Factories Throttle Back, Pressuring U.S. Economy

Date : 06/09/2019 @ 2:29PM
Source : Dow Jones News
Stock : Navistar International Corp (NAV)
Quote : 30.3075  0.9775 (3.33%) @ 8:08PM

Factories Throttle Back, Pressuring U.S. Economy

Navistar (NYSE:NAV)
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By Austen Hufford and Patrick McGroarty 

Factories have shifted into low gear after a year of record output and big job gains, putting additional pressure on a U.S. economy that already is expected to grow more slowly this year.

American consumers and companies are buying fewer cars, trucks and tractors and building fewer houses. That, in turn, is weighing on demand for wheels and steel parts, washing machines and paint.

Deere & Co., General Motors Co., 3M Co. and other companies that make those goods are cutting output, slowing hiring or cutting jobs as a result. That means manufacturers, which contributed more than any other industry to the U.S. economy's 2.9% expansion last year, could become a drag on growth. Many economists expect U.S. gross-domestic product growth to drop to 2.5% or lower this year.

Navistar International Corp. executives said the company's biggest customers are replacing only their oldest vehicles this year, instead of expanding their fleets, after one of the busiest years on record for the trucking industry in 2018.

"The U.S. economy is showing signs of slowing but remains very healthy," Troy Clarke, chief executive at the truck maker, told analysts on Tuesday.

Manufacturers in the U.S. in 2018 had their best year since the recession. Industrial production was higher than ever, and manufacturers rapidly boosted employment to nearly 13 million across the sector, helping pull the national unemployment rate to the lowest level in decades.

Now the diminished vigor of U.S. manufacturers is posing a new threat to a U.S. expansion that this month is ending its 10th year. Manufacturers added just 3,000 jobs in May, the Labor Department said Friday, continuing a stretch of lackluster hiring this year. Factory output fell in the first four months of 2019. IHS Markit's index of sentiment among purchasing managers fell in May to the lowest level since September 2009.

"Growth has slowed very sharply," said Chris Williamson, IHS Markit's chief business economist. "Companies are more reticent to spend, both on hiring staff and on business equipment."

Other sectors of the economy, such as health care and information technology, have continued to grow at vigorous rates this year. Manufacturing accounts for just 11% of GDP, according to the Bureau of Economic Analysis. And many manufacturers say that business remains strong even if the robust demand they saw last year has cooled somewhat.

"When you go from 85 miles an hour to 75, you're still speeding," said Barry Zekelman, chief executive of Zekelman Industries Inc. The Chicago-based manufacturer is on track to ship about $2.8 billion worth of steel pipes and tubes this year, he said, flat in dollar terms from last year and up about 6% by volume.

But manufacturers' sales are pointing to weak spots in both the health of the global economy and domestic demand. Global growth is slowing to the slowest pace since 2016, the World Bank said last week. Discretionary spending on goods including motorcycles and furniture has fallen.

"Do I need to buy that extra piece of machinery or equipment or expand a warehouse? Maybe not. Maybe I'll wait and see a little bit," Bruce Van Saun, chief executive of Citizens Financial Group Inc., said at a conference on May 30.

New challenges are looming at home and abroad. The Trump administration's trade fights with China and other major trading partners are exacerbating the impact of that slowdown for some manufacturers. Meanwhile, the strength of the dollar relative to many other currencies also is making some U.S. products less competitive.

"We're in a fight for survival," said Brian O'Shaughnessy, chairman of Revere Copper Products Inc., which has cut the workforce at its copper mill in Rome, N.Y., to 320 from 600 in 1990 in part because the strength of the dollar has pushed production costs in the U.S. far above those of competitors abroad, Mr. O'Shaughnessy said.

Domestic demand is also softening.

Building construction -- a generator of demand for appliances, light fixtures and paint -- fell 1.2% in April from a year earlier. The number of permits issued to build new homes dropped 5% that month from a year ago.

That has meant less business for Whirlpool Corp., which sold 7% fewer washing machines in North America in the first quarter than a year earlier. Paint maker PPG Industries Inc. said demand at its stores in the U.S. and Canada was weak for much of the quarter, too. Masco Corp. said lower demand for paints, windows and plumbing products cut sales revenue in North America by 6% in the quarter.

Michael Burdis, chief executive of James L. Taylor Manufacturing Co. in New York's Hudson Valley, said demand for his company's wood-working machines has leveled off along with sales of the cabinets and flooring that his customers make.

"Their orders have sort of plateaued like ours have," he said. He said orders could increase next year if the housing-construction market gets stronger.

Vehicle makers that buy everything from engines to coatings from other U.S. manufacturers are also ratcheting back demand.

Tariffs aren't always to blame. Boeing Co. slowed production of its best-selling 737 in April after the MAX version of the aircraft was grounded following two fatal crashes. New orders for nonmilitary aircraft and their parts fell more than 50% in April from a year before.

And farmers, facing challenges including record wet weather in addition to trade tensions that have pushed down crop prices, are buying fewer tractors. Deere in May cut machinery production by 20% for the remainder of its fiscal year.

"Farmers have been hesitant, a little reluctant to buy equipment," Andrew Beck, financial chief at farm-equipment maker AGCO Corp., told investors Wednesday.

That, in turn, is hurting sales of tires, steel tubing and other components that Deere and AGCO buy.

Bill Hickey, a third-generation executive at Lapham-Hickey Steel Corp., a Chicago-based processor and distributor of steel sheet and tubing, said, "We've started to see a slackening of orders."

Navistar said backlog from last year's record-high orders means that trucks purchased today won't be delivered until 2020, encouraging some buyers to postpone purchases until they are more confident the U.S. economy will continue to grow.

"It does provide the opportunity for some customers to say, 'Hey, let's take a wait and see,'" Mr. Clarke said.

Write to Austen Hufford at austen.hufford@wsj.com and Patrick McGroarty at patrick.mcgroarty@wsj.com


(END) Dow Jones Newswires

June 09, 2019 09:14 ET (13:14 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.

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