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U.S. Manufacturing Data Shows Recession Is Almost Here

Last Updated September 23, 2020 1:04 PM
Harsh Chauhan
Last Updated September 23, 2020 1:04 PM

The calls for a recession in the U.S. are getting stronger by the day, and the latest manufacturing data for the month of September is more fodder for the doomsayers.

According to the latest Institute for Supply Management (ISM) PMI report, September manufacturing activity in the U.S. shrunk to its lowest level in over a decade.

The trade war with China is pushing the U.S. toward a recession

ISM’s U.S. manufacturing Purchasing Managers’ Index fell to 47.8% last month. CNBC reports  that this is the lowest level seen since June 2009, adding to the fear of a potential recession as the reading is way below the original expectation of 50.2%.

What’s more, this is the second consecutive month that the reading has dropped as the PMI came in at 49.1% in August. Any reading below the 50% level indicates a contraction in manufacturing activity, so it is not surprising to see why Twitter is going berserk and pointing out that the U.S. is being pushed deliberately toward a recession.

A gloomy picture

Timothy Fiore, the chair of the ISM manufacturing business survey committee, said that the readings point toward lower business confidence as the September contraction happened at a faster rate than August. Fiore and other respondents put the blame  on a global trade slowdown and the trade war with China.

According to Fiore:

Global trade remains the most significant issue, as demonstrated by the contraction in new export orders that began in July 2019. Overall, sentiment this month remains cautious regarding near-term growth.

But the fact that just three of the 18 manufacturing industries reported growth in September does not paint a pretty picture. And it might be long before sentiment turns from cautious to bearish based on the comments from the respondents, increasing the chances of a recession in the U.S.

The transportation equipment industry respondents, for instance, point out that orders are decreasing. The machinery industry respondents say that order backlogs are down thanks to an increase in dealer inventories. The food, beverage, and tobacco products industry group lay the blame squarely at China, saying:

Chinese tariffs going up are hurting our business. Most of the materials are not made in the U.S. and made only in China.

The ISM report also points out that the employment scenario in the manufacturing sector is not rosy. The ISM employment index dropped 1.1 percentage points in September to 46.3%. This is the lowest reading seen since January 2016, and the report points out that there is a sense of cautiousness as far as employment expansion is concerned.

So weak demand and unsold inventories could lead to a slowdown in job creation in the U.S. This could soon show up on the employment data by the Bureau of Labor Statistics as manufacturing activity in the U.S. has been contracting for the past several months. All of this seems like a recipe for a potential recession in the U.S.

PMI data
Manufacturing activity in the U.S. has been on the decline, strengthening the chances of a recession. | Source: Trading Economics

No relief in sight from the trade war

A resolution to the U.S.-China trade war could help avoid a recession, but that seems unlikely at present. Ian Bremmer, the president of political risk research and consulting firm Eurasia Group, believes that the trade war is getting worse. He told Bloomberg :

The two sides are digging in and it’s gotten considerably worse in the past weeks.

Chinese foreign minister Wang Yi has adopted a combative tone, slamming Donald Trump’s trade policies and issuing a warning that the world could be headed toward a recession. In fact, key recession alarms are already flashing, forcing notable economists to warn that bad times could be here within a year.

This is why the latest manufacturing data out of the U.S. is a big cause for concern as it strengthens the probability of an economy-wide contraction.