The streak is over.
Since August 2016, the U.S. manufacturing industry had logged 35 consecutive months of growth and expansion. It was the longest stretch of consecutive growth since December 2006. The end to this impressive streak came on Tuesday with the August release of the ISM Manufacturing Index. For the first time in four years, America’s manufacturing industry didn’t grow – it contracted.
Released each month by the Institute for Supply Management (ISM), the ISM Manufacturing Index is a leading gauge on the health of America’s manufacturing industry. The index has a benchmark of 50. Any reading above 50 indicates the U.S. manufacturing industry is expanding. Below 50, the industry is contracting.
The ISM Manufacturing Index has been gradually declining since August 2018, when the index reached 60.8 – its highest level in more than 14 years. July’s index reading was 51.2. Yes, the U.S. manufacturing industry was still growing, albeit at a gradually declining pace. But August’s index reading was 49.1, signaling a contraction and an end to four years of consecutive growth.
Private industries drive 87.9% of all U.S. economic growth. Federal, state and local government enterprises drive the remaining 12.1%. Of the 14 private sector industries that comprise the U.S. economy, manufacturing ranks No. 3 – accounting for, on average, 11% of all Gross Domestic Product (GDP). GDP is the total dollar-value of goods and services produced by the U.S. during the year. Financial Activities (20.6%) ranks No. 1 while Professional & Business Services (12.6%) ranks No. 2.
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Over the past year-and-a-half, American manufacturers have come under increasing pressure, primarily from outside forces. In our ongoing and escalating trade dispute with China, the U.S. manufacturing and agricultural industries remain China’s top targets. But the greater impact has been a severely weak global economy which started in early 2018 and continues to worsen.
According to the International Monetary Fund, in 2017, the global rate of economic growth was a fairly robust 3.8%. In 2018, global growth slowed to 3.6%. This year, the projected growth rate is just 3.2%, its slowest pace since the global financial crisis in 2009. More importantly, this economic weakness is most evident in America’s top trading partners.
In 2017, China’s economic growth rate was 6.9%. This year, China’s projected growth rate is 6%, a near 30-year low. Canada’s pace of economic growth is expected to decline from 3% in 2017 to 1.4% this year. For Mexico, economic growth is projected to decline from 2.1% in 2017 to just 0.8% in 2019. For the European Union, economic growth is projected to decline from 2.4% in 2017 to 1.2% in 2019.
China, Canada, Mexico and the European Union buy significant quantities of American goods and services. Combined, these four countries account for 64% of all U.S. trade. And when their respective economies are in a downward spiral, their citizens and businesses will inherently reduce the amount of goods purchased from American manufacturers.
As the world’s largest economy, the U.S. accounts for nearly a quarter of the world’s total economic output. And despite our recent pullback in economic growth, the U.S. economy still remains the shining star on the global economic stage. But the nations that make up the remaining 75% of the world’s economic activity are experiencing some serious pain. Unfortunately, that pain is being transferred to America’s manufacturers.