Why US Industrial Activity Has Gone into Contraction

US industrial activity

Although the US labor markets have been doing fine, the manufacturing sector has faced a slowdown that has impacted the country’s international trade.

The following table presents data for manufacturing activity along with inflation data.
Why US Industrial Activity Has Gone into Contraction

Looking at the table, we see that manufacturing and non-manufacturing activities are represented by the respective PMI (Purchasing Managers’ Index) and ISM (Institute of Supply Management). The trade gaps are listed with the export prices. PPI stands for Producer Price Index, and CPI stands for Consumer Price Index.

Weakness in the energy sector and exports erupted in June and July of 2015. PMI for manufacturing showed slow growth in July. In August, although there was strength on the domestic front, PMI reached near break-even 50 points due to weak export orders and a reduction in energy spending. The fall in new orders in the months of August and September led to the slow rise in PMI.

While domestic demand rose in October, showing robust strength in PMI, it was followed by a weakness once again in November and December. The ISM manufacturing index contracted due to the fall in new orders and exports. Job openings were strong through the given period but were mainly driven by the labor demand in the service sector with an exception of mining services.

Deflationary pressures

Export prices, PPI, and CPI show the deflationary pressures that exist in the US economy. Because of this, the Federal Reserve didn’t raise the interest rate in January. Its target inflation rate of 2% was not achieved during the period.

US exports

The international trade gap in June 2015 widened due to the rise in petroleum imports and a decline in exports of industrial supplies and capital goods. Those are symptoms of a slowdown in the industrial activity of the trading partners.

In the same period, the trade gap with Europe and China rose. This gap narrowed in July due to the rise in auto exports and the fall in imports of pharmaceuticals. Then the exports of capital goods and industrial supplies kept softening.

Let’s also look at the new order levels of durable goods. Stocks of Joy Global (JOY), Cummins (CMI), Caterpillar (CAT), and Jacobs Engineering (JEC), which belong to the SPDR S&P 500 ETF (SPY), were impacted in the second half of 2015. So the Federal Reserve will have to consider the export impact on the US GDP (gross domestic product) before deciding on a rate hike or rate cut. That’s because US domestic consumption and the labor market are sound, but the contraction in industrial activity has not fully eased. Since US trade relations with countries in Europe and China that have slowed down economically aren’t less than North America, market volatility seems sentimental rather than fundamental.

For more on US equities, please visit our US Equity ETFs page.