American manufacturers, after helping power the economy of the past decade, are losing momentum — hurt by trade wars and a slowing global economy.
A report Tuesday showed that nationwide factory activity in September fell to the lowest level since 2009, the last month of the Great Recession. Another report found that confidence levels among Minnesota and Midwest manufacturers fell into "fragile" territory in September, as factory activity contracted for a second consecutive month.
As a result, some economists now consider the manufacturing sector to be in a recession.
"Based on the last two months of surveys of manufacturing supply managers, both the U.S. and Mid-America economies are likely to move even lower in the months ahead," said Ernie Goss, director of Creighton University's Economic Forecasting Group, which measures activity in Minnesota and eight other states including the Dakotas.
The probability of a recession during the first half of 2020 has "risen significantly" over the past few months, he said.
Interest rates on treasuries plummeted on Tuesday after the manufacturing reports were released. The dollar also lost strength. And U.S. stocks had their worst loss in five weeks.
The reports follow months of worrying earnings and other economic reports that signaled slowing economies around the world and heightened pressures as U.S. factories scrambled to deal with the shortage of skilled workers and the fallout from a volatile trade war with China. September's regional employment index sank to its lowest level in 34 months.
"For 2019, the Mid-America economy has been expanding at a pace well below that of the nation," said Thomas Simons, senior money market economist at Jefferies LLC. He said the reports were "troubling," "weaker than expected" and dragged down by "non-organic forces" such as the trade war and Boeing's grounding of its entire fleet of 737 Max Jets following two fatal airplane crashes in October 2018 and March 2019.
"Manufacturing itself is in a recession, but it does not mean that the overall economy is in a recession," Simons said.
September was the second consecutive month that national and regional manufacturing indexes fell below the critical threshold of 50 that separates growth from economic contraction. While economists want all reported figures to land above 50, that was not the case last month or the month before.
The national Institute for Supply Management (ISM) reported Tuesday that its index for September was 47.8. It fell from 49.1 in August as only three of 18 U.S. manufacturing sectors grew during the month. Surveyed factory heads across the country noted that their exports, new orders and production fell.
Creighton University's regional Mid-America Index was 49.1 in September, down from 49.3 in August amid shrinking inventories, employment, imports and exports. The downtick is the second after 32 consecutive months of continuous growth in the region.
Minnesota's index was 48.4. That was down from 48.6 in August as new orders, production, inventories and employment all fell below 50.
While construction and medical equipment manufacturers in the state largely bucked the downtrend, food processors, ethanol producers and other nondurable goods manufacturers continued to see "pullbacks in economic activity," the report said.
Minnesota manufacturers also continue to complain about one of the tightest labor markets in decades, a situation that state officials say has put pressure on growth.
Tom Hainlin, national investment strategist at U.S. Bank Wealth Management in Minneapolis, said his team has closely watched weaknesses in the manufacturing and construction sectors for months.
"It's not dissimilar to what we saw in 2016," he said, but a key difference this year is heightened concern because of trade policy impacts.
"We've had a chance to talk to manufacturing executives for the last few weeks because we had some conferences here in town," Hainlin said. "Easily the biggest issue that people talk about is trade. And we saw that in the ISM survey. That was flagged as the number one area of concern for manufacturing folks."
The manufacturers are not just worried about the trade war between the Trump administration and China, but also unresolved trade agreements with Canada and Mexico, Germany's weak economy and unfinished U.S. trade policies that affect Europe's auto industry.
"We are seeing proposed or predicted business investment is fairly weak, primarily due to the uncertainty on U.S. trade policy," Hainlin said. "That is the biggest policy uncertainty we have."
The National Association of Manufacturers is calling for the Trump administration to resolve trade issues.
"Manufacturers need certainty," said Chad Moutray, the association's chief economist.
Across Creighton University's Mid-America region, 48% of surveyed supply managers said trade tariffs negatively affected their companies.
The tariffs disrupted supply chains, increased costs, forced hiring freezes and pushed nearly a fifth of producers to find new vendors and suppliers outside of China and other affected countries. As a result, September's business confidence index was just 47.7.
Goss said he expects business confidence over the next six months will depend heavily on U.S. trade talks with China and the whether the North American Free Trade Agreement's replacement, the United States-Mexico-Canada Agreement (USMCA), is finalized.
"Quick passage of USMCA is very important for the regional economy," Goss said.
In a few weeks, large multinational manufacturers such as 3M, Polaris Inc. and Graco begin reporting third-quarter results. Economists said they are looking for how the companies have dealt with trade issues, the high U.S. dollar and shrinking demand from global customers that are cutting costs.