Graph of the week: US manufacturing signals recession

While most of the attention lately has been going to the weakness of the Chinese economy, the outlook for the US economy has clearly deteriorated in recent weeks. This week, the first indicator on business confidence for January dropped to recession-like levels.

US empire

Of the major developed economies, the US has seen the most robust recovery since the 2008-09 crisis. However, recent data have raised questions about the durability of this recovery. The manufacturing sector has been hit hard by lower oil prices, developments in China and a stronger dollar. Two important regional business confidence indicators (for the New York and Chicago regions) have now fallen to levels that were only seen during recessions in the past.

Granted, other key areas of the US economy, like housing and the labour market, continue to do well and are nowhere near recession-like levels. However, in the past the manufacturing sector was more often than not a useful leading indicator for the rest of the economy. It is quite possible that the recent resurgence of the US oil sector (linked to shale) had distorted historical patterns, making the manufacturing data less reliable as a leading indicator for the economy as a whole.

However, even if the manufacturing is less important today than in the past, the weak leading indicators for the sector raise warning flags about the state of the overall US economy. While still below 50%, the probability of the US economy slipping into recession in the next 12 months is higher today than at any moment since the Great Recession.

This article was written by Bart Van Craeynest

on 15 January, 2016

On completion of his studies in economics at UFSIA, Bart Van Craeynest started work as an economist in the financial sector. In this capacity he has been following economic developments in Belgium and internationally and the impact of the latter on the financial markets for over 15 years. Following a long period at a large bank, he became chief economist at a Belgian financial institution in 2010. Bart Van Craeynest has held the position of chief economist at Econopolis since 2015. He is co-responsible for the economic line of the house and hence closely involved in developing the investment strategy.