Bank of the West US Outlook Report for January 29, 2016

US Outlook Report: Another Leg Down for Manufacturing

It was another week of disappointing readings on the state of U.S. manufacturing. From regional manufacturing surveys to durable goods orders, the near-term outlook for U.S. manufacturing remains moribund.  A combination of a strong U.S. dollar and fading demand abroad is having a chilling effect on a broader cross-section of manufacturers. So what does this mean for the entire U.S. economy and the outlook for economic growth?

U.S. manufacturers employ 12.3 million people or 8.6 percent of total employment in the United States. Manufacturers’ share of the nation’s GDP is only 12.1 percent. Despite its relatively modest stature on the employment and share of GDP metrics, manufacturing still fights above its weight class and could have an outsized impact on the U.S. economic outlook. Every U.S. recession since the 1970s has either been proceeded by or happened currently with a recession in manufacturing. Any prolonged slowdown or outright recession in this sector will likely have a direct and significant impact on the national output.

The latest Empire State Manufacturing Survey data, covering the New York region, came at -19.4 in January, far lower than consensus expectations of -4.0, and the lowest reading on this indicator since April 2009.  New orders and employment subcomponents were all reported with negative signs, indicating contraction.

The Dallas Fed manufacturing survey for January came in at a disastrous -34.6, a worse reading than the Dallas region reported during the early quarters of the Great Recession.

The U.S. manufacturing industry ended 2015 with a thud. Durable goods orders sank 5.1 percent in December despite analysts’ expectations of a gentler 0.7 percent decline.

New orders to shipments ratio is also suffering, reaching 0.96, the lowest reading since August 2009. A reading below 1 indicates that new orders are less than shipments, signaling weak production in the near future.

Following strong job growth of +215,000 jobs in 2014, the manufacturing sector added only 30,000 jobs in 2015, a subdued annual growth of 0.2 percent versus healthy 1.9 percent growth in total payrolls.

One of the fastest growing states in the nation, Texas, lost 41,900 jobs in manufacturing (-4.7%) and 33,600 in mining sectors (-10.5%) in 2015. Low oil prices are decimating the oil and gas industry of Texas and those businesses that depend on it. But the rising US dollar has also made local producers less competitive in foreign markets, making U.S.-made goods less affordable abroad.

So far the U.S. consumer is still holding up well, supporting nearly 70 percent of the nation’s GDP. New jobless claims remain relatively low, signaling health and momentum in the labor market, but if recent trends in manufacturing don’t start turning the corner soon, it is doubtful that the momentum in these other areas will be sustained.


To find out more, check out this week’s US Outlook Report.

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