Manufacturing Crashes to Crisis-Level Lows

Manufacturing in the United States has turned significantly weaker, hitting its lowest point since 2009.  In May, manufacturing activity fell because of weak new order growth and poor inventories.

Manufacturing in the United States has turned significantly weaker, hitting its lowest point since 2009.  In May, manufacturing activity fell because of weak new order growth and poor inventories.

According to a new study by Markit Economics, the manufacturing purchasing managers index (PMI) fell to 50.7, a downtick from last month’s reading and the lowest level since September 2009. At that time, America was in the throes of the worse part of the subprime mortgage crisis, which caused a ripple effect impacting consumer spending, jobs, stocks, and virtually every facet of the economy.

The weakness is a result of poor new orders, according to Markit. “Anecdotal evidence suggested that softer new order growth and efforts to rein in inventory accumulation had exerted negative influences on production schedules,” the group said. Markit also noted that manufacturers see “weak capital investment across the energy sector, uncertainty related to the presidential election and generally subdued economic conditions” as well as poor export sales, which may be the result of a rebounding U.S. dollar.

“The survey data indicate that factory output fell in May at its fastest rate since 2009, suggesting that manufacturing is acting as a severe drag on the economy in the 2nd quarter,” said Markit Chief Economist Chris Williamson.

Recently, several economists have upgraded their expectations for economic growth thanks to a few hopeful indicators showing that Americans are spending more and home prices are rebounding. Williamson said, however, that rebound might be hindered by the manufacturing sector. “For those looking for a rebound in the economy after the lackluster start to the year, the deteriorating trend in manufacturing is not going to provide any comfort,” he said.

Poor Construction Data

On top of the poor performance in manufacturing, a separate study on construction spending showed a monthly decline despite expectations of an increase after a soft March.

In April, construction spending fell 1.8% to $1.13 billion, with private construction leading the declines with just $843.2 billion spent. According to the study by the Census Bureau, spending was still up 4.5% on a year-over-year basis, with communication and highway spending falling over 6% each contributing to the declines.

Analysts had been hoping for a rebound in construction spending, especially in residential spending, thanks to renewed demand for new homes and a rebound in new homebuilders’ revenue and sales growth. Residential spending, however, fell 1.5% on a month-over-month basis despite seasonal trends that usually point to an uptick in the spring months.

Despite the weakness in manufacturing and construction, the Federal Reserve continues to sound a positive note about the economy. In the Federal Reserve’s Beige Book, which marks changes in the economy, the Fed noted that the labor market has tightened significantly, with several regions in the country reporting that employers are having difficulties finding qualified workers.

Wage growth has remained anemic while inflation has remained far below the 2% target that the Federal Reserve laid out, as measured by the Personal Consumption Expenditure (PCE) metric. Weak data is not expected to deter the Federal Reserve, who has strongly hinted that they will increase borrowing costs at the meeting of the Federal Open Market Committee later this month.