The Industrial Slowdown Continues Into September
Industrial activity in the United States continued on a downward path through the end of August with industrial production growth falling to a 31-month low.
US Industrial Production Growth:
Source: Bloomberg, EPB Macro Research
Leading indicators of industrial activity such as new orders or new commitments continue to decelerate which suggests the weakness in the manufacturing sector is likely to continue through year-end.
Looking at the three-panel graph below shows the growth rate of total manufacturing new orders less transportation, durable goods new orders less transportation, and nondefense capital goods new orders less aircraft.
All three data sets represent new orders and tend to lead broader industrial production by several months.
Industrial New Orders:
Source: Bloomberg, EPB Macro Research
The manufacturing sub-category of industrial production posted a growth rate of -0.40%, up 10bps from last month but the third negative reading in the last five months.
US Industrial Production Growth: Manufacturing
Source: Bloomberg, EPB Macro Research
A prolonged contraction in manufacturing activity raises the probability of job losses coming from this sector, dropping the rate of employment growth below the current 96-month low.
Our leading industrial index, which contains the three new orders data sets graphed above, in addition to industrial commodity prices and several other manufacturing indicators, has historically lead industrial production by an average of 6-8 months.
Leading Industrial Index:
Source: Bloomberg, EPB Macro Research
The ongoing slowdown in various measures of new orders, commodity prices and other manufacturing indicators raise the likelihood that US manufacturing production may experience several more months of contraction before signs of a cyclical upturn emerge.
The longer a slowdown persists, the greater the risks become to the employment market which increases the chances of a recession.
The other notable data point today was the Housing Market Index "HMI", a monthly survey of National Association of Home Builders members, designed to take the pulse of the single-family housing market.
The HMI increased to a reading of 68 in September, up from a revised 67 last month.
Housing Market Index:
Source: Bloomberg, EPB Macro Research
While sentiment has improved relative to the beginning of 2019, expectations for sales in the future have continued to soften relative to the peak of the cycle in February 2018.
Housing Market Index Future Sales:
Source: Bloomberg, EPB Macro Research
The industrial sector remains in the most persistent trend of deceleration relative to other areas of the global economy.
The market is wrestling with the concept of just how long the manufacturing malaise can persist without derailing the labor market and the pace of consumption.
Leading indicators of manufacturing and employment show little indication that a new cyclical upturn is imminent and that the economic cycle risks are still tilted lower.
