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Manufacturing Slowdown: What Does It Mean for the Economy?

The slump in U.S. manufacturing is being driven by a variety of factors, including a weakening global economy, the strong dollar, and escalating tariffs on U.S. and imported goods.

In September 2019, the Institute for Supply Management (ISM) Purchasing Managers Index (PMI), which measures a wide variety of manufacturing data, fell to 47.8%, the lowest level since June 2009.1

A reading below 50% generally means that manufacturing activity is contracting. The August reading of 49.1% had signaled the beginning of a contraction, and the drop in September suggested that the contraction was not only continuing but accelerating. The index rose slightly to 48.3% in October, but this indicated the third consecutive month of contraction.2 Nearly two-thirds of economists in a Wall Street Journal poll conducted in early October said the manufacturing sector was already in recession, defined as two or more quarters of negative growth.3

Leading indicator

The PMI — which tracks changes in production, new orders, employment, supplier deliveries, and inventories — is considered a leading economic indicator that may predict the future direction of the broader economy. Manufacturing contractions have often preceded economic recessions, but the structure of the U.S. economy has changed in recent decades, with services carrying much greater weight than manufacturing. The last time the manufacturing sector contracted, during the “industrial recession” in 2015 and 2016, the services sector helped to maintain continued growth in the broader economy.4

That may occur this time as well, but there are mixed signals from the services sector. In September, the ISM Non-Manufacturing Index (NMI) dropped suddenly to its lowest point in three years: 52.6%. The index bounced back in October to 54.7%, marking the 117th consecutive month of service sector expansion. Even so, these recent readings were well below the 12-month high of 60.4% in November 2018.5

Global weakness and trade tensions

The slump in U.S. manufacturing is being driven by a variety of factors, including a weakening global economy, the strong dollar, and escalating tariffs on U.S. and imported goods.

In October 2019, the International Monetary Fund (IMF) downgraded its forecast for 2019 global growth to 3.0%, the lowest level since 2008-09. The IMF pointed to trade tensions and a slowdown in global manufacturing as two of the primary reasons for the weakening outlook.6 Put simply, a weaker world economy shrinks the global market for U.S. manufacturers.

The strong dollar, which makes U.S. goods more expensive overseas, reflects the strength of the U.S. financial system in relation to the rest of the world and is unlikely to change in the near future.7 Tariffs, however, are a more volatile and immediate issue.

Originally intended to protect U.S. manufacturers, tariffs have been effective for some industries. But the overall impact so far has been negative due to rising costs for raw materials and retaliatory tariffs on U.S. exports. For example, tariffs on foreign steel, which were first levied in March 2018, enabled U.S. steel manufacturers to set higher prices. But higher prices increased costs for other U.S. manufacturers that use steel in their products.8 Retaliatory tariffs by Canada and Mexico contributed to a $650 million drop in U.S. steel exports in 2018 and a $1 billion increase in the steel trade deficit.9 (In May 2019, the United States removed steel tariffs on Canada and Mexico, which dropped retaliatory tariffs in return.)10

U.S. manufacturers in every industry may pay higher prices for imported materials used to produce their products. An average of 22% of “intermediate inputs” (raw materials, semi-finished products, etc., used in the manufacturing process) come from abroad.11 Tariffs paid by U.S. manufacturers on these inputs must be absorbed — cutting into profits — and/or passed on to the consumer, which may reduce consumer demand.

The uncertainty factor

Along with specific effects of the tariffs, manufacturers and other global businesses have been hamstrung by trade policy uncertainty, which makes it difficult to adapt to changing conditions and commit to investment. A recent Federal Reserve study estimated that trade policy uncertainty will lead to a cumulative 1% reduction in global economic output through 2020.12

On October 11, 2019, President Trump announced that he would delay further tariff hikes on China — including an increased tariff on intermediate goods scheduled for October 15 — while the two sides attempt to negotiate a limited deal. Although a deal would be welcomed by most interested parties, past potential deals have collapsed, and it’s uncertain how any agreement might affect the $400 billion in tariffs on Chinese goods already in place, or the tariffs on goods from other countries.13

Will the slowdown spread?

Manufacturing accounts for only 11% of U.S. gross domestic product (GDP) and 8.5% of non-farm employment, a big change from 50 years ago when it accounted for about 25% of both categories.14-15 However, the manufacturing sector’s economic influence extends beyond the production of goods to the transportation, warehousing, and retail networks that move products from the factory to U.S. consumers. The final output of U.S.-made goods accounts for about 30% of GDP.16

Even so, a continued slowdown in manufacturing is unlikely to throw the U.S. economy into recession as long as unemployment remains low and consumer spending remains high. The key to both of these may depend on the continued strength of the services sector, which employs the vast majority of U.S. workers. It remains to be seen whether the service economy will stay strong in the face of the global headwinds that are holding back manufacturing.

1-2, 5) Institute for Supply Management, 2019
3) The Wall Street Journal, October 10, 2019
4) The New York Times, July 28, 2019
6) International Monetary Fund, 2019
7) National Review, August 22, 2019
8) Bloomberg, March 24, 2019
9) The Wall Street Journal, March 18, 2019
10) Bloomberg, May 17, 2019
11) Federal Reserve Bank of St. Louis, 2018
12) Federal Reserve, 2019
13) USA Today, October 11, 2019
14) U.S. Bureau of Economic Analysis, 2019
15-16) The Wall Street Journal, October 1, 2019

 

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2019

IMPORTANT DISCLOSURES Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Ballast Advisors, LLC is a registered investment advisor under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about the firm, including its services, strategies, and fees can be found in our ADV Part 2, which is available without charge upon request. The opinions expressed herein are those of Ballast Advisors, LLC and are subject to change without notice.

3 Tips for Personal Finances During the Holiday Season

Ballast Financial Professionals share tips for your personal finances this holiday season.

(originally published November 2018)

Between holiday gifts, parties and meals — this time of year is one of inevitably higher spending.

No matter what your regular habits are around your personal financial planning, it’s a good practice this time of year to give your household budget a once-over and pay extra attention to your spending.

Even if your gifting budget is unlimited, there are a few reasons an extra eye on your expenditures is recommended.

Professionals from Ballast Advisors share three best practices for personal finances this holiday season.

Tip #1: Plan Ahead

Santa shouldn’t be the only one making lists and checking them twice.

“Plan ahead and stick to your budget,” recommends wealth advisor Scott Peterson of Ballast Advisors, who has twenty-seven years of experience in the financial services industry. 

Consider planning for the not so obvious — smaller expenses like hostess gifts and extra groceries for out of town company can add up quickly, so factor them in advance.

There are even some apps that can help you plan your giving. Santa’s Bag is an easy-to-use Christmas themed shopping app that helps you budget and track your gift giving by recipient.

Ultimately, you can’t calculate where you’re going financially unless you know where you stand now, so cash flow and budget analysis is key.

Christmas shopping list

Tip #2: Shop Early

Even if you’re not a die-hard Black Friday shopper, don’t wait until Christmas Eve to do your shopping, or you will likely spend more.

“Start shopping early,” says Paul Parnell, Founding Partner of Ballast Advisors.  Paul has over twenty-three years of experience in guiding clients and helping them prepare for a sound financial future.

“From personal experience, last minute shopping is much more expensive,” adds Parnell.

Again if you couple this second tip with planning ahead, you’re on track to wiser spending.

Tip #3: Evaluate Regularly

As the saying goes, “the road to Hell is paved with good intentions” —and the same logic applies to your holiday shopping.

Even if you start off with a budget, a plan, shop early — if you don’t actually stick to it, it’s not worth much.

“Don’t wait until after the Holidays to evaluate what you spent,” says CFP®  certified financial professional Richard Juckel, who is responsible for overseeing the advice and wealth management operations and serves on the Investment Committee at Ballast Advisors.

Not only is it important to make a budget, but it’s equally important to track it closely. Hang on to your receipts, spend that extra time entering your spend against your budget.

Unfortunately, this time of year is also a time where theft is on the rise. Keep track of your transactions to be sure there isn’t any unauthorized spending.

These simple steps put into action will help you keep on track this season.

For more information on how Ballast Advisors helps Twin Cities professionals discover their financial needs and goals

 

 

For more information on how Ballast Advisors helps professionals discover their financial needs and goals, contact Ballast Advisors for a complimentary consultation at a location near you:

Ballast Advisors – Woodbury

683 Bielenberg Dr., Suite 208
Woodbury, MN  55125-1705
Tel: 651.478.4644

 Ballast Advisors – St. Paul

3820 Cleveland Ave. N, Ste. 500

St. Paul, MN  55112-3298
Tel: 651.200.3100

Ballast Advisors – Punta Gorda
223 Taylor Street, Suite 1214
Punta Gorda, FL  33950-3901
Tel: 941.621.4015

 Ballast Advisors, LLC is a registered investment advisor under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about the firm, including its services, strategies, and fees can be found in our ADV Part 2, which is available without charge upon request. The opinions expressed herein are those of Ballast Advisors, LLC and are subject to change without notice.