The fiscal cliff is negatively impacting new orders and jobs in US manufacturing

Yesterday the ISM Manufacturing Report on Business came out and it showed a large decline in the US manufacturing sector. The headline PMI number of 49.5% means that the US manufacturing sector is below the 50% threshold that separates expansion and contraction. The best interpretation for why the manufacturing sector has taken a tumble is the fiscal cliff.

If one looks at the ISM sub-indices a more nuanced picture emerges. Production has actually increased from 52.4 to 53.7. So the manufacturing sector will add even more to GDP in Q4 2012 based on November’s production than October’s. And this has nothing to do with inventory building as the inventory sub-index moved to contraction from unchanged. The reason that the PMI has faltered has everything to do with forward-looking subindices, new orders and employment. While new orders are barely growing, the number fell 3.9% from October. And the employment subindex is now contracting. What this speaks to is business caution, based, in my view, largely on the unpredictable economic impact of the fiscal cliff resolution. The ISM even says so:

The Employment Index registered 48.4 percent, a decrease of 3.7 percentage points, which is the index’s lowest reading since September 2009 when the Employment Index registered 47.8 percent. The Prices Index registered 52.5 percent, reflecting a decrease of 2.5 percentage points. Comments from the panel this month generally indicate that the second half of the year continues to show a slowdown in demand; respondents also express concern over how and when the fiscal cliff issue will be resolved.”

The fiscal cliff is a manufactured crisis to prevent the US from deficit spending. There is no solvency constraint for an entity like the US government which pays for outlays with IOUs it can manufacture in infinite quantities. The problem is the politically intractable one of how to limit deficits that are seen as emblematic of government waste and excess. I believe the solution will indeed see some tax increases and spending cuts which will act as a drag on the economy. Whether this means recession is unknown. But generally, I am increasingly optimistic about the US economy being able to muddle through without recession unless the fiscal cliff creates one. 

Source: ISM


Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty five years of business experience. He has also been a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College.

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