Industrial sector enters a recession
Manufacturing slump could hurt Trump, who rode to White House on blue-collar support in key states.
WASHINGTON — During President Trump’s first two years in office, his standing with many voters was buoyed by a surge in manufacturing that helped create millions of jobs and undergirded the whole U.S. economy.
But today, manufacturing has plunged into recession and is threatening to pull down other sectors, perhaps hitting hardest on supporters in those states that helped put Trump in office.
Impeachment may be dominating the news, but the less-noticed industrial slump ultimately could pose a greater threat to Trump’s reelection.
As measured by the Federal Reserve, manufacturing output shrank over two straight quarters this year. That’s the common definition of recession.
A separate, widely followed index drawn from purchasing managers showed September’s contraction in manufacturing was the steepest since June 2009, with production, inventories and new orders all falling.
And after adding nearly half a million jobs in the prior two years, which Trump frequently stressed in hard-hat rallies throughout the Midwest, manufacturing employment has stalled.
Instead of healthy job growth, layoff announcements have surged this year, especially in battleground states such as Pennsylvania and Michigan. Friday’s jobs report for September showed a slight drop in total factory jobs.
Manufacturing today accounts for only about 10% of economic activity, and so far, the overall economy and employment in the U.S. are still growing. But the pace has slowed considerably this year. The faltering industrial sector has started to crimp businesses in the transportation and warehousing sectors. And there are growing worries of spillover effects in the larger services sector and broader economy.
Even if the nation can avoid a recession next year, a manufacturing downturn could prove to be politically damaging for Trump, who rode to the White House on enthusiastic support from blue-collar workers in key states and on his promise to
revive America’s coal, steel and other industries.
Although manufacturing constitutes a far smaller portion of the whole U.S. economy than it once did, it remains very important in a handful of swing states that Trump narrowly won in 2016 — including Wisconsin, Michigan and Pennsylvania.
In the months before the 2016 election, it didn’t help Hillary Clinton’s prospects that manufacturing was on the skids and factory jobs were shrinking, thanks to a drop-off in energy-related investments, a strong dollar and lackluster demand for American goods in emerging economies.
Some of those same factors are again weighing against American industry. But analysts and business leaders say the single biggest restraint on manufacturing this year has been of Trump’s own making: excessive use of tariffs and his trade wars with China and other countries.
Of utmost concern has been Trump’s confrontation with China, the world’s second-largest economy. Many American firms have major operations there — both manufacturing, such as smartphones, and sales, such as motor vehicles. And U.S. companies rely on China for a big chunk of their sales and profits.
U.S. businesses have put off spending on major equipment and buildings as they’ve sought to look through the fog of a swirling trade conflict marked by Trump’s haphazard tariff actions and off-and-on negotiations.
U.S. and Chinese officials concluded high-level talks Friday in Washington, and afterward Trump announced that the two sides had reached a partial, tentative agreement on trade. He called it a “Phase One deal” that includes a big increase in Chinese purchases of U.S. farm goods. In return, he agreed to halt a planned tariff hike that was to take effect next week on some Chinese goods. The agreement, which must still be formalized in the coming weeks, isn’t expected to have a major effect on manufacturing anytime soon.
Jim Springer, chief financial officer of Industrial Nut Corp. in Sandusky, Ohio, doesn’t need the Fed to tell him that manufacturing is in recession. He can see it in his 111-year-old family business making locknuts and other fasteners.
Springer, 58, who runs the company with his father and three brothers, remembers when orders took off at the end of 2016. Sales surged 30% in 2017 and went up an additional 14% last year, to just shy of the company’s record-high sales of $20.25 million in 2006.
It’s been downhill since the first quarter, however, as the company’s largest customers, such as Caterpillar Inc., the big manufacturer of tractors and construction trucks, started to scale back. Sales at Industrial Nut are expected to fall about 10% this year, and Springer says tariffs are a big culprit. They’ve hurt the company both by making raw materials more expensive and by slowing sales in China for companies such as Caterpillar, and those effects have trickled down to parts suppliers like Industrial Nut.
“The magnitude of the loss we’re seeing from tariffs far outweighs the benefits of the tax cuts,” Springer said, referring to the GOP-led move to shave the U.S. corporate tax rate to 21% from 35% starting in 2018.
“That was pro-business, and it was nice,” he added, but “the tariffs are just too blunt of an instrument.”
Like manufacturers across the country, Industrial Nut has recently begun to reduce overtime hours for workers, and Springer says the company is managing labor costs also through attrition and retirement of its aging workforce.
Sandusky County, some 60 miles west of Cleveland along Lake Erie, has a population of about 59,000. Manufacturing accounts for roughly 40% of the county’s private employment and has been shedding jobs since the middle of last year. In 2016, Trump won the county with 58% of the vote, even though it went to Obama in both 2012 and 2008.
“Our shop floor is divided,” Springer said of the company’s 40 hourly employees, who are represented by the United Steelworkers. “Some people love him, the ‘fake news’ things ... and there are those who don’t trust him.”
He added, “It’ll be very difficult [for him] to get reelected in a recession. Then again, the alternatives aren’t very appealing from a probusiness perspective.”
Most analysts see U.S.China tensions remaining high in coming months. And that probably means little relief on tariffs and continued uncertainty for businesses, which will keep manufacturing limping along.
Michael Hicks, a regional economist at Ball State University in Muncie, Ind., said there was a greater than 50% chance of a national recession in the next 12 months. Indiana has the country’s largest concentration of manufacturing, accounting for some 22% of the state’s economy — about double the U.S. average.
Trends in recreational vehicles, made in northern Indiana, have been a good indicator of recent recessions, and shipments are down about 20% this year, Hicks said. By year’s end, he predicted, it won’t be just Indiana’s manufacturing jobs that will be down from a year ago but employment overall for the state.
“Indiana has never had a year where employment dropped for the year and the U.S. was not in recession,” he said.
Trump isn’t likely to lose Indiana in 2020; it has voted for a Democratic presidential candidate only five times since 1900, most recently in 2008, when Barack Obama beat Mitt Romney.
But industrial activity in Indiana is deeply intertwined with manufacturing in nearby states that are not rock-solid Republican — especially Michigan, Illinois and Wisconsin.
Wisconsin, which Trump took by a mere 22,748 votes in 2016, the narrowest of his vote margins in any state, is second to Indiana in its reliance on manufacturing.
Wisconsin has one of the state’s lowest jobless rates in the country, just 3.1% in August. Manufacturing payrolls, however, have been mostly declining since September and are down for the year, as the trade war and other forces have hurt manufacturers in industrial machinery, metal fabrication, paper products and food processing.
“Tariffs are one of the reasons that our production costs have increased, along with increases in the costs of raw materials, labor and freight,” said Donna Parke, marketing and services manager at Tramontina, which in the summer closed its cookware plant in Manitowoc, Wis., and consolidated it with factories in Brazil. The shutdown eliminated 145 jobs.
Like Tramontina, much of Wisconsin’s manufacturing operations and workforce are in rural areas, which, along with betterthan-expected support in Milwaukee suburbs, helped Trump squeak out a win over Clinton.
Charles Franklin, director of the Marquette Law School Poll, said that, for Wisconsin voters in 2016, manufacturing and the overall performance of the economy took a back seat. Voters were more concerned about cultural conservatism and felt pessimistic about the future of the country, factors that made Trump more appealing to them.
But he Franklin noted that, in late August, a substantially greater share of Wisconsin’s registered voters said they expected the economy over the next year to get worse rather than better. It was only the second time in more than 50 surveys conducted since 2012 in which economic pessimism was stronger than optimism for the future.
The only other time was in January, around the time of the federal government shutdown.
“This represents a weakness of a central part of Trump’s rhetoric,” Franklin said. “We may not be in a fullblown recession, but enough that that could play a role in 2020.”