US: Manufacturing on the path to recession

In view of James Knightley, chief international economist at ING, intensifying trade war fears and an inventory overhang are weighing on the US manufacturing sector as depicted by the recent data releases.

Key Quotes

“The latest set of regional manufacturing surveys have been dire. The NY Empire survey saw a record fall, the Dallas Fed manufacturing survey is at a three-year low, the Philadelphia Fed survey is a relative outperformer at only a four-month low while Richmond survey managed to modestly beat market expectations, though still fell. Taking these altogether they point to a sizeable drop in the national ISM measure, which is already at its lowest level since October 2016. There is the very real prospect it dips below the break-even 50 level on Monday.”

“The ISM manufacturing index has historically been one of the best lead indicators for US GDP growth, although its predictive power has seemingly become less strong in recent years, reflecting the diminishing importance of the sector in terms of total economic output. Nonetheless, a sub-50 ISM will heighten concerns within the Federal Reserve that the economy is softening and with little prospect that trade tensions will ease in the near term, there is a growing probability the Federal Reserve will choose to act pre-emptively to try and support the economy through lowering interest rates.”

“Should trade talks go badly over the weekend, the ISM breaks below 50 and next Friday’s jobs report offers further evidence of a slowdown in hiring we will seriously have to consider putting in an additional July rate cut into our forecast.”

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