The markets were mostly upbeat last week after the Federal Reserve hiked interest rates for the first time in almost a decade by a razor thin 0.25%. Federal Chair Janet Yellen wasn’t quite ready to shout “Mission Accomplished” aboard an aircraft carrier, but her words did tell Wall Street the U.S. economy was strong enough to support a rate hike. But a raft of economic data shows she may have been a little premature. In fact, three key manufacturing indexes (U.S. Manufacturing Purchasing Managers’ Index, Empire State Index, and Philly Manufacturing Index) suggest the U.S. economy could easily slip back into a recession in 2016.
U.S. Manufacturing Purchasing Managers’ Index Stalls
The Federal Reserve brings good cheer and the underlying data takes it away. The Federal Reserve hiked interest rates for the first time in nearly a decade, citing a stronger U.S. economy.
Except the economic data aren’t quite lining up the way they should if that’s the case. If you think manufacturing is important, that is. The U.S. Manufacturing PMI fell to 51.3 in December, down from 52.8 in November and at its lowest level in three years. Caviar-popping economists had estimated the index would come in at 52.6. (Source: “US Markit flash manufacturing PMI slips to three-year low in December,” EconoTimes, December 16, 2015.)
New order growth was the weakest since September 2009 and output growth was the weakest in over two years. A reading below 50 suggests contraction in the manufacturing sector. While the index is above the 50 threshold, it’s only by a sliver in the grand scheme of things. And by that, I mean the trillions the Federal Reserve has showered upon us in the form of quantitative easing to kick-start the economy.
Empire State Manufacturing Index Falls for 5th Consecutive Month
The bad economic news continued to roll in with the Empire State Manufacturing Index. The index is a monthly survey of manufacturers in New York State, one of the country’s leading manufacturing states, conducted by the Federal Reserve Bank of New York. (Source: Federal Reserve Bank of New York, “Empire State Manufacturing Survey,” December 2015.)
The Empire State manufacturing index stayed negative for the fifth straight month, coming in at -4.6 in December. It’s one of those best/worst-case scenarios. Analysts had forecast a reading of -7.0.
Source: New York Federal Reserve
New orders continued to fall and labor market conditions deteriorated. The index for the number of employees was negative for a fourth consecutive month and the average workweek index was at its lowest level since early 2009.
Apparently, there is growing optimism out there. But I’m not sure where. Roughly a quarter of respondents said conditions had improved over the last month, while 29% said they had gotten worse. That means around half thought things were pretty much the same. Miserable.
Yes, New York manufacturing is not the epicenter of the U.S. economy, but it is a litmus test for the broader economy. And this isn’t the best news for an improving economy that is supposedly strong enough to withstand a rate hike.
Philadelphia Manufacturing Index Turns Red for the Holidays
Not the best present ever. The Philly manufacturing index fell into negative territory in December, falling to -5.9. The forecasted reading was 2.1. A pretty significant miss. A measure of manufacturing activity in the Philadelphia area, the index turned red for the third of the last four months. (Source: Federal Reserve Bank of Philadelphia, “December 2015 Manufacturing Business Outlook Survey,” December 2015.)
Almost all of the survey’s future indicators showed increased weakness. The index for current orders remains negative, while firms report a fall in unfilled orders and manufactured goods prices decline.
What about 2016? Don’t hold your breath. The index for future activity plunged to 23.0 in December from 43.3 in November, the lowest reading in three years. The percentage of firms that are optimistic about the next six months tanked to 35% in December from a non-committal 50% in November.
Continued signs of trouble in the manufacturing sector do not bode well for an economy that has put the financial crisis in the past. And they’re further proof the Federal Reserve is a little out of touch.
Manufacturing has been hit by the strength of the U.S. dollar, slowing foreign demand, and of course…the collapse in oil prices. You could look at these factors and say that they are outside of the U.S. economy and not indicative of its strength.
But the fact is, if it affects U.S. manufacturing, it doesn’t matter where it’s coming from. And the effects will be felt everywhere. That doesn’t mean the U.S. economy is rock solid. It isn’t. Debt levels are still high; underemployment is, too.
Again, the Federal Reserve and President Obama might be telling you the country is strong and can withstand the rate hike, but the underlying economic data say otherwise.