ResearchDecember 6, 2019

Sure, US Manufacturing Is in a Recession, but So What?

Capital Group economist Franz, harking back to 2015-16's mini-recession, says industrials won’t bring down the rest of the economy.

Reported by Larry Light

The US right now is going through a mini-recession, confined to industrials, that likely won’t spread into a full-blown economic slump, according to Capital Group’s US economist.

“We’re in a mini-cycle that affects industrials, not housing and retail” and other parts of the consumer economy, said Jared Franz, in a news conference. “The good news is that we will get out of it and then there will be tailwinds” for the nation’s overall economic output.

Franz pointed to the previous mini-recession, in 2015 and 2016, which was centered on the oil industry, a sector that had been keelhauled by a big drop in crude prices. This slide was largely restricted to oil companies and their suppliers, although their woes did result in slightly lowered earnings broadly. GDP growth decelerated sharply in the last half of 2015, and that year the S&P 500’s robust advance plummeted to a mere 1.4% gain.

But Franz noted that the mid-decade experience, with its rebound, likely would be replicated this time around with manufacturing. The solid consumer end of the economy (70% of GDP, versus 11% for industrial) is also helping.

He said the Federal Reserve’s recent interest rate cuts were also helpful. That is a course that’s smoothed due to dropping inflation: to 1.6% from 1.9% a year ago, using the Fed’s favorite measure, the personal consumption expenditures price index.

Nonetheless, the 2015-16 dip had two powerful propellants to restore economic expansion that are unlikely to recur: The Chinese government stimulated its sliding economy with fiscal outlays, and Washington lowered taxes, and hiked federal spending. “We won’t get that China or federal stimulus” this time, he said.

US factory activity contracted for the fourth straight month in November, according to the Institute for Supply Management. In October, a Wall Street Journal poll of economists found that two-thirds thought the industrial sector had entered into a recession. Culprits they cited were subdued global growth, the US-China trade war, and domestic political turmoil.