At a time when all eyes seem to be focused on Washington’s unfolding impeachment drama, news on the economy could receive short shrift. But some of the most recent data call for attention. In a few words, the U.S. economic engine has a bad case of lethargy, far more like a turtle than a rabbit, and impeachment proceedings are unlikely to change that.
By many important economic indicators, the economy shifted into low gear in December 2018 when our elected leaders decided to shut down the government and impose higher tariffs on Chinese imports. Since January 2019, year-over-year growth in employment, which remains positive, has fallen systematically. The same holds true for growth in commercial and industrial loans made by banks.
When measured by the gross domestic product totem pole, we see 2% growth in 2019’s second quarter, following 3.1% in 2018’s fourth quarter. Current estimates by the Atlanta Fed suggest we will be lucky to see 2% in 2019’s third quarter. The various indicators are not yet signaling a recession but an economy that’s headed south is far more likely to hit a recession crossroad than one headed north.
Where is the weakness showing up? Which sectors? Which states and communities are suffering?
The most recent Purchasing Managers Index report on the industrial economy from the Institute for Supply Management tells us where in the economy the slowdown is most pronounced, and the latest set of state leading indicators produced by the Federal Reserve Bank of Philadelphia identifies which of the 50 states is most likely to be headed toward a recession.
The September PMI read 47.8, which was the lowest reading since June 2009. I note that a reading below 50 means the economy is contracting. The September PMI reading for exports was 41, the lowest level since March 2009. Of 18 reporting industries, only three showed positive growth: Miscellaneous Manufacturing; Food, Beverage & Tobacco Products; and Chemical Products. All heavy industries reported weaker numbers. In a nutshell, the data suggest that trade wars and the slowing world economy have taken a large bite from future U.S. prosperity.
What’s the culprit? Is it the accelerating China trade war? Higher interest rates that strengthen the dollar and cause U.S. goods to become more expensive to foreign buyers? Unfortunately, the interaction of these two economic forces is impossible to completely disentangle and say that one is more responsible for the slowdown than the other. What we know is that both policy actions lead in the same direction: a slowing U.S. economy.
But what can we say about the geographical locations of the slowdown? The accompanying Federal Reserve Bank of Philadelphia’s August state leading indicator map offers an answer. It predicts growth six months out, or in this case, for February 2020. A quick glance at the map tells us that Delaware, Kentucky, Michigan, Ohio, Oklahoma, Wisconsin, and Wyoming may expect negative growth six months from now. Some of these are heavy manufacturing states, others are tied to energy and grain production.
Yes, the pending impeachment process commands our attention, but data on the weakening U.S. economy suggest we best not forget that economic policy decisions matter. Our elected officials have heavy responsibilities that include widening the path for economic progress.
Bruce Yandle is a distinguished adjunct fellow with the Mercatus Center at George Mason University and dean emeritus of the Clemson University College of Business and Behavioral Science.
