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March 15, 2019

American manufacturing is in danger of entering a recession

american flag manufacturing

  • Manufacturing activity fell during the first couple months of the year.
  • As growth slows and trade tensions drag on, the sector could be headed for a recession.
  • Manufacturing accounts for about 12% of the US economy.

Manufacturing activity in the US unexpectedly fell for a second straight month in February, underscoring expectations for slower growth across major economies and raising concerns that the sector could be headed for a downturn.

Factory output fell 0.4% last month, Federal Reserve data showed Friday, compared with expectations for a slight increase. In January, manufacturing activity fell 0.5%.

"In other words, a broad-based softening is underway, and we're sticking to our view that the sector will be in recession through mid-year," said Ian Shepherdson, the chief economist at Pantheon Macroeconomics.

From machinery to electronics, manufacturing output fell across sectors in February. The decline was offset by an increase in utilities and mining, bringing overall industrial production 0.1% higher from a month earlier.

Motor-vehicle production was little changed after dropping a steep 8.8% in January.

Because the manufacturing sector accounts for just over a tenth of activity, Shepherdson said a short recession in the sector wouldn't bring the rest of the economy down with it. But it would be a constraint on overall growth in both gross domestic product and employment.

The American economy is expected to grow at a much slower pace in coming months. Most economists forecast first-quarter GDP growth to come in between 1% and 2%, reflecting expectations of a broader slowdown across major economies.

"The further decline in manufacturing output confirms that the global industrial slowdown is now weighing more heavily on US producers," said Andrew Hunter, an economist at Capital Economics.

That's in part thanks to the fading effects of stimulus measures, including a $1.5 trillion tax-cut package passed in the US last year, but ongoing trade tensions haven't helped.

A spate of tariffs between Washington and Beijing have raised company costs, lowered access to foreign markets, and disrupted supply chains. Manufacturers across the US, including carmakers, warned last year they could be hurt by the trade war that is in its eighth month and counting.

"From the US perspective China remains a strategic manufacturing partner, which enables US companies to substantially lower manufacturing costs," said James Ragan, director of wealth management research at D.A. Davidson.

In 2015, American manufacturing was plunged into its longest recession since the financial crisis when a collapse in oil prices and a strong dollar crimped output.

SEE ALSO: Dozens of manufacturing companies testified about how Trump's trade war with China could affect them - here's what they said

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