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Recession Speculation: Recent Manufacturing Data Points to Possible Downturn

Isaac Nuriani    |
Jun 16, 2023
  • U.S. manufacturing index contracts for seventh straight month.
  • One economist says Europe’s manufacturing weakness could last for months.
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Are we headed for a recession?

That appears to be among the most pressing economic questions of the day. And despite the outstanding credentials of the economists, analysts and strategists who spend time seriously weighing the answer, there doesn’t seem to be a consensus opinion one way or another.

On the one hand, there’s no shortage of professional observers who think recession is forthcoming. One such group is The Conference Board, a highly respected global economic think tank. They’ve been predicting a U.S. recession for some time and continue to do so.

In its most recent economic forecast issued just a handful of days ago, The Conference Board reiterated its view “that weaknesses emerging in some parts of the economy will intensify and grow more diffuse over the coming months, leading to a recession.” Among the influences cited by The Conference Board as factors it believes are contributing to elevated recession prospects are persistent inflation, the Federal Reserve’s hawkish interest-rate posture, and the credit crunch emerging from concerns about banking-system stability.

The Conference Board now says it expects recession to begin in the latter part of this year, with real gross domestic product (GDP) growth rates likely to decline in the third and fourth quarters as well as the first quarter of 2024.[1]

Still, there are others who think it’s likely the country will sidestep a recession. For example, in a recent report, Amanda Agati, chief investment officer at PNC Financial Services Asset Management Group declared, “No recession, no correction, no more rate hikes.”[2]

Another analyst, Simon Hamilton, managing director and portfolio manager for the Wise Investor Group of Raymond James, isn’t quite as sure there won’t be a downturn, but does say that in his view recession chances now are no better than 50-50.

“The reason those odds aren’t higher is because people are still working,” Hamilton wrote in a note to clients. “It’s almost impossible to have recession with unemployment this low.”[3]

Unemployment has held up despite what has been the fastest rate-tightening regime in four decades, remaining close to its lowest level in a little more than 50 years.[4] Consumer spending has proved resilient in the face of the same strict rate environment, as well.[5]

Some strategists suggest this resilience is on borrowed time, however, as the impact of 10 interest-rate increases in less than a year and a half continues to work its way through the economy.[6]

“The economy is holding up reasonably well,” analysts at Oxford Economics recently said, “but faces several hurdles during the second half of the year, including the lagged effect of tighter monetary policy and stricter lending standards.”[7]

Among the evidence supporting the belief that those hurdles may be coming to pass include recent signs of weakness in manufacturing. In particular, several closely watched U.S. manufacturing indexes, including measures from S&P Global and the Institute for Supply Management, now are signaling that the economy may be in the throes of contraction. Additionally, there are signs of unfolding manufacturing slowdowns in China and across the Eurozone, as well.

Few, if any, would dispute the fundamental importance of manufacturing to the health of the world’s leading economies. Given this, signs that anemia now may be setting in to at least some of those economies – including the U.S. – could be seen as something of a bellwether recession signal. Whether recession actually develops remains to be seen. But the signs could be worthy of consideration.

Let’s discuss them in greater detail.

Manufacturing Indexes Across the Globe Are Declining

It’s a common refrain: Manufacturing is the lifeblood of an economy. A look at no more than a few incidental statistics makes that clear.

For example, according to the National Association of Manufacturers, for every manufacturing worker in the U.S. economy, 4.4 additional workers are necessarily hired somewhere in the broader economy. Every $1.00 earned in direct labor income from manufacturing generates an additional $3.75 in labor income for the overall economy. And to clarify the context of the substantial role that the U.S. manufacturing sector plays in our national economy, if that manufacturing sector alone was its own national economy, it would be the eighth-largest economy in the world.[8]

So, when signs emerge – on multiple fronts – that suggest manufacturing has hit a rough patch, it’s reasonable to consider the potential implications of that choppiness on the broader economy…including whether it might serve as a harbinger of recession.

And lately, those signs have been emerging.

One is in the form of the S&P Global U.S. Manufacturing PMI (Purchasing Managers’ Index) for May. The index is a survey-based economic indicator of business conditions in the U.S. Notably, it dropped to 48.4 last month from a measure of 50.2 in April. Although the point difference between the two index measures may not seem significant, the drop below the threshold of 50 indicates a manufacturing sector that now is contracting (whereas measures above 50 signal expansion).

Of particular note in the May figure is the decrease in new orders, specifically; those fell at the fastest pace in three months.[9]

The Institute for Supply Management’s Manufacturing PMI is another measure pointing directly at contraction in the sector right now.

In May, the ISM Manufacturing PMI came in at 46.9, dropping from April’s 47.1. The New Orders Index also fell deeper beneath the expansion threshold, sinking down to 42.6 from the 45.7 posted in April.

Further underscoring the weakness in the manufacturing sector conveyed by the ISM data is that May was the seventh consecutive month that overall Manufacturing PMI contracted, and the ninth consecutive month the New Orders Index contracted.[10]

Data from Uncle Sam also suggests growing weakness in industrial output. In a recent report, the Commerce Department indicated that factory orders increased 0.4% in April following a 0.6% increase in March. But it’s not the mere deceleration from 0.6% to 0.4% that’s suggestive of a potential issue.

For one thing, the 0.4% pace of growth is just half of the 0.8% rate economists expected for April. More significantly, however, is the fact that factory orders excluding transportation – which can be an especially volatile category – actually were down 0.2% for the month, while factory orders excluding those from the defense industry were down 0.4%.[11]

In fact, the April figures mean factory orders excluding transportation fell for the third consecutive month and factory orders excluding defense have been down four of the past six months through April.[12]

Adding to concerns about possible deterioration in the U.S. manufacturing sector are signs of that deterioration occurring across the pond, as well.

Let’s take a look at those next.

Eurozone Now in Technical Recession

It appears manufacturing in the Eurozone isn’t faring much better than manufacturing in the U.S. these days.

According to the May survey conducted on behalf of the S&P Global HCOB (Hamburg Commercial Bank) Eurozone Manufacturing PMI, the volume of production across the Euro area tumbled at its fastest pace since November, pulled down by a steep decline in new orders which fell at their fastest pace in six months.[13]

The overall index fell deeper into contraction territory from April’s 45.8 figure, down to 44.8. As of the latest measure, the index is now at its lowest level in three years.[14]

Notably, the current Eurozone PMI picture is not due to just a couple of nations encountering acute challenges, but instead is the result of weakness evident throughout the Euro territory.

“The downturn in the manufacturing sector is geographically broad-based,” notes Dr. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank. “In the four largest Eurozone countries (Germany, France, Italy and Spain), manufacturing PMIs are below the key 50.0 threshold.”[15]

De la Rubia also projected that “the decline in new orders from home and abroad signals that the weakness in output is likely to persist for several more months.”[16]

In fact, that weakness already is taking its toll on general economic output. According to revised estimates of first-quarter GDP from Eurostat, the official statistical office of the region, the Eurozone has entered a technical recession. Real GDP growth fell by 0.1% in Q1, and that follows a drop by 0.1% of GDP growth in the fourth quarter of 2022.[17]

A peek at conditions in China – the world’s second-largest economy and largest exporter – reveals signs of possible weakness there, also.

One manufacturing metric, the S&P Global Caixin China General Manufacturing PMI, did improve for the first time in three months, rising to 50.9 in May from the 49.5 measure posted in April. Although the increase was modest, it did move the index from contraction territory to expansion.[18]

However, acute signs of weakness in the Chinese industrial complex remain prominent. For one thing, any enthusiasm that might arise from the slight improvement in the Caixin PMI is tempered by data from the same survey that reveals that confidence in the 12-month outlook for production fell to a seven-month low.[19]

Additionally, another Chinese PMI measure, the official manufacturing purchasing managers’ index of the Chinese state, contracted further in May, dropping to 48.8 from 49.2 in April. The May measure was below the expectations of economists surveyed by the Wall Street Journal, who forecast it would come in at 49.7.[20]

Potential distress in the Chinese economy also is indicated by the fact that exports sank 7.5% year over year last month. That number is considerably worse than the projection of economists surveyed by Reuters, who expected the drop to be just 0.4%.[21]

Based on what we can see, it’s not unreasonable to consider that the manufacturing sector right now is suggesting a possible downturn. And if the interest-rate environment remains tight, a further deterioration in that sector could be possible.

On that note, let’s look briefly at what, in fact, could be in store for interest rates from here as we close out this week’s article.

Federal Reserve: Rate Hikes Could Continue

One of the reasons some observers believe recession is likely in our future even as its predicted onset remains elusive is because the full impact of rate increases has yet to fully work its way through the economy. Analysts at Oxford Economics, whom I referenced earlier, are among those who share that opinion.

Now, as of this week, we’ve learned that it’s not only the rate increases we’ve seen up to this point that may exert a dampening effect on the economy going forward. Although the Federal Reserve concluded its June policy meeting this week opting not to raise interest rates (the first time in the last 11 meetings it didn’t hike rates), the consensus projection of Federal Open Market Committee members is that there will be another two rate hikes sometime this year.[22]

Not only is it unlikely, then, that the central bank will reverse course and start cutting rates at any point in the near term, but policymakers appear inclined to resume rate increases for a time before concluding the current tightening regime.

By itself, that rate-hike profile is enough, in the opinion of some, to continue anticipating a recession in the foreseeable future. It remains to be seen if one actually will come to pass or if the nation will continue to fend off or completely sidestep recession. However, if Americans also consider signs of real-time deterioration evident in the manufacturing sector both here and abroad, it wouldn’t be a bad thing to more seriously prepare our savings for the impact of a potential downturn.

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[1] The Conference Board, “The Conference Board Economic Forecast for the US Economy” (June 9, 2023, accessed 6/15/23).
[2] Irina Ivanova, CBSNews.com, “Remember that looming recession? Not happening, some economists say” (June 6, 2023, accessed 6/15/23).
[3] Ibid.
[4] Bureau of Labor Statistics, “The Employment Situation – May 2023” (June 2, 2023, accessed 6/15/23).
[5] Bureau of Economic Analysis, “Consumer Spending” (May 26, 2023, accessed 6/15/23).
[6] FederalReserve.gov, “Open Market Operations” (accessed 6/15/23).
[7] Ivanova, “Remember that looming recession?”
[8] National Association of Manufacturers, “Facts About Manufacturing” (accessed 6/15/23).
[9] S&P Global, “Renewed decline in manufacturing sector conditions as weak demand drags on performance” (June 1, 2023, accessed 6/15/23).
[10] PR Newswire, “Manufacturing PMI® at 46.9%; May 2023 Manufacturing ISM® Report On Business®” (June 1, 2023, accessed 6/15/23); Trading Economics, “United States ISM Manufacturing New Orders” (accessed 6/15/23).
[11] Reuters.com, “US services sector softens, factory orders boosted by defense” (June 5, 2023, accessed 6/15/23).
[12] Bryan Mena, CNN Business, “Manufacturing is sputtering in the world’s largest economies” (June 12, 2023, accessed 6/15/23).
[13] S&P Global, “HCOB Eurozone Manufacturing PMI®” (June 1, 2023, accessed 6/15/23).
[14] Ibid.
[15] Ibid.
[16] Ibid.
[17] Silvia Amaro, CNBC.com, “Euro zone enters recession after Germany, Ireland growth revision” (June 8, 2023, accessed 6/15/23).
[18] S&P Global, “Caixin China General Manufacturing PMI™” (June 1, 2023, accessed 6/15/23).
[19] Ibid.
[20] Sudarshan Kumar, CNBCTV18.com, “China’s manufacturing activity contracts further, May PMI at 48.8” (May 31, 2023, accessed 6/15/23).
[21] Evelyn Cheng and Clement Tan, CNBC.com, “China’s exports plunge by 7.5% in May, far more than expected” (June 9, 2023, accessed 6/15/23).
[22] Jeff Cox, CNBC.com, “Fed holds off on rate hike, but says two more are coming later this year” (June 14, 2023, accessed 6/15/23)

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