Oregon Office of Economic Analysis

Right now leading indicators are generally split between the manufacturing side which are flashing recession warnings and the non-manufacturing side which are mostly still in expansion territory. Much of the bad news comes from the global and Chinese economic slowdown, strong USD, and pullback in investment due to low oil prices. All of these are interrelated and speak to the manufacturing weakness.

One of the best indicators along these lines is industrial production. We use it in our Oregon Index of Leading Indicators. Right now industrial production is down nearly 2 percent over the past year. Every single time industrial production has been this negative in the past 40 years, the U.S. economy has already been in recession. Obviously this is a concern, to say the least.

However, given that we know much of the decline is due to the oil and gas industry, a key question is how broad of a slowdown are we really seeing or is it just a sector specific story weighing on the top line? The graph below takes a diffusion style look at the 20 subsectors within industrial production (3 digit NAICS level). Right now 7 subsectors are contracting year-over-year. While this is considerably higher than the 1 subsector contracting to begin 2015, it remains below what is typical in past recessions when 16 subsectors registered declines, on average (see table).

The table shows the number of contracting sectors, out of 20 total, for each month when total industrial production first falls nearly 2 percent over the previous year.

The declining subsectors are apparel, paper, primary and fabricated metals, machinery, oil and gas, and other mining. The first two sectors no longer comprise much of U.S. manufacturing. Metals and machinery declines are much more worrisome. In our latest Governor’s Council of Economic Advisors meeting on Friday, it was mentioned that the metal weakness was coming in large part from pipes, which are a direct input into oil and gas exploration of course.

Taken together, all of this does paint a picture so far that is closer to an industry specific shock. The pain is not as widespread within industrial production as in past business cycles, or at least not yet. Of course this does not mean the economy is free and clear, rather, this one good indicator may be giving a false warning thus far. See Josh Zumbrun’s latest in the Wall Street Journal for more along these lines.

For the record, I do not believe we are in recession today as most indicators are not saying so, particularly given the labor market strength. As Tim Duy points out, probably the two best leading indicators are the yield curve and initial claims — both of which remain in expansion territory. That being said, our office is worried about manufacturing here in Oregon. Our outlook for manufacturing in the state is very subdued given the strength of the dollar and global weakness.