In This Article:
ISM Manufacturing Index Drops To Disturbingly Low Level
The September ISM Manufacturing Index registered 47.8 percent, a decrease of 1.3 percentage points from the August reading of 49.1 percent. It’s not only below 50 percent, which indicates a contraction, but it’s actually the lowest level since June 2009, when the Great Recession formally ended, as the chart below shows.
Chart 1: The US ISM Manufacturing PMI from 2009 to 2019
The sharp decline in the index rattled the Wall Street, sending the stock market sharply lower. President Trump also got upset. He tweeted:
As I predicted, Jay Powell and the Federal Reserve have allowed the Dollar to get so strong, especially relative to ALL other currencies, that our manufacturers are being negatively affected. Fed Rate too high. They are their own worst enemies, they don’t have a clue. Pathetic!
It’s always great idea to make fun of the central bankers who think they can set the adequate interest rates and run complex economy. And, yes, Trump is right that the strong US dollar is not helping the American manufacturers. But the non-manufacturing part of the economy continues its expansion, while the unemployment rate remains very low. In such an environment, to further lower the interest rates would only add fuel to excessive risk-taking, indebtedness and irrational exuberance in the asset markets. The unpleasant truth is that the current level of interest rates is unprecedented and it should be normalized. Yes, this is a painful process – and this is why the Fed is in a trap without any good solutions – it either normalizes the monetary policy risking a slowdown or financial crisis, or it eases further, creating larger macroeconomic imbalances that risk an even greater economic crisis later on.
What is missing in Trump’s tweet is, of course, any reference to the US-China trade war, although global trade remains the most significant issue for manufacturers. As one executive said “Chinese tariffs going up are hurting our business. Most of the materials are not made in the U.S. and made only in China.” So, it’s really ironic that Trump blasts the Fed that already cut the federal funds rate by 50 basis points to save the economy from Trump’s trade war.
Implications for Gold
What does the manufacturing recession imply for the gold market? Well, in theory, it should be positive for the yellow metal, which shines the brightest during recessions. However, we have so far just a manufacturing recession, not the broad slump of the whole economy. Although the significance of manufacturing in the economy is often underestimated (many services depend on manufacturing for their own expansion), the U.S. economy foremost relies on services.