So “the Sky is Falling” on California Manufacturing(?!)

“October is, for unknown reasons, the worst month in memory.”

A month ago, the Institute of Applied Research, which publishes the Purchasing Managers’ Index for the Inland Empire – with about 4 million people, the third-most populous region in California – reported: “We are not yet ready to say that ‘the sky is falling.’”

Back then, they were lamenting that the Inland Empire PMI had dropped below 50 for the second month in a row (below 50 = contraction), hitting 44.1 in September, after having already hit 46.6 in August. But the sky wasn’t falling “yet,” the report pointed out, because, given how volatile the index is, “it takes three months of figures below 50 before a new trend (in this case a trend of contraction rather than growth) is established.”

Alas, on Monday, the IAR released the Inland Empire PMI for October, and it was sharply below 50 for the third month in a row, this time at 45.9.

So is the IAR now “ready to say that ‘the sky is falling?’” We don’t know. The authors didn’t specifically address the issue. We only know that the index is falling – and a lot: back in April, it was still flying high at 60.

But the index covers only manufacturing. And the rest of the Inland Empire economy?

On the bright side, a PMI over 43.1 percent generally indicates an expansion of the overall economy, thus the Inland Empire economy appears to be continuing its slow growth even as the manufacturing sector is experiencing weakness.”

The details weren’t exactly pretty, with Production at 40, New Orders at 41.9, and the Employment Index deteriorating from 50.0 in September to 41.9 in October. Now September’s employment stagnation seems like nirvana.

Respondents are “very cautious in their projections about the state of the local economy for the coming quarter” with only 23% forecasting that the economy will be stronger, with 43% predicting no change, and 33% predicting that it will be even weaker.

The survey asks Purchasing Managers to comment on the “general business conditions” affecting their company. Turns out, “there were only a few positive remarks,” while “most of the comments were cautionary,” including these gems:

  • “Business is soft, new orders are flat compared to last year at this time.”
  • “Commercial OEM sales are terrible.”
  • “October is, for unknown reasons, the worst month in memory. The opening production schedule was about half of a normal October. Some orders are coming in but the month looks to be very low in dollars shipped….”
  • “Production has surpassed sales this last month and we will see a negative dip in overall customer shipments.”

But no big deal. Manufacturing is only a small part of the California economy. According to the Census Bureau, in 2012 there were over 38,000 manufacturing businesses in the state. They’re now estimated to employ 1.4 million people, or “only” about 8% of all workers in the state.

So we shouldn’t worry: startups with no sales are booming, and the gig economy is too.

The Inland Empire PMI thus joins the five regional manufacturing surveys, conducted by the corresponding Federal Reserve Regional Districts: Dallas, Kansas City, New York, Richmond, and Philadelphia (the remaining 7 Districts, including San Francisco, don’t conduct manufacturing surveys).

This chart by Doug Short at Advisor Perspectives shows the dismal condition of manufacturing in those five districts by averaging the five regional indices. And this average is at the worst level since the Financial Crisis:


I added the red line in the chart to show exactly when manufacturing indices dropped like this the last time: it was in early 2008, when the US economy was already in the Great Recession, though that was officially acknowledged only long afterwards, as official recessions always are.

But like in California, manufacturing in the US is no big deal – that’s what we’re always told when things turn sour. Already, the much ballyhooed meme of a “manufacturing renaissance” has been junked into oblivion. No one talks about it anymore.

These days, manufacturing employs only 9% of the US workforce and accounts for only 12% of the US economy, which is otherwise driven by consumer spending and services. So when manufacturing sinks into the mire, the “sky isn’t falling,” at least not yet, because we can always make it up with some part-time gig in the new “sharing economy.”

But in this consumer-based economy, most consumers are struggling. Only some are doing well. And businesses are now catching the drift. Read… Chilling Thing Hershey Just Said About American Consumers

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  16 comments for “So “the Sky is Falling” on California Manufacturing(?!)

  1. So, when the PMI hits zero, can we finally say the sky is falling?

    The Manufacturing base isn’t just about companies who manufacture things. The domino effect slams all the companies and people who service those manufacturers; suppliers of parts and equipment, engineering companies, maintenance contractors, inspectors. You name it. The “Falling Sky” penumbra extends far beyond just the manufacturer.

  2. Sgt Milstar says:

    California Steel industries, Fontana, CA last month laid off 200 employees. Whats interesting is the lack of news of this event in the media.

    • VegasBob says:

      We know that Walmart customers are pretty much broke, living from check to check.

      But even consumer spending among the wealthy is not particularly robust. Neiman Marcus, the luxury goods department store chain, laid off 500 people on October 1st.

      But the manic stock market keeps flying higher. Even as the economic depression resumes its course, I suppose Jim Cramer will still be shouting ‘buy, buy buy!’

      • Petunia says:

        I was a good customer of NM once. I still go to the site and the decline in quality of the goods available (not their fault) is striking. This may be the reason the rich are not spending as much. There is a lot of junk out there passing itself off as high end merchandise.

  3. BoyfromTottenham says:

    Hi from Oz. A query here Wolf – in this otherwise excellent article you say “Back then, they were lamenting that the Inland Empire PMI had dropped below 50 for the second month in a row (below 50 = contraction),”, and then quote (the IAR talking about the Inland Empire PMI?) saying “On the bright side, a PMI over 43.1 (??? – my edit) percent generally indicates an expansion of the overall economy, thus the Inland Empire economy appears to be continuing its slow growth even as the manufacturing sector is experiencing weakness.” IMO these indexes are generally constructed so that index values below 50 indicate economic contraction (as you pointed out above), but IAR say that a PMI over 43.1 indicates expansion. Are you talking about the same indexes here? If yes, is the IAR telling porkies? If not, can you kindly clarify this for us? Thanks for your great blog -I recommend it to others frequently.

    • Wolf Richter says:

      The PMI covers manufacturing companies only. Manufacturing is a small part of the overall economy, as I pointed out in the article. So it takes a big swoon in manufacturing to indicate that the overall economy is shrinking as well.

      What the IAR pointed out is that the manufacturing PMI generally has to drop below a certain level before overall economic growth turns negative (based on experience). That relationship is true for all manufacturing surveys.

      • meofios says:

        manufacturing is a small part of GDP, but measure the economy using gross output, manufacturing is 40% of the economy, gross output is a more accurate measure of economic activity than GDP.

  4. michael says:

    The sharing economy and social media. Without jobs we will have a lot more time for those. I am not worried. I am sure that facebook, twitter, or linkedin will save us. What could possibly go wrong?

  5. Paulo says:

    Wait for it, one day soon there will be ‘selfies’ posted of well dressed people in unemployment lines. Or, did I miss it already.

    From “The Committments”
    Unemployment Official: Mr. Rabbitte, you’ve been collecting unemployment benefit for two years. Are you trying to tell me you can’t get a job?

    Jimmy Rabbitte: We’re a third world country – what can you do?

  6. Jungle Jim says:

    ……….given how volatile the index is, “it takes three months of figures below 50 before a new trend (in this case a trend of contraction rather than growth) is established.”

    But it only takes one month of rising numbers to signal a recovery. Or, have I got that wrong ?

    • Inhibitor says:

      Depends if you’re the optimist or the pessimist.

      Wall street is optimistic because it pays to be. Easier to rope in investors when “the economy is booming”. And who wants to wait three months for that headline?

  7. Sgt Milstar says:

    From the IE Business Daily, 11/03/2015:

    The seasonality refers to the late summer/early fall surge in Christmas-related manufacturing that is mostly finished by October. However, Inland Empire manufacturing has also been hurt by a roughly 32 percent increase in the value of the U.S. dollar that has occurred during the last year, regional economist John Husing said.

    “We’re the capital of logistics in the western United States, so we benefit from cheaper imports,” Husing said. “But the downside is our manufacturing sector gets hurt.”

    John Husing is the local economy economic hack that believes that the building of warehouses and trucking companies for the distribution of foreign made goods is good for the local economy.

    These jobs average pay is $15 per hour. Amazon has large operations in San Bernardino and Redlands. Amazon has plans to expand hiring for the Christmas season by at least 1000.

  8. oneyedjack says:

    Notice Fox plays citizens for raising taxes on everything.From gas,property tax,Wall Street Tax,business tax,,,,,,What strikes me is no one brings up no bid gov contracts to family members of congress,or friends,cronies. and run away gov spending with no accountability,none! In an Obamacare crippled economy,how can Americans pay more?So instead of leaving the state for cheaper taxes,take your money leave the country!Expatriates goes up every year.

  9. interesting says:

    I’ve read the first paragraph… i’ll say it, yes the sky is falling!!!

  10. interesting says:

    I’ve mention this before, we are already in recession and it’s every bit as bad as 2007/08 or even worse, somebody turned the switch and the work has dried up.

    my main customer just informed me that due to obamacare his heath care costs have risen 43% this year and now all employees have to pick up the tab as the owner isn’t going to cover that cost. So every employee just took a $1800 a year pay cut.

    manufacturing may only be 9% of the economy but that 9%, due to technological advances, turns out a lot of work AND it’s 100% of my income so i’m not happy that nobody who should care gives a shit.

    i guess i can go find a $15 an hour job at guitar center….i’m not sure how i’ll cover $1750 a month in rent on that but……

  11. Julian the Apostate says:

    Mark Twain once observed that one should go to Heaven for the climate and He’ll for the company. California seems to have flipped the equation…

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