US factory output appears to be slowing amid rising commodity costs, mounting international headwinds, as well as wobbly consumer sentiment at home.
Kristian Rouz – The US manufacturing sector has lost some of its momentum at the beginning of this month, coinciding with a slowdown in the services sector, as insufficient growth in disposable household incomes and elevated borrowing costs weighed on consumer demand.
International trade woes played a role as well, but economists believe higher wages could solve part of the problem.
According to a new report from London-based information provider IHS Markit, US factory output slowed in June, despite the broader economy maintaining its modest pace of expansion.
Flash Purchasing Managers’ Index (PMI) for the US manufacturing sector declined to 50.1 points in early June, IHS Markit said – its lowest since September 2009. Readings above 50 indicate expansion, which may suggest the American industrial sector could be balancing on the edge of contraction.
Overall, Markit’s flash Composite Output Index for the US economy dropped to 50.6 points this month from 50.9 in May, hitting a 40-month low.
“It is likely that the news on trade policy has weighed on business sentiment and activity”, Daniel Silver of JPMorgan said.
Additionally, the US services sector has slowed as well, with the PMI having dropped to 50.7 – its lowest since February 2016.
However, a separate report from the US Federal Reserve found the US manufacturing sector posted its first monthly growth in May, expanding 0.2 per cent amid an increase in the production of auto parts and motor vehicles.
The Fed said the output of aerospace and metal producers dropped last month but pointed to a likely ongoing expansion across US industries. However, officials also said an ongoing slowdown in the global economy could weigh on US industrial output, which also contracted in January, February, and April of this year.
In light of these reports, Fed officials appear to be worried a late-cycle expansion in US economy could be in jeopardy, and latest statements from the central bank are seen as pointing to possible cuts in interest rates. Such a move would lower the cost of credit and spur consumer activity.
However, some economists say the effects of a monetary stimulus to the economy could be short-lived, as structural woes keep weighing on America’s long-term growth prospects.
The US economy has grown for almost 10 years now, but the GDP growth rate has been mostly subdued, while unemployment has declined at a slow pace – accompanied by a massive build-up in household debt – which topped $13 trln in recent months.
Some experts say it might be getting increasingly harder for the US to sustain the expansionary cycle, and a recession could be just around the corner.
“Expansions don’t die of old age, but when you are cruising along at full employment, you have more vulnerability”, Prof. James Stock of Harvard University said.
Meanwhile, the Markit report also found roughly 67 per cent of US manufacturers have cited the rising costs of raw materials and imports tariffs as the main cause of their concern going forward.