What a difference a few days can make.
On Monday, the Dow Jones Industrial Average (DJIA) ended the trading day at 26,916 – just 442 points shy of its all-time-high. It also marked the end of the July-September third quarter. In the first three quarters of 2019, the DJIA had gained 15.4%. The S&P 500 and the tech-heavy NASDAQ reported gains of 18.7% and 20.6%, respectively. For the DJIA and S&P 500, it was the best performance in the first nine months of the year since 1997. For the NASDAQ, since 2013.
But on Tuesday morning, the release of September’s ISM Manufacturing Index sent the stock markets reeling. The index serves as the key measure on the health of the U.S. manufacturing industry. With a benchmark of 50, any level above 50 indicates growth and expansion. Below, the industry is contracting.
America’s manufacturing industry has been in a gradual decline since August 2018, when the index reached a 14-year high of 60.8. September’s reading was just 47.8, the lowest level since June 2009. It also marked the second consecutive month of contraction for the manufacturing industry. Of the 18 manufacturing sectors tracked by the ISM, just three reported growth in September. August’s index level was 49.1, which ended a string of 35 consecutive months of expansion.
The market’s response was fairly swift. On Tuesday and Wednesday, the DJIA fell by a combined 838 points, or 3.1%. The S&P 500 lost 3% while the NASDAQ declined 2.7%.
But the manufacturing industry’s sudden contraction belies an even greater concern — the continued weakness of the global economy.
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According to the International Monetary Fund, in 2019, global economic growth is projected at just 3.2%, the slowest pace in 10 years. Unfortunately, this meltdown is manifested in America’s largest trading partners.
China, the world’s second-largest economy, is now projected to have its slowest pace of economic growth in nearly 30 years. Canada, the world’s 20th-largest economy, has seen its economic growth decline from 3% in 2017 to 1.4% in 2019. Mexico’s economy, the world’s 15th-largest, is on the brink of recession. Its economic growth has plunged from 2.1% in 2017 to just 0.5%. The European Union (EU), whose 28 members account for more than 20% of the world’s economic growth, has seen its growth collapse from 2.4% in 2017 to just 1.1%.
Combined, America’s top four trading partners account for 41% of the world’s economic growth. More importantly, they represent 64% of all U.S. trade.
This decline in global trade was evidenced on Tuesday, when the World Trade Organization (WTO) sharply lowered its forecast for global trade growth. In 2019, world trade volumes for goods and merchandise are expected to rise by just 1.2%, the lowest annual increase since 2009. This is less than half of the 2.6% growth rate the WTO had forecast in April. In 2018, global trade growth was 3%.
As the world’s largest economy, the U.S. accounts for 25% of all global economic output. No, that’s not a typo. Simply stated, our economy is built for, and thrives on, global trade and commerce. In fact, an estimated 44% of all sales for corporations in the S&P 500 are derived from foreign countries. And when these foreign economies are struggling, the effect will eventually make its way to America’s shores, including America’s manufacturers.