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Manufacturing Recession- A Matter to Consider

The decline that began in the late half of 2015 for the manufacturing industry is proving to have serious implications for investors. While the American economy is gradually growing, the manufacturing industry is slowly going in the opposite direction, affecting profits.

The current trends show that while declining production in the manufacturing sector does not indicate an economic recession, it is somehow linked to profit recession.

Many investors view the manufacturing industry as only a small portion of the economy as a whole. When looking at the percentages, the manufacturing industry only makes up 10%, while retail and services comprise about 70% of the economy. When looking at the consumer sector, people are still spending at a decent rate, causing the overall economy to climb slowly.

Manufactured goods make up almost 86% of United States’ exports. These exports provide one-quarter of the manufacturing jobs in America. For companies to see any real profit increase, they need to rebalance the growth. Simply put, they need to increase their exports of manufactured goods.

Corporate Profits and their relevance to Industrial Production

The stock market in the U.S. is geared for industries such as the mining, manufacturing, and other industries that many consider being the founding industries of the economy, rather than to focus on the economy as a whole. The rise in other financial sectors, such as retail and energy industries, tends to balance out the decline in the manufacturing industry. This causes investors to ignore the manufacturing recession.

The decline in manufacturing goes against the claims that the downfall in profits is about the energy sector. With oil companies seeing a collapse in their earnings, the overall U.S. profits recession shows a more general sluggishness in the economy as a whole.

In the past, investors have focused their attention on the rebound of value stocks. To keep the momentum going and to see an incline in value, the depressed earnings and low rate of profitability will have to improve. That isn’t a likely scenario while the manufacturing industry is still contracting. 

There is some speculation that leads us to believe that the manufacturing sector may stabilize, however, the signs are scarce. The Federal Reserve released a report in April stating that the Industrial sector has been in contraction for 12 out of the last 15 months, and continually drops by 2% each year. Even with the spike in oil prices, the manufacturing industry still continues to struggle to make a profit.

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Reasons for the Recession

There are two key factors that play a role in the recession of the manufacturing sector:

1.    In developing countries, the economic growth has slowed down due to the high prices of commodities such as oil.

2.    The American dollar has gained value causing American products to become more expensive while consumers are looking for lower prices. 

Predictions for the 2016 Economy

Manufacturing in America is expected to increase faster than the other sectors of the economy. Observers are predicting a 2.6% growth through the rest of 2016, with the unemployment rate dropping slightly.

While these predictions look good for the manufacturing industry as a whole, the chance of corporate profits rising at great rates does not look very promising. Even with the growth of the industry, profits are still taking a hit to allow employers to offer a higher rate of hourly pay.

While the Federal Reserve continues to raise the interest rates, the American dollar is expected to hold compared to many other currencies, causing global growth to remain low for the upcoming years.

The following are the signs that the Manufacturing Industry is improving:

1.    There is still an increase in industrial production. Even though the industry overall is in a slow decline, it is still producing at a higher rate than it was a year ago. Last year, the manufacturing communities managed to avoid any layoffs; however, they only added 30,000 new jobs.

2.    Employment is falling, but it’s not impacting activity. Studies show that while the manufacturing industry is on a downward trend, it have been going in that direction for the past 30 years. It is being viewed more as a shift in structure than a warning.

3.    Income for workers is on the rise. Since the drastic decline in 2009 for the manufacturing industry, workers have seen an increase in their hourly pay over the last six years. This is a positive trend for the U.S. economy.

4.    Room for improvement in real sales. When looking at shipments compared to dollars sold, the decline is not evident and evens out. This is with inflation factored in.

All in all, even though the economy appears to be improving, the manufacturing industry is still in a recession, and it seems like it will stay that way for a little while longer.

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Bank of America Warns: ‘Deepest Recession on Record’ Headed Our Way

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stock market graph representing negative economic outlook

Bank of America released its latest economic outlook, and it’s absolutely frightening.

The bank predicts that the US economy stands at the beginning of three straight quarterly declines. It expects Q1 to shrink by 7%, followed by a 30% decline in Q2 and a 1% drop in Q3.

The bank says Q4 will see the return of a growing economy. They, however, said that this will only come after overcoming unimaginable pain. “We forecast the cumulative decline in GDP to be 10.4% and this will be the deepest recession on record, nearly five times more severe than the post-war average,” the bank’s analysts wrote. The report goes on to say that although they expect consumer spending to perk up in Q3, the effects of the coronavirus outbreak will linger as consumers “face job cuts and a significant negative wealth shock.”

Unfortunately for many of us hoping for a quick recovery, Bank of America isn’t alone in their pessimism.

Lowering Expectations

The Congressional Budget Office also lowered its expectations for economic growth through the end of the year. Revised figures now show second-quarter GDP declining 7% with a 10% unemployment rate compared to our current 3.5% unemployment rate.

“CBO expects that the economy will contract sharply during the second quarter of 2020 as a result of the continued disruption of commerce stemming from the spread of the novel coronavirus,” CBO Director Phil Swagel said in a post on the agency’s site.

Fitch Ratings also has a troubling economic outlook for the rest of the year. In its latest research report, the company states “A deep global recession in 2020 is now Fitch Ratings’ baseline forecast according to its latest update of its Global Economic Outlook (GEO) forecasts.”

In just 10 days since its last report, the company has revised its global GDP estimates for the year. It went from a modest 1.3% growth to a 1.9% decline. “The speed with which the coronavirus pandemic is evolving has necessitated another round of huge cuts to our [gross domestic product] forecasts,” the company added.

Here in the US, Fitch says the shutting down of the economy to slow the spread of the coronavirus will result in an “unprecedented peacetime” GDP decline of 7% to 8% in Q2. Alternatively, it may also result in a 28% to 30% decline on an annualized basis.

Negative Economic Outlook

Investors should also prepare for another drop in the market, says a hedge-fund manager. He correctly predicted the impact the coronavirus would have on the stock market and the economy in the US.

“If you go back and look at history, there are nine times that the market has sold off about 30% or so since the 1920s,” said Dan Niles, who runs the Satori Fund. “You get one of these every 10 years or so and if you look at every one of them, you always get these bear market rallies.”

Niles says that he sees another major drop headed our way. He says that valuations are still well above historical norms, even after the recent pullback.

“Just to get to average, you would have to have the market go down 30%,” he said. “It is very easy to figure out the market probably goes down 30% before we’re even near fair valuation.”

And he says don’t expect a quick recovery, either.

“I sort of laugh when I hear people talking about a V-shaped recovery because we are going to have at least 10% unemployment, my guess is closer to 20% before all of this is said and done.”

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Stocks Rally as Oil, Jobless Claims Rocket Higher

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Stocks Rally as Oil, Jobless Claims Rocket Higher

The stock market rally continued yesterday with the Dow Jones Industrial Average jumping 2.24%, the S&P 500 gaining 2.28% and the Nasdaq up 1.72%.

Investors felt optimistic after President Trump tweeted that he had spoken with Saudi Arabian Crown Prince Mohammed bin Salman. Many were hoping that both Saudi Arabia and Russia were willing to end the price war and mutually agree to cut production by at least 10 million barrels per day.

“Just spoke to my friend MBS (Crown Prince) of Saudi Arabia, who spoke with President Putin of Russia, & I expect & hope that they will be cutting back approximately 10 Million Barrels, and maybe substantially more which, if it happens, will be GREAT for the oil & gas industry!” Trump tweeted.

However, some experts are doubting the reality of cutting production by such a significant amount.

Edward Marshall, a commodities trader at Global Risk, told The Wall Street Journal, “It’s physically impossible for Saudi Arabia and Russia to get 10 million barrels a day off the market—they’d burst their onshore storage and fill every ship in sight.”

News also broke that Saudi Arabia called for an emergency meeting of OPEC and other oil-producing countries. The country called for a meeting to talk about how they can stabilize the oil market. Prices have been in freefall since the last meeting ended without a production agreement beyond April 1.

This was enough to send oil prices rocketing higher. West Texas Intermediate crude gained as much as 34% intraday before settling at $25.32 per barrel, a 24.7% jump. This is its largest single-day percentage gain in history.

Even with prices moving higher, it may not be enough to prevent bankruptcies in the oil and gas sector. This wave of bankruptcies was kicked off by shale driller Whiting Petroleum Corp. on Wednesday.

Jobless Claims Set Record

The market’s rally yesterday came in spite of some very bad news early in the day. Initial jobless claims for the week ending March 28 came in at 6.6 million. This figure is nearly double the previous week’s then-record of 3.2 million.

To put this number in a historical perspective, prior to the last two weeks, the previous record number of claims in a single week sat at 665,000 in March 2009 during the Great Recession.

To put it simply, this week’s initial jobless claims number was equal to the total claims filed during the entire Great Recession.

Chris Rupkey, chief financial economist for MUFG Banks, wrote in an email, “We knew that massive job losses were coming because of reports that many workers were unable to file a claim for benefits even after waiting on line for hours. Everywhere you look Washington and state governments were not prepared for the rapid spread of the virus and the devastating damage that would be done to the economy if businesses were shut down and workers sent home.”

He added “In a normal recession, job layoffs build over the many months of recession until they peak. In this pandemic-based recession, the job losses are immediate where the economy’s weakest hour is right now.”

Why was the market able to rally despite historically bad jobless claims?

JJ Kinahan, chief market strategist at TD Ameritrade, says it’s possible that the market knows it’s going to get worse. He also mentioned that this number won’t seem as bad in the coming weeks.

“Overall this is a little bit of a victory in and of the fact that it was such a bad number and the market did kind of shake it off. It is also the market preparing for a lot more bad numbers.”

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American Airlines Seeks $12B in Coronavirus Rescue Funding

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American Airlines seeks $12B in coronavirus rescue funding

American Airlines is seeking $12 billion in loans and grants from the U.S. government, and says it won’t furlough employees for the next six months during the coronavirus health crisis.

In a memo sent to employees from CEO Doug Parker and President Robert Isom, the U.S. carrier said it will seek the funding as part of the $50 billion pot set aside for airline industry bailouts that’s included with the $2.2 trillion economic relief bill passed by Congress and signed by President Donald Trump last week.

Parker and Isom said, with the government help, they’re confident American will “fly through even the worst of potential future scenarios.”

To receive the rescue funding, carriers must not furlough workers or cut their pay rates through Sept. 30. It allows for equity stakes for the federal government and requires carriers to maintain certain air routes.

American is the world’s largest airline by fleet size, passenger traffic and revenue passenger miles. It and other airlines are offering partially paid, voluntary leaves of absence to workers as traveler demand has evaporated due to the pandemic. Three out of every four Americans are presently subject to municipally ordered lockdowns.

Monday, American said it’s extending no-fee travel changes for flyers who bought fares through April 30.

Also Monday, low-cost carrier Spirit Airlines said it’s canceling all flights to and from New York, New Jersey and Connecticut after the Centers for Disease Control and Prevention warned against all non-essential travel in the region.

Spirit said it’s suspending service to New York City’s LaGuardia Airport, Newark, N.J., Hartford, Conn., and Plattsburgh, N.Y., through at least May 4.

Copyright 2020 United Press International, Inc. (UPI). Any reproduction, republication, redistribution and/or modification of any UPI content is expressly prohibited without UPI’s prior written consent.

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