Industrial production weakness in the United States has led to increased talk of a recession, but a deeper examination shows that this weakness is highly concentrated in energy and globally exposed sectors.
The recent weakness in U.S. industrial production has grabbed headlines and raised concerns about another recession. Indeed, with industrial production falling 0.5 percent in February—the fifth decline in the last six months—and with activity down 1.6 percent from last year, the latest industrial-sector data weren't encouraging. With that, capacity utilization has fallen to 75.3 percent, about 4.7 percentage points below its long-term average.
Where is this weakness coming from? There are essentially two sources. The first is energy; the second is "global headwinds."
With regard to energy, the sharp plunge in oil prices has been the main catalyst. As oil prices fell from US$100 per barrel in mid-2014 to around US$30 per barrel in early 2016, investment in the oil and gas sector contracted severely. The sector, which represented about 1 percent of the U.S. economy at the end of 2014, now represents just under 0.5 percent of gross domestic product (GDP). On its own, the drag from reduced oil and gas investment imposed a 0.4 percentage point drag on real GDP last year. Likewise, the drop in industrial production over the past 12 to 18 months has largely been due to reduced energy output (energy products, drilling, converted fuel, and primary metals). The subsector saw its output fall 10 percent from an early-2015 peak, bringing its share of total industrial production back to the 2009 level—prior to the boom in "unconventional energy," such as oil obtained through hydraulic fracturing.
The other key factor weighing on industrial production is often described as "global headwinds" in the form of a strong U.S. dollar and sluggish global demand. Indeed, the near 20 percent appreciation of the U.S. dollar has rendered U.S. exports more expensive, thereby weighing on final external demand. Simultaneously, the sluggish global growth environment, with emerging markets facing a gloomy outlook, has also weighed on U.S. export prospects.
Are we in an industrial recession?
A question on many minds right now is whether the United States has entered an industrial recession. The short answer is both yes and no. Based on the sometimes-abused definition of a recession being two consecutive quarters of contraction, we can say that industrial production indeed entered a recession at the start of 2015. While output rebounded in Q3 2015, it has since fallen back into contraction with a 3.25 percent decline (annualized) in Q4 2015 and another decline expected in Q1 2016.
Is this sufficient to conclude that the entire industrial production complex is in a recession? Not really. As described above, while nonenergy output has flattened, it is not declining. (Figure 1 shows a comparison of energy versus nonenergy-based production.) In fact, despite a number of weak months, manufacturing output has increased in seven of the last eight quarters, and the latest data show manufacturing production trending at a 1.1 percent year-over-year pace in February. More specifically, we find that the weighted sum of manufacturing subsectors contracting in February 2016 was "only" 32 percent—near cyclical lows—and well below the 50-percent threshold generally associated with economywide recessions. (See Figure 2.)
In other words, while some manufacturing sectors are struggling, others are not. With so much of the industrial weakness focused on the energy sector, it is not surprising that machinery is one of those hardest hit. The oilfield equipment collapse has only a limited direct impact since it comprises only about 6 percent of total machinery, but the indirect supply chain impact across other subsegments, such as pumps, motors, and material handling equipment, is more significant. Additionally, because of its high trade intensity (40 percent of output is exported), machinery suffers disproportionately from global headwinds—not only because of the strong dollar but also because equipment demand remains weak in the key European and Chinese markets.
Consumer-oriented sectors, meanwhile, have been more resilient. In the case of food and beverages, there has been a marked acceleration in activity—a direct result of low trade intensity and robust household consumption. Healthy consumer demand is also supporting U.S. automotive production, which, despite a small pullback in Q4, reached a 14-year high last year.
Outlook: Cloudy but not super-stormy
Outside of what appears to be sector-specific weakness in the industrial arena, the rest of the economy continues to display solid fundamentals. We continue to see strong employment growth, solid income growth, and resilient private sector confidence supporting private sector spending. Perhaps the most descriptive illustration of this resilience comes from the Institute for Supply Management's nonmanufacturing index, which appears firmly fixed around the 55 threshold for solid expansion. (See Figure 3.) Since the nonmanufacturing sector represents close to 90 percent of the U.S. economy, this is a good indication that overall the U.S. economy remains on solid footing.
After growing an average 2.9 percent in 2014, industrial production slowed sharply, growing only 0.3 percent in 2015, weighed down by weakness in the energy segment and global headwinds. However, while we expect output will contract in Q1 2016, we foresee subdued positive momentum through the rest of the year. In particular, we expect the drag from energy to become less severe and that an ongoing need or desire to replace the aging stock of industrial equipment will provide some cushion. Additionally, low oil and natural gas prices should support chemical production, which has started to see important investment in new facilities in the United States.
Online merchants should consider seven key factors about American consumers in order to optimize their sales and operations this holiday season, according to a report from DHL eCommerce.
First, many of the most powerful sales platforms are marketplaces. With nearly universal appeal, 99% of U.S. shoppers buy from marketplaces, ranked in popularity from Amazon (92%) to Walmart (68%), eBay (47%), Temu (32%), Etsy (28%), and Shein (21%).
Second, they use them often, with 61% of American shoppers buying online at least once a week. Among the most popular items are online clothing and footwear (63%), followed by consumer electronics (33%) and health supplements (30%).
Third, delivery is a crucial aspect of making the sale. Fully 94% of U.S. shoppers say delivery options influence where they shop online, and 45% of consumers abandon their baskets if their preferred delivery option is not offered.
That finding meshes with another report released this week, as a white paper from FedEx Corp. and Morning Consult said that 75% of consumers prioritize free shipping over fast shipping. Over half of those surveyed (57%) prioritize free shipping when making an online purchase, even more than finding the best prices (54%). In fact, 81% of shoppers are willing to increase their spending to meet a retailer’s free shipping threshold, FedEx said.
In additional findings from DHL, the Weston, Florida-based company found:
43% of Americans have an online shopping subscription, with pet food subscriptions being particularly popular (44% compared to 25% globally). Social Media Influence:
61% of shoppers use social media for shopping inspiration, and 26% have made a purchase directly on a social platform.
37% of Americans buy from online retailers in other countries, with 70% doing so at least once a month. Of the 49% of Americans who buy from abroad, most shop from China (64%), followed by the U.K. (29%), France (23%), Canada (15%), and Germany (13%).
While 58% of shoppers say sustainability is important, they are not necessarily willing to pay more for sustainable delivery options.
Gulf Coast businesses in Louisiana and Texas are keeping a watchful eye on the latest storm to emerge from the Gulf Of Mexico this week, as Hurricane Rafael nears Cuba.
The category 2 storm’s edges could also brush Florida as it heads northwest, causing tropical storm force winds in the lower and middle Florida keys. However, the weather agency said it is too soon to forecast Rafael’s impact on the U.S. western Gulf Coast.
In the face of campaign pledges by Donald Trump to boost tariffs on imports, many U.S. business interests are pushing back on that policy plan following Trump’s election yesterday as president-elect.
U.S. firms are already rushing to import goods before the promised tariff increases take effect, to avoid potential cost increases. That’s because tariffs are paid by the domestic companies that order the goods, not by the foreign nation that makes them.
That dynamic would likely increase prices for U.S. consumers as importers pass along the extra cost in the form of price hikes, according to an analysis by the National Retail Federation (NRF). Specifically, Trump’s tariff plan would boost prices in six consumer product categories: apparel, toys, furniture, household appliances, footwear, and travel goods. “Retailers rely heavily on imported products and manufacturing components so that they can offer their customers a variety of products at affordable prices,” NRF Vice President of Supply Chain and Customs Policy Jonathan Gold said in a release. “A tariff is a tax paid by the U.S. importer, not a foreign country or the exporter. This tax ultimately comes out of consumers’ pockets through higher prices.”
The rush to avoid those swollen costs can already be measured in the form of rising rates for transporting ocean freight, as companies start buffering their inventories before the new administration officially announces tariff hikes. Transpacific rates are still $1,000/FEU or more above their April lows, showing increased ocean volumes and climbing rates generated by shippers’ concerns about supply chain disruptions including port strikes and the Trump tariff increases, supply chain visibility provider Freightos said in an analysis. "The Trump win may start shaking up supply chains even before he takes office. Just the anticipation of higher tariffs may lead importers to pull forward shipments, creating a preemptive freight frenzy," Judah Levine, Head of Research at Freightos, said in a release. “Frontloading will cause freight rates to feel the heat as importers race to dodge the extra costs, similar to what took place with Trump’s tariffs on Chinese goods in 2018 and 2019."
Another group sounding a note of caution about international trade developments was the Global Cold Chain Alliance (GCCA), a trade group which represents some 1,500 member companies in more than 90 countries that provide temperature-controlled warehousing, logistics, and transportation. “We congratulate President Trump on his election. We also congratulate all those who have been elected to the U.S. Senate and House of Representatives,” GCCA President and CEO Sara Stickler said in a statement. “We are also committed to promoting the growth of exports from U.S.-based food production and broader manufacturing sectors. We will engage constructively in the policy discussion about future trade policy and continue to make the case for the importance of maintaining balanced and resilient trade routes for food and other temperature-controlled products across the world.”
Businesses in the European Union (EU) were likewise wary of tariff plans, judging by a statement from the VDMA, a trade group representing 3,600 German and European machinery and equipment manufacturing companies. "Donald Trump's second term will be a greater challenge for German and European industry than his first presidency. We must take his tariff announcements seriously, in particular. This will once again put a noticeable strain on transatlantic trade and investment relations," VDMA Executive Director Thilo Brodtmann said in a statement. “The USA is and will remain the most important export market outside the EU for mechanical and plant engineering from Germany. Our companies offer the products required to implement the re-industrialization of the USA that Donald Trump is striving for. The VDMA's overall outlook for the American market therefore remains positive."
In addition to its flagship Clorox bleach product, Oakland, California-based Clorox manages a diverse catalog of brands including Hidden Valley Ranch, Glad, Pine-Sol, Burt’s Bees, Kingsford, Scoop Away, Fresh Step, 409, Brita, Liquid Plumr, and Tilex.
British carbon emissions reduction platform provider M2030 is designed to help suppliers measure, manage and reduce carbon emissions. The new partnership aims to advance decarbonization throughout Clorox's value chain through the collection of emissions data, jointly identified and defined actions for reduction and continuous upskilling.
The program, which will record key figures on energy, will be gradually rolled out to several suppliers of the company's strategic raw materials and packaging, which collectively represents more than half of Clorox's scope 3 emissions.
M2030 enables suppliers to regularly track and share their progress with other customers using the M2030 platform. Suppliers will also be able to export relevant compatible data for submission to the Carbon Disclosure Project (CDP), a global disclosure system to manage environmental data.
"As part of Clorox's efforts to foster a cleaner world, we have a responsibility to ensure our suppliers are equipped with the capabilities necessary for forging their own sustainability journeys," said Niki King, Chief Sustainability Officer at The Clorox Company. "Climate action is a complex endeavor that requires companies to engage all parts of their supply chain in order to meaningfully reduce their environmental impact."
Supply chain risk analytics company Everstream Analytics has launched a product that can quantify the impact of leading climate indicators and project how identified risk will impact customer supply chains.
Expanding upon the weather and climate intelligence Everstream already provides, the new “Climate Risk Scores” tool enables clients to apply eight climate indicator risk projection scores to their facilities and supplier locations to forecast future climate risk and support business continuity.
The tool leverages data from the United Nations’ Intergovernmental Panel on Climate Change (IPCC) to project scores to varying locations using those eight category indicators: tropical cyclone, river flood, sea level rise, heat, fire weather, cold, drought and precipitation.
The Climate Risk Scores capability provides indicator risk projections for key natural disaster and weather risks into 2040, 2050 and 2100, offering several forecast scenarios at each juncture. The proactive planning tool can apply these insights to an organization’s systems via APIs, to directly incorporate climate projections and risk severity levels into your action systems for smarter decisions. Climate Risk scores offer insights into how these new operations may be affected, allowing organizations to make informed decisions and mitigate risks proactively.
“As temperatures and extreme weather events around the world continue to rise, businesses can no longer ignore the impact of climate change on their operations and suppliers,” Jon Davis, Chief Meteorologist at Everstream Analytics, said in a release. “We’ve consulted with the world’s largest brands on the top risk indicators impacting their operations, and we’re thrilled to bring this industry-first capability into Explore to automate access for all our clients. With pathways ranging from low to high impact, this capability further enables organizations to grasp the full spectrum of potential outcomes in real-time, make informed decisions and proactively mitigate risks.”