U.S. Economy Shows Signs of Shrinking

A little over a month after the Federal Reserve confidently proclaimed the economic strength of the U.S., several indicators are showing signs of a shrinking economy.  Manufacturing activity continues to decline, marking the fourth month that U.S. manufacturing has weakened. According to the Institute for Supply Management, manufacturing activity fell from the previous month and is shrinking. The Institute for Supply Management’s (ISM’s) Manufacturing PMI fell to 48.2%, with employment and inventories contracting.

A little over a month after the Federal Reserve confidently proclaimed the economic strength of the U.S., several indicators are showing signs of a shrinking economy.  Manufacturing activity continues to decline, marking the fourth month that U.S. manufacturing has weakened. According to the Institute for Supply Management, manufacturing activity fell from the previous month and is shrinking. The Institute for Supply Management’s (ISM’s) Manufacturing PMI fell to 48.2%, with employment and inventories contracting.

The only positive readings in the PMI were production, slightly above contraction, customers’ inventories, imports, and new orders, which rose sharply from contractions to a growth reading of 51.5.

Construction Spending Disappoints

While manufacturing is weakening, construction spending is also weak, with private construction falling from the prior month.

In total, there was a 0.1% month-over-month growth in construction in December, according to the Census Bureau. Analysts expected 0.6% month-over-month growth with much stronger investment in nonresidential private construction than the decline observed.

The study shows construction spending rose to $1.117 trillion, up from 1.116 trillion the previous month. Private construction, however, fell 0.6% to $824 billion, with a 0.4% contraction in nonresidential construction offsetting a small growth in residential building.  At the same time, public construction rose 1.9% as government spending offset the weakness elsewhere in the construction industry.

Economists’ expectations of an improving economy fueling demand for construction have failed to materialize, with most industries posting a weakness in construction as fewer companies invest in expanding operations.

Deflationary Trends

Some analysts believe the combination of falling manufacturing and falling private construction indicate a fall in investment activity that indicates business expectations of negative growth in the economy.

In one note to clients, an investment bank warned that many medium-sized businesses “in the field” are witnessing consumers pull back and are in turn, making less advance orders on the expectation of weak demand in the future.  This trend, if real, could be the result of a spiraling deflationary trap, as prices on many goods have begun to fall.

Several commodities have fallen in price with no commodities in short supply, according to the ISM’s study. While natural gas and steel were reportedly up in price, the ISM also saw many other commodities falling in price, including oil, gasoline, and aluminum, while some respondents also saw steel fall in price at the same time as some found it rising in price.

Additionally, while the PMI is contracting, employment, inventories, order backlogs, and exports are also contracting, indicating weakening activity and demand that could also point to a deflationary trend. Prices, at 33.5, were the weakest indicator in the ISM study, indicating a sharp decline. Prices have been falling for 15 months in a row.