American manufacturing is in recession

Here’s a bad thing: American manufacturing is in a recession.

On Wednesday, we got the latest data on manufacturing activity in the Midwest from the Chicago PMI reading, which unexpectedly showed activity contracted in September. The Institute for Supply Management’s Milwaukee report on business also indicated a contraction in activity.

So, overall discouraging data.

But these were merely the latest in a series of indications that broadly, the US manufacturing sector stinks right now.

In a note to clients on Wednesday following the Chicago PMI report, analysts at TD Securities wrote that right now, all seven regional manufacturing PMIs have fallen in contractionary territory. The last two times this happened were 2009 and 2001. At both of these points, the entire US economy was mired in recession.

Now, however, the economy appears to be doing broadly well, with US consumers driving the economy towards what is shaping up to be its best year since 2006. Additionally, the unemployment rate has plunged to pre-recession levels and job gains are still averaging around 200,000 a month.

But simply put, the manufacturing sector in the US is in recession.

“The manufacturing sector has been like a sore thumb for the US economic recovery lately,” TD wrote on Wednesday.

“Since last year, this crucial sector has struggled to navigate against the headwinds coming from the collapse in global energy prices, the drag from the strengthening dollar on export activity and the weakening in global demand.”

On Wednesday, we looked at how the pressures weighing on exports — which, of course, are a major part of business for manufacturers — were a boon for US consumers. The strong dollar makes exports expensive for foreign buyers but gives US consumers additional purchasing power.

Additionally, the US manufacturing sector has really felt the squeeze from the crash in oil prices, which has brought activity in that sector way down, a reversal from the major stimulus seen during the shale revolution over the last few years.

But with the manufacturing sector accounting for just 12% of GDP — while consumer spending, in contrast, accounts for about two-thirds of GDP — TD doesn’t think the broader economy is headed towards a recession.

“To be sure, it is not our belief that the US economy is in or about to enter a recession,” TD wrote on Wednesday.

“Our proprietary model indicates a 1% chance that the US economy is in a recession, and a 16% probability that it enters a recession in 6 months. The signal from the ISM manufacturing sector index, which we consider to be a far superior barometer on the health of US economic activity, has been equally encouraging.”

The firm does, however, expect that the ISM manufacturing reading will fall to an even 50 in September, showing an economy that is in neutral (readings over 50 indicate expansion; below indicate contraction).

And the disappointing regional readings do, in TD’s view, indicate downside.

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