US industry output has contracted for 8 months in a row, the longest stretch since the Great Depression.
US manufacturing keeps falling steeply as high-interest rates increase their toll on American industry. The US Purchasing Manager’s Index (PMI), the main indicator of industrial output, declined to its lowest level since the Covid pandemic.
Specifically, the American PMI in June fell to 46.0 points. In May 2020, at the height of the first Covid wave, the same measurement read 46.9 points.
A PMI below 50 is indicative of a contraction in manufacturing. For the longest stretch since the Great Depression, the American PMI has remained below the threshold for 8 months in a row.
"The health of the US manufacturing sector took a sharp turn for the worse in June," said Chief Economist at S&P Global Market Intelligence Chris Williamson, "adding to concerns over the economy potentially slipping into recession in the second half of the year."
Talks of a US recession have been going on since late 2022. So far, the American economy has proved to be incredibly resilient, with unemployment remaining steadily low.
But the American Federal Reserve tested the US economy with the fastest streak of interest rate hikes in 40 years. The hawkish Fed strategy almost caused a banking crisis earlier this year, while US corporations have started to suffer from interest rate pressure.
The role of manufacturing in America
Another reason why US manufacturing production has dropped is weak internal demand. The United States, as the world’s richest country, has since moved on from an industry-based economy to a service-based one.
Since the 1980s, the American current account has steadily declined, meaning imports have increasingly outpaced exports. In short, the United States doesn’t produce goods anymore, rather it creates services.
This has allowed industry giants like China and Germany to take the US spot, the former with cheap labor and the latter with advanced technologies.
Decades of US negative current accounts were also made possible by the outstanding power of the US dollar. As the global reserve currency, the dollar could "guarantee" the US debt, which continues to rise despite being 20% larger than the nation’s economy.
But the world is changing fast. Chinese labor is now much more expensive as China also switches to a service-based economy. Recession and economic stagnation are destroying German industry too.
The United States needs to kickstart its manufacturing again, especially if it wants to address its enormous debt once and for all. The largest economy in the world cannot rely on foreign manufacturing if it wants to keep its prime for long.
This is what the new "Bideneconomics" is trying to address. Though in the very early stages, the new US economic strategy will have far-flung consequences.
