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.
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.