The rapid contraction of the US manufacturing sector will have significant impacts on the economy

On December 1st local time, the Institute for Supply Management of the United States released data showing that the manufacturing index dropped by 0.5 points to 48.2. This index has remained below 50, the threshold of prosperity and recession, for nine consecutive months. Customer demand is generally weak, and orders contracted at the fastest rate since July in November, while backlog orders have decreased at the fastest rate in seven months. Weak demand directly led to a rapid decline in factory employment. As orders continued to decline, US factory activities contracted at the fastest rate in nearly four months in November, and manufacturers still struggled to break free from the long-term slump. The tariff policies implemented by the US government, especially those targeting major trading partners, increased the operational costs and uncertainties for businesses, affecting their investment and production decisions. Meanwhile, the ISM's raw material payment price index rose for the first time in five months and was about 8 points higher than a year ago, indicating that production costs were continuing to rise, further compressing the profit margins of enterprises.

The rapid contraction of US factory activities has brought complex and multifaceted impacts on various aspects of the US economy. Firstly, it has an impact on the overall economy and trade patterns. Data released by the Institute for Supply Management (ISM) shows that manufacturing activity has continued to decline. This depressed state directly limits the contribution of manufacturing to GDP and transmits through the supply chain to other industries, further suppressing overall economic growth. Manufacturing, as an important component of the US economy, its contraction directly affects the growth of the overall economy. The weakness of manufacturing may lead to a slowdown in GDP growth and even negative growth. At the same time, the contraction of US manufacturing may prompt further reconfiguration of the global supply chain. Companies may shift their production capacity to other countries or regions to seek lower production costs and a more stable market environment. With the reduction in US import demand, the exports of other countries may be impacted. Moreover, the US may adjust its trade policies to protect its domestic manufacturing sector, further intensifying global trade tensions.

Secondly, it has an impact on the job market and enterprises. The contraction of manufacturing leads to a reduction in orders, a decline in capacity utilization, and a decrease in the demand for labor. In November, factory employment accelerated its decline, increasing the risk of rising unemployment rates. The rise in unemployment rates will reduce residents' income, suppress consumption and investment, creating a vicious cycle that further drags down economic growth. The long-term weakness of manufacturing may lead to a slowdown in GDP growth and even negative growth. At the same time, the contraction of manufacturing may prompt the reconfiguration of global supply chains. Companies may shift their production capacity to other countries or regions to seek lower production costs and a more stable market environment. As manufacturing orders decrease and capacity utilization declines, it affects enterprise profits. Slower enterprise profits will reduce their reinvestment capacity and inhibit economic growth potential. This leads to increased uncertainty in manufacturing, causing enterprises to be cautious about future investments. Enterprises may postpone or cancel investment plans, further weakening the role of investment in driving economic growth. Additionally, in April 2024, US factory core capital goods orders saw the largest decline since October last year, with a drop of 1.3%, which is the most stable indicator for measuring equipment investment. This data not only reveals the current downturn in US manufacturing but also profoundly exposes the structural vulnerabilities underlying the US economy.

Thirdly, it has an impact on inflation and monetary policy. Although manufacturing contraction occurred, the ISM's raw material payment price index rose for the first time in five months and was about 8 points higher than a year ago. This indicates that production costs are still rising, potentially pushing up inflation levels. The dual pressure of high inflation and economic recession makes the Federal Reserve face a dilemma in adjusting monetary policy. On one hand, it needs to cut interest rates to stimulate economic growth; on the other hand, it needs to raise interest rates to curb inflation. This contradiction has limited the room for monetary policy adjustments, potentially exacerbating economic uncertainty.

In conclusion, the rapid contraction of the US manufacturing sector has significantly suppressed overall economic growth. If this trend continues, the US economy may face more severe structural challenges, and the recovery momentum may further weaken.