Is U.S. Manufacturing In a Technical Recession?

The U.S. factory sector, ailing from the strong dollar, global weakness and lower oil prices, has slipped into a technical recession, new data released Monday show.

The Federal Reserve said Monday that industrial production dropped unexpectedly in May and hasn’t increased since November.

The six-month drop in output, adjusted for inflation, puts the sector in a technical recession, said Alan Tonelson, a former economist for a manufacturing trade group who now writes commentary on the sector.

Industrial output sank 0.2% in May. Economists polled by MarketWatch had expected a 0.2% gain.

Compared to 12 months ago, industrial production was up 1.4% - compared to 4.8% growth was recently as November.

Industrial Production Index
Change from previous year, seasonally adjusted

Source: Federal Reserve via FRED

Stocks were sharply lower after the data were released. The S&P 500 index (SPX, +0.57%) was down 19 points or almost 1% to 2,075.

The U.S. economy is still fighting headwinds from lower oil prices and the stronger dollar, said Jennifer Lee, senior economist at BMO Capital Markets.

Those headwinds will likely be highlighted by the Fed as policymakers meet Tuesday and Wednesday to set monetary policy for the next six weeks. No rate hike is expected at the meeting and the U.S. central bankers wait for signs the economy is strong enough to handle higher interest rates.

Beneath the headlines, manufacturing output was down 0.2% in May after a 0.1% gain in April.

Auto production has been one bright spot, rising 1.7%. Excluding autos, manufacturing was down 0.3%.

Mining output declined 0.3% last month, after declining more than 1% on average over the past four months. The slower rate of decrease was in part due to a reduce pace of decline in the index for oil and gas well drilling, the Fed said.

The data is “soft and unlikely to recovery anytime soon,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

The Empire State manufacturing survey, an early read on conditions in June, was also released Monday and added to the sense of weakness. The Empire State factory index decreased five points to a reading of negative 2.0 in June, the Federal Reserve Bank of New York said.

Survey Indicators
Diffusion Index of Current and Expected Activity - Seasonally Adjusted

Economists polled by MarketWatch had expected a reading of 5.7.

This is the second negative reading in the past three months for the index.

And the executives had a sour view of future business conditions. The six-month outlook index worsened to 25.8 in June from 29.8 in May. This is the lowest level since January 2013.

Source: MarketWatch