This under-the-radar recession indicator just posted its biggest warning in 35 years
A closely watched indicator of the U.S. manufacturing industry has been in contraction for most of the last two years, having recently crossed a dangerous threshold that has only been seen once before.
The Institute for Supply Management’s (ISM) manufacturing Purchasing Managers Index (PMI) dipped to 47.2 in September on a scale where anything below 50 signals contraction.
As macro strategist Charlie Bilello explained, ISM’s manufacturing PMI has been in contraction territory for 22 of the last 23 months.
“With data going back to 1948, that’s only happened one other time: 1989-91,” Bilello wrote.
The U.S. economy was in a recession in 1990-91.
Although manufacturing directly contributes only about 11% to U.S. GDP, its indirect contribution is roughly 24% of the economy’s total.
Weak manufacturing demand is problematic because it’s often associated with a loss of employment.
Regions that are heavily reliant on factory production could be hit especially hard, impacting everything from consumer spending to supply chains.
A degraded manufacturing sector adds to a growing list of concerns economists have about the current state of the economy. Although GDP growth is expected to be positive in the third quarter, the devil lies in the details.
GDP growth doesn’t tell the full story
Goldman Sachs predicted that the U.S. economy likely expanded at a 3% annual rate in the third quarter, which would match the second-quarter growth rate. But as economist David Rosenberg explained following the Q2 report, a solid GDP number doesn’t tell the full story.
Rosenberg’s chief warnings at the time—that Americans are depleting their savings, the government is contributing too much to employment, and that unsold business inventories could be negative in the long run—were likely all still present in the third quarter.
Without these technical growth drivers, economic growth in the U.S. has basically stalled.
Meanwhile, DoubleLine Capital founder and CEO Jeffrey Gundlach has warned that the economy is already in a recession due to a massive spike in layoffs.
Gundlach’s concerns were laid out in a recent Challenger, Gray, & Christmas report, which showed that layoffs spiked by 193% in August.
Meanwhile, data from the Federal Reserve’s Beige Book showed that 75% of the central bank’s 12 districts had flat or negative economic growth.
According to the report, companies were “more selective with their hires and less likely to expand their workforces, citing concerns about demand and an uncertain economic outlook.”
Although the economy has avoided a recession this year, analysts at JPMorgan say there’s a 45% chance of a downturn in 2025.
JPMorgan’s CEO, Jamie Dimon, said Americans should brace for something much worse than a recession in the coming years, referring to the threat of stagflation.
Stagflation, or the combination of high inflation, high unemployment, and slow growth, would be a worst-case scenario for Americans.
It’s hard to look at the economy and say, “‘Well, no, we’re out of the woods.’ I don’t think so,” Dimon said.
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