession risks.
  • ISM data forecasts U.S. GDP growth at 1.5%.

The U.S. manufacturing sector contracted in November for the fourth consecutive month, extending one of the longest skids for goods producers since the financial crisis.

A closer look at the numbers suggest the U.S. economy, which includes the much larger services sector, could be headed for a recession over the next two years.

Manufacturing Slowdown Broadens

The Institute for Supply Management’s gauge of U.S. manufacturers  held below 50 in November, indicating contraction for the goods producing industries. ISM’s manufacturing purchasing managers’ index (PMI) fell to 48.1 from 48.3 in October, confounding expectations of a slight increase.

The monthly report is based on a survey of more than 300 purchasing managers and supply executives from various industries.

It was the fourth consecutive month manufacturing PMI contracted. Demand, consumption and inputs were all lower for the month.

Timothy Fiore, the chair of ISM’s manufacturing survey, said:

Global trade remains the most significant cross-industry issue. Among the six big industry sectors, Food, Beverage & Tobacco Products remains the strongest, while Fabricated Metal Products is the weakest. Overall, sentiment this month is neutral regarding near-term growth.

The United States isn’t the only region where manufacturing is languishing. Large-scale producers in China are still struggling in the face of a multi-year trade war. Manufacturing remains in a severe downturn across much of Europe, as evidenced by the latest PMI reports from IHS Markit.

Recession Risks for the U.S. Economy

The PMI data gave no indication that the U.S. economy is heading for recession, but it did see GDP growth falling to around 1.5% annually. That’s down from 2.1% in the third quarter.

A closer look at PMI data over the years reveals that the manufacturing slowdown is bleeding into other sectors of the economy, making recession likely at some point in the not-too-distant future.

Widely-followed investor and writer Charlie Bilello tweeted Monday  that ISM manufacturing could be “signaling an upcoming recession.” His research revealed that when manufacturing PMI falls below 50 for four straight months, recession usually follows within two years. This happened at least 11 times since 1948.

Us manufacturing recession
Odds of recession seem to increase when U.S. manufacturing PMI contracts for an extended period. | Source: Twitter 

Four straight below 50 readings don’t always lead to recession, as we saw in 1967, 1985, 1995-6, 1998, 2003 and 2015-16.

There are a few caveats to this potential recession signal. For starters, U.S. manufacturing accounts for a much smaller percentage of GDP today as it did between 1940 and 1980. Manufacturing has been in a five-decade downturn due to globalization. The net effect has been the rise of service employment and subsequent suppression of wages (at least relative to inflation).