Early Signs of Weakness in Manufacturing Have Economic and Political Implications

Manufacturing Overview

Breakthroughs from successful research and development (R&D) have created new processes and technologies that ripple through the economy, changing lives and society. R&D is an important factor driving the estimates that for every dollar spent in manufacturing, another $1.82 is added to economic activity. (1) Though manufacturing is only approximately 12% of the U.S. economy, it has been responsible for approximately ⅔ of all R&D spending in recent years. (2) So not only do manufactures make the things we use including electronics, telephonics, pharmaceuticals, transportation equipment, motor vehicles, and chemicals, manufacturers are critical to developing the new things that will bring delight, functionality, and/or ease to us in the future.

Manufacturers are overwhelmingly small businesses. Seventy-five percent of the nearly 250,000 manufacturing firms employ fewer than 20 people, and only 1.5% of manufacturing firms employ more than 500 people. These firms exported approximately $500 billion of goods to our trading partners in Canada and Mexico. (1)

Skilled manufacturing jobs are good ones, paying approximately $85,000/year including benefits (1), but 53% of the open positions are unfilled due to a shortage of qualified applicants (3). Demand for manufacturing is expected to drive the need for an additional 4.6 million jobs in the next decade, a 36% increase.3 Each new manufacturing job creates additional jobs in other parts of the economy. So, it is no stretch to state that a vibrant manufacturing sector can have a meaningful impact on the trajectory of the U.S. economy.(1)

Source: Thomson Reuters Eikon 7/2019

Manufacturing as a Leading Economic Indicator

The recent tariff wars have created an aura of uncertainty that is crimping growth rates of the manufacturing sector to an extent that may be visibly detectable in the charts. We have long warned about reading too much into stock and economic charts via “the science of wiggles” but think that in this case the trends warrant monitoring. If the trends of slowing growth do not reverse, the entire U.S. economy would seem to be in for a period of much slower growth and possibly a recession. If there is a manufacturing led recession, we expect it to be short and mild, followed by a resumption of record setting economic activity levels.

Source: Thomson Reuters Eikon 7/2019

Source: Thomson Reuters Eikon

Political Implications

It is our sense that POTUS sought to improve inequitable global economic dynamics using the only tool that was not bogged down in the political swamp of Washington D.C., i.e. tariffs. We recall that his learning curve was dreadfully steep at first, as the impact of a small initial tariff was quickly made moot by minor changes in currencies, but we think he is learning. It is in the best interest of the U.S. economy and POTUS reelection chances that the growth rate in the manufacturing sector accelerates, or at least does not slip a great deal more.

Market Implications- There are still cheap stocks

The bond market is now pricing in the need for the Federal Reserve to cut interest rates more than once, and the lower forecasted interest rates have pushed the prices up on quality bonds considerably since late May.

Despite the appreciation in the major stock market indexes, driven by stocks of mega cap companies that seem less tariff sensitive, many stocks are priced to reflect a lackluster business environment. We have written before about how market indexes seem increasingly driven by a narrow group of stocks. This is where bountiful opportunities will be found if growth in the manufacturing sectors resumes a vibrant growth rate.

Redmond Asset Management July 2019

https://www.nam.org/facts-about-manufacturing/
https://fas.org/sgp/crs/misc/R42135.pdf
https://www2.deloitte.com/insights/us/en/industry/manufacturing/manufacturing-skills-gap-study.html?mod=djemRTE_h