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What the Heck Is Happening to US Manufacturing?
Wolf Richter www.wolfstreet.com www.amazon.com/author/wolfrichter
Despite President Obama’s emphatic assurances in the State of the Union Address that “our economy is growing and creating jobs at the fastest pace since 1999,” there have recently been some uncomfortable squiggles, so to speak.
The collapse in the prices of oil, natural gas, and natural-gas liquids has started to make its imprint on the largest hydrocarbon producer in the world, namely the US of A. Oilfield layoffs and project cancellations are raining down on the oil patch on a daily basis. Suppliers are hit too. Many energy stocks are in the process of evisceration. Energy junk bonds are in a rout.
But consumers love it – those who aren’t losing their jobs over it – because they spend less on fuel. Consumers are voters. So politicians love it because voters love it. Hence, it’s good for the economy. I get that.
These sorts of squiggles have been worming their way into national numbers. For example, Markit’s Services PMI for December dropped to 53.3, down for the sixth month in a row, after having peaked in June. This was “not just a one-month wobble,” the report said, as the economy “lost significant growth momentum at the close of the year.” But it remained above 50, the dividing line between expansion and contraction. It’s still an expansion, and “growth is merely slowing from an unusually powerful rate rather than stalling.”
The Manufacturing PMI for December fell to 53.9, down for the fourth month in a row, from the peak in August. Production volumes rose at the weakest pace in 11 months. Same song: Still a “solid expansion,” but at a slower pace. Turns out, “uncertainty towards the global economic outlook had contributed to slower production growth and softer new business gains during recent months.”
The ISM Purchasing Managers Index fell sharply in December, down for the second months in a row, but still in expansion mode. Other indicators piled on as well: on a national basis, the economy seems to be humming along and expanding, but at a slowing pace.
Then comes along the Southeast manufacturing PMI, by the Kennesaw State University Econometric Center, that the Atlanta Fed uses. It covers Alabama, Georgia, Florida, Louisiana, Mississippi, and Tennessee. And in December, it plunged 12.7 points to 45.6.
Below 50. Not “slowing growth,” but an outright contraction. Decembers can be crummy in the Southeast, and these kinds of indices can be volatile, but this was the worst month since December of crisis-year 2009.
And it was crummy across all sub-indices:
- New orders plunged a breath-taking 27 points to 34, blowing with some panache through the magic 50-point mark. Orders essentially evaporated; a harbinger for what might happen next.
- Production dove 19.8 points to 40, a steep contraction.
- Employment dropped 10.6 points to 54, remaining in expansionary mode.
- Supply deliveries fell 7.3 points to 50, the flat line.
- Finished inventory edged up 1.2 points, also to 50.
- Commodity prices dropped 10.4 points to 42, in contraction.
Oil and gas weren’t the only commodities that were down. In December, the Commodity Research Bureau’s all commodities price index fell to 446, the lowest level since 2010 (chart), and down 22.6% from the index’s peak in April 2011. So there are some demand issues lurking somewhere.
But ironically, the Atlanta Fed emphasized that, despite the worst contraction since 2009 in the manufacturing index, “optimism rose in December.” Concerning their expectations for production over the next three to six months, 66% of survey participants “expected production to be higher going forward.”
These “survey participants” are company executives. They’re paid to be optimistic. They have to forecast growth. No executive wants to manage a decline. This bias has infected all these kinds of surveys of executives.
The Empire State Manufacturing Index, for example, always shows a much higher value for expected activity in the future than current activity. In December, the index for current activity (blue line in the chart below) was 9.9, where zero is the dividing line between expansion and contraction. In November, it had been below zero – in contraction mode – for the first time since polar-vortex January 2013. So these aren’t exactly heady times.
But the expectation index was almost 50! The highest since January 2012. Current activity, a measure of reality, has never ever made it anywhere near that level. These folks expect an expansion of a blistering pace, even as reality is bumping along the bottom of an expansion. Note how expectations (black line) dipped into the negative only twice since the survey began in 2001, and only for the briefest moment, and only barely: on 9/11 and during the Financial Crisis. These folks are truly blind optimists, bordering on delusional, at least when it comes to these types of surveys!
Even the New York Fed, which publishes the index, noted: “As has been the case for much of the past year, indexes for the six-month outlook pointed to widespread optimism about future conditions” – conditions that somehow never get anywhere near reality. And the Atlanta Fed’s optimistic group, which is expecting production “to be higher going forward,” is likely to fall into the same category.
So the Atlanta Fed scratched its head about the plunge in manufacturing activity in the Southeast and came up with two very plausible reasons, neither of which is going away anytime soon: “Maybe the strong dollar is reducing manufacturing exports, or maybe the fall in oil prices is affecting production activity.”
Or maybe both, in addition to a slew of other factors. Because these aren’t exactly rosy times.
And now, years of wondrous Wall-Street engineering in the oil and gas sector dissolve into messy reality. Read… Money Dries Up for Oil & Gas, Layoffs Spread, Write-Offs Start
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You ever try to do business in China? A pain in the ass. Costs are rising. No longer a great deal.
You don't have to physically do business in China to do business in China. There are plenty of US based firms who do the heavy lifting - dealing with the factories, shipping, customs and currency. Just pay them. They guarantee everything. True it costs more to broker it but you pay to alleviate those worries and complications. But in many areas it is still a lot less money than dometsic even if you broker it all. Much of what we think of as "US Manufacturing" isn't really manufacturing so much as just processing and/or assembly of components made elsewhere. Manufacturing an intermediate or finished product from a mineral or vegetable is high cost, heavy infrastructure and often low margin business. It is done less and less in the west. There is more profit in sewing garments than making cloth, in selling cars than making tires and engines, in blowing plastic than making resins, in stamping dies than forging metals and so on. And its less involved, less capital intensive, smaller footprint, less labor intensive etc. So get the intermediate products from the east and add value to them (often merely in the form of marketing) in the west. Sometimes its not even practical to get domestic items. In many cases the cost of shipping a container from central USA to one of the coasts is greater than shipping a container across the ocean. Maybe less so now with oil prices down but it can be. And there are other factors such as lead time, tooling expenses etc. A lot to consider.
And who is going to buy all your shit when nobody has a job because they are all in China!!!!!!!!!!!!!!!!!!!!!
Goobermint workers, that's who. They are the ones getting all the money. Police( out the fucking wazoo, by the way), fireman, teachers, buerocrats - fed, state, local., anyone who works for a government contractor,( and here in Maryland, it's like we are 80% government).
If government checks stopped in Maryland, the whole state would fucking evaporate. Let's face facts, government paycheck money is either taxed or borrowed. Either way, the creators in the real world get fucked. I love to hear a goober mint worker claim they pay taxes. Ha! I guess they also provide value.
Anyone who drives on Rt50/301, Md's Eastern shore, knows what I mean about cops. It's a pig feeding frenzy. You would think we are crime central. It's ALL motor vehicle tickets. ( government extortion) there are 5-6 agencies competing. It's unbelievable.
Here in NYC burbs you have cops with high speed pursuit Hemi Chargers (in a village that's a couple square miles with NO roads to go above 40) equipped wioth all the latest toys. More than half the retirees are on disability pensions (from WHAT?!?!). The last shooting was BY a drunk NYC cop letting loose at a random car. BUT even though the cops get whatever they want, the roads are a disaster with tire blowing potholes everywhere and an old abandoned overpass dropping concrete chunks on the road below... and meanwhile property taxes are some of the highest in the area.
Totally screwed up priorities.
Sounds sorta like medieval times with knights in expensive armor riding around in the squalor.
Excellent; the metaphore is perfect; because the cause is the same. All power and wealth controlled by a tiny elite; basically invisible to the serf in the village. Yes, indeed; welcome to the new dark ages.
Don't forget, those same burdensome regulations, taxes and fees can be applied to nearly all american industries.
Just try to build something that "impacts" a wetland, or an "endangered species habitat" etc...
It's going to cost you at least three years to permit, and about 3 times the actual construction cost after you've paid your pound of flesh to the Federal, state and local agencies.
If Barrack Hussein and company truly cared about getting the economy going, they could do away with 90% of the regulations and permits.
Dude; Barrack is an employee of the people who did this to you; just like Clinton was; and if you actually elect Hillary, I'm outa here for Uruguay.
That is the smartest comment I have read today !!!!!!!!!! Actually in a long long time.....Uruguay? You can't do any better than Uruguay?
I am optimistic about the future. All the manufacturing jobs that have been outsourced to Asia already are gone. There is nothing left to outsource.
I predict a major economic collapse worldwide within the next 3 years. Followed by a one world currency which countries cannot manipulate.
In the USA there will be a tax reform deal to restore confidence in the markets. There will be a political compromise where the corporate tax rate will be lowered, and a new VAT tax will be installed. The VAT will act like an import tariff.
Then after all that happens corporations will start to hire again. Old abandoned factories will be refurbished and used for manufacturing.
Globalization and free trade will be dead.. Replaced by everything being made locally.
Optimistic ? You're nuts. you don't get it;' this isn't an accident, or history evolving; this is a conspiracy. you aren't going to manufacture anything.
We are still in the beginning stages of outsourcing the most valuable commodity - people.
With all the unemployed, they'll be shipped overseas to fight in other nation's wars. We're just cannon fodder. It will also get rid of the expense of their retirement (SS) and medical costs (if we die). Saves the Government a whole bunch of money. Hell, they'll make money off of it.
I don't think Globalization will ever be dead. There will always be trade. The partners will change from time to time, but it never dies.
A friend of mine was doing contract manufacturing in California. Over two hundred employees. Twenty people in HR managing rules, regulations, higing and firing. A dozen languages spoken requiring translators: Spanish, mixtec, Portuguese, Mandarin, Cantonese, Tagalog, Samoan, etc. After a murder in the parking lot, fires, union troubles, and all manner of bureaucratic hassles he quit and moved the manufacturing to China. Only one language is spoken at his factory there and everyone shows up to work on time.
Lester, sounds nice.
I'm still waiting on the major economic collapse that is about 5 years late.
Don't worry. It will be better when we raise the minimum wage and give two free years of junior college.
What, are you against free day care for the 20 somethings. At least they can get out of mom's basement for a little while.
Exactly. "Kick back and enjoy the ride. Stop being a PARTY POOPER!"
Pessimism is for sissies
Ladies & Gentlemen I give you Sec. of the Treasury Andrew Mellon's prescription for ending the Great Depression:
"liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate... it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people..."
Liquidate mal-investments such as shale oil.
When did the bankers get liquidated?
Hoover largely ignored Sec. Mellon.