Atlas shrugged? Manufacturing seems worn out
WASHINGTON (MarketWatch) -- There are signs that the manufacturing sector, which has led the economic recovery, is about to take a breather.
"It seems like the [factory] sector is stuck in neutral," said Guy Berger, an economist at RBS in New York.
Several factors appear to be at work, economists said.
Weakness in the global economy is cutting back exports. And factory owners are uncertain about how the outcome of the November election and what it means for taxes and government largesse.
"Japan is going nowhere, Europe is in recession, and we've got our own problems," such as stalemate over tax policy and government spending, said Josh Shapiro, chief U.S. economist with MFR Inc.
Shapiro is concerned that there are no obvious heirs-apparent waiting in the wings to pick up the slack and propel the economy forward.
Housing seems to finally in recovery mode but it seems doubtful it can pick up the load.
Without an obvious source of strength, Shapiro sees a 50% chance of a recession in the next 12 months.
"I think things are more dangerous than a lot of other economists think," Shapiro said.
Another economist forecasting a high probability of a recession in the next year is Chad Moutray, chief economist for the National Association of Manufacturers, the trade group for the factory sector.
Moutray downplays the impact of Europe on the slowdown in the factory sector and the economy.
"I don't see Europe, by itself, sending us into recession," Moutray said.
Instead, he puts the onus squarely on the stalemate in Washington over taxes and spending.
Without agreement between Republicans and Democrats, deep spending cuts and tax hikes are scheduled to take place early next year, an event that has become known by the short-hand of "fiscal cliff."
Fiscal policy "is a huge area of doubt for many manufacturers," Moutray said. Many factory owners now do work for the defense sector, which will see $500 billion in cuts over the next decade if the so-called sequester is implemented.
While it is the conventional wisdom in the nation's capital that these tax and spending issues will be ironed out after the November election, Moutray is more wary.
"There is a real chance that it [a solution to the fiscal cliff] might not happen," he said
The NAM is urging both Republicans and Democrats "to act sooner" on resolving fiscal concerns, he said.
That said, alarm over manufacturing is not widespread.
One reason is that data is mixed. The industrial production data, released by the Federal Reserve, has been holding up well while the regional surveys of manufacturers have started to sound alarm bells. Read story on industrial production.
Read story on Philly Fed index.
"It is one thing to stall, it is another thing to go into reverse," Berger of RBS said.
In the second quarter, manufacturing output rose at a 1.4% rate, the Fed said. On the surface that's not so bad, but it followed a strong 9.8% gain in the first quarter.
Analysts will be looking at the July durable goods data report Friday for more clarity, but even that may be obscured by a strong headline.
That is because
The consensus forecast of Wall Street economists surveyed by MarketWatch forecast a 4% gain in durable goods in July, up from a 1.3% gain in the prior month.
The range of forecasts is all over the map. The maximum is for a gain of 6.3%, with the weakest expecting a 1.5% drop in the month.
June's strength came from two volatile categories, defense and aircraft, Berger noted. Without these two sectors orders fell 1.5%, he said.
There are only a few other indicator releases next week.
The Fed will release a summary of its July 31-Aug.1 policy meeting on Wednesday. Fed watchers will be parsing the report for clues about how close the central bank is to another easing.
In the statement released after this meeting, the Fed said it was "closely monitoring" the economy, which many economists said was a message that the bar is low for another asset purchase plan.
Some doubt about quick Fed action has emerged as incoming economic data has started to improve.
Shapiro from MFR said he doesn't expect any "bombshells" from the minutes.
"There will be the usual suspects banging the table for more action, and others wanting no action and a whole pack in the middle that hasn't made up its mind," Shapiro said.
Other data include sales of existing and new homes for July, which should both show modest gains.
The jobless claims data for the week are also important because it is the survey week for the August employment report.
Claims have been holding at the low end of recent ranges, with the four-week moving average hitting its lowest level since March in the latest week. See The Week In Charts.
Berger of RBS said the claims data are pointing towards an August report that is stronger than the three reports in the second quarter but not as good as the July report in which the economy added 163,000 jobs.
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