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.
By the numbers, overall retail sales in August were up 0.1% seasonally adjusted month over month and up 2.1% unadjusted year over year. That compared with increases of 1.1% month over month and 2.9% year over year in July.
August’s core retail sales as defined by NRF — based on the Census data but excluding automobile dealers, gasoline stations and restaurants — were up 0.3% seasonally adjusted month over month and up 3.3% unadjusted year over year. Core retail sales were up 3.4% year over year for the first eight months of the year, in line with NRF’s forecast for 2024 retail sales to grow between 2.5% and 3.5% over 2023.
“These numbers show the continued resiliency of the American consumer,” NRF Chief Economist Jack Kleinhenz said in a release. “While sales growth decelerated from last month’s pace, there is little hint of consumer spending unraveling. Households have the underpinnings to spend as recent wage gains have outpaced inflation even though payroll growth saw a slowdown in July and August. Easing inflation is providing added spending capacity to cost-weary shoppers and the interest rate cuts expected to come from the Fed should help create a more positive environment for consumers in the future.”
The U.S., U.K., and Australia will strengthen supply chain resiliency by sharing data and taking joint actions under the terms of a pact signed last week, the three nations said.
The agreement creates a “Supply Chain Resilience Cooperation Group” designed to build resilience in priority supply chains and to enhance the members’ mutual ability to identify and address risks, threats, and disruptions, according to the U.K.’s Department for Business and Trade.
One of the top priorities for the new group is developing an early warning pilot focused on the telecommunications supply chain, which is essential for the three countries’ global, digitized economies, they said. By identifying and monitoring disruption risks to the telecommunications supply chain, this pilot will enhance all three countries’ knowledge of relevant vulnerabilities, criticality, and residual risks. It will also develop procedures for sharing this information and responding cooperatively to disruptions.
According to the U.S. Department of Homeland Security (DHS), the group chose that sector because telecommunications infrastructure is vital to the distribution of public safety information, emergency services, and the day to day lives of many citizens. For example, undersea fiberoptic cables carry over 95% of transoceanic data traffic without which smartphones, financial networks, and communications systems would cease to function reliably.
“The resilience of our critical supply chains is a homeland security and economic security imperative,” Secretary of Homeland Security Alejandro N. Mayorkas said in a release. “Collaboration with international partners allows us to anticipate and mitigate disruptions before they occur. Our new U.S.-U.K.-Australia Supply Chain Resilience Cooperation Group will help ensure that our communities continue to have the essential goods and services they need, when they need them.”
Artificial intelligence (AI) tools can help users build “smart and responsive supply chains” by increasing workforce productivity, expanding visibility, accelerating processes, and prioritizing the next best action to drive results, according to business software vendor Oracle.
To help reach that goal, the Texas company last week released software upgrades including user experience (UX) enhancements to its Oracle Fusion Cloud Supply Chain & Manufacturing (SCM) suite.
“Organizations are under pressure to create efficient and resilient supply chains that can quickly adapt to economic conditions, control costs, and protect margins,” Chris Leone, executive vice president, Applications Development, Oracle, said in a release. “The latest enhancements to Oracle Cloud SCM help customers create a smarter, more responsive supply chain by enabling them to optimize planning and execution and improve the speed and accuracy of processes.”
According to Oracle, specific upgrades feature changes to its:
Production Supervisor Workbench, which helps organizations improve manufacturing performance by providing real-time insight into work orders and generative AI-powered shift reporting.
Maintenance Supervisor Workbench, which helps organizations increase productivity and reduce asset downtime by resolving maintenance issues faster.
Order Management Enhancements, which help organizations increase operational performance by enabling users to quickly create and find orders, take actions, and engage customers.
Product Lifecycle Management (PLM) Enhancements, which help organizations accelerate product development and go-to-market by enabling users to quickly find items and configure critical objects and navigation paths to meet business-critical priorities.
Nearly one-third of American consumers have increased their secondhand purchases in the past year, revealing a jump in “recommerce” according to a buyer survey from ShipStation, a provider of web-based shipping and order fulfillment solutions.
The number comes from a survey of 500 U.S. consumers showing that nearly one in four (23%) Americans lack confidence in making purchases over $200 in the next six months. Due to economic uncertainty, savvy shoppers are looking for ways to save money without sacrificing quality or style, the research found.
Younger shoppers are leading the charge in that trend, with 59% of Gen Z and 48% of Millennials buying pre-owned items weekly or monthly. That rate makes Gen Z nearly twice as likely to buy second hand compared to older generations.
The primary reason that shoppers say they have increased their recommerce habits is lower prices (74%), followed by the thrill of finding unique or rare items (38%) and getting higher quality for a lower price (28%). Only 14% of Americans cite environmental concerns as a primary reason they shop second-hand.
Despite the challenge of adjusting to the new pattern, recommerce represents a strategic opportunity for businesses to capture today’s budget-minded shoppers and foster long-term loyalty, Austin, Texas-based ShipStation said.
For example, retailers don’t have to sell used goods to capitalize on the secondhand boom. Instead, they can offer trade-in programs swapping discounts or store credit for shoppers’ old items. And they can improve product discoverability to help customers—particularly older generations—find what they’re looking for.
Other ways for retailers to connect with recommerce shoppers are to improve shipping practices. According to ShipStation:
70% of shoppers won’t return to a brand if shipping is too expensive.
51% of consumers are turned off by late deliveries
40% of shoppers won’t return to a retailer again if the packaging is bad.
The “CMA CGM Startup Awards”—created in collaboration with BFM Business and La Tribune—will identify the best innovations to accelerate its transformation, the French company said.
Specifically, the company will select the best startup among the applicants, with clear industry transformation objectives focused on environmental performance, competitiveness, and quality of life at work in each of the three areas:
Shipping: Enabling safer, more efficient, and sustainable navigation through innovative technological solutions.
Logistics: Reinventing the global supply chain with smart and sustainable logistics solutions.
Media: Transform content creation, and customer engagement with innovative media technologies and strategies.
Three winners will be selected during a final event organized on November 15 at the Orange Vélodrome Stadium in Marseille, during the 2nd Artificial Intelligence Marseille (AIM) forum organized by La Tribune and BFM Business. The selection will be made by a jury chaired by Rodolphe Saadé, Chairman and CEO of the Group, and including members of the executive committee representing the various sectors of CMA CGM.