Manufacturing shrinks, raising questions for Trump

The risks of an economic recession are on the rise, but the country’s manufacturing sector is already there.

And for President Trump, who promised to end the “American carnage” of “rusted-out factories scattered like tombstones across the landscape of our nation,” that could be political trouble.

The manufacturing sector shrunk by 1.9 percent in the first quarter of the year and another 1.2 percent in the second quarter. In July, it is estimated that it contracted 0.4 percent. A recession occurs when an economy contracts in two consecutive quarters.

{mosads}Trump won the Electoral College and White House by becoming the first Republican in a generation to sweep the states of Pennsylvania, Wisconsin and Michigan.

He’ll likely need to do so again in 2020 to win reelection, and the bad economic news in manufacturing could be a dilemma to Trump in these states.

Trump vowed to help manufacturers, and the sector did enjoy a banner year in 2018 after Trump’s corporate tax cuts took effect.

Manufacturing jobs grew at an average rate of 22,000 a month in 2018.

This year, even as the sector has contracted, manufacturers have continued to add jobs, but at a much slower rate of 8,000 per month.

The slowdown is attributed in part to growing trade tensions and slumping growth in foreign markets which has hit manufacturing around the world.

“It’s pretty clear, not just in the U.S. but globally, that the manufacturing sector is contracting right now,” said Chad Moutray, chief economist of the National Association of Manufacturers. 

Trump’s escalating trade war with China, in particular, is dragging on the industry, according to an analysis from Moody’s Analytics last week.

Trump in July announced a new round of tariffs on China, raising doubts that a deal could be struck before the 2020 election. Earlier this month, Trump decided to delay and cancel a handful of the tariffs, pushing them to Dec. 15 instead of Sept. 1 to avoid raising prices during the holiday shopping season.

Yet the tariffs are still taking a toll, raising the cost of Chinese imports, some of which are used by U.S. manufacturers.

The tariffs raised costs for 79 percent of regional manufacturers surveyed by the Federal Reserve Bank of New York. Almost half increased their selling prices as a result.

It’s not just trade that has been a problem for U.S. manufacturers.

While the recent downturn in manufacturing can be linked to specific policies, the sector’s decline is part of a larger trend, according to Urban Institute fellow Stephen Rose. 

“A lot of people try to blame it on trade, and that’s not unimportant, but an important thing to understand is what’s happened with productivity,” he said.

Better technology and automation have led manufacturers to cut jobs over the last half century. Many of the jobs that still exist in the sector are now white-collar jobs that require college degrees.

“In the past manufacturing was key for non-college educated men. Today there’s been more of a shift to other jobs,” Rose says, pointing to industries such as construction and transportation, which are harder to automate.

In his estimation, the manufacturing sector can at best expect to hold on to its current place in the economy, but will likely continue to shrink in the future

That could create a vulnerability for Trump, who continued to tout his record on manufacturing this week at a Royal Dutch Shell Plc plant outside Pittsburgh.

“Factory floors across this land are once more crackling with life,” he said. “Our steel mills are fired up and blazing bright. The assembly lines are roaring.”

Manufacturing accounted for more than double the share of employment in counties Trump won in Pennsylvania, Michigan and Wisconsin, according to a Brookings Institution analysis. If people in the industry are feeling pain come November, it could deal a fatal blow to Trump’s reelection bid.

Some of Trump’s potential Democratic opponents in 2020 are sensing an opportunity.

Sen. Elizabeth Warren (D-Mass.) specifically pointed out the slump in manufacturing in a Medium post predicting doom and gloom for the economy.

“For the first time ever, the average hourly wage for manufacturing workers has dropped below the national average,” she wrote of the current manufacturing recession. 

“Trump’s trade war with China threatens American manufacturing and has already hurt American companies that investors think of as ‘industry bellwethers,’ while feeding an all-time economic slowdown in China that could have dramatic ripple effects on the American economy,” she added.

While Warren called for a slew of changes, among them investing $2 trillion in green manufacturing, industry leaders say they are more concerned about a handful of proximate issues.

“We need certainty when it comes to trade. We need a trade deal with China. We need USMCA passed. We need a functioning Ex-Im bank,” said Moutray, referencing the United States Mexico Canada Agreement, an update on the North American Free Trade Agreement, as well the Export-Import Bank.

But equally important, he said, is keeping the corporate tax rate low, something he worries Democrats will reverse.

Moutray said that even if manufacturing continues to decline, voters in manufacturing states may not punish Trump. The president’s supporters, he said, are likely to approve of Trump’s efforts for the sector and the boom that came in 2018.

“For the most part, they’re going to give the president a lot of credit there,” he said.

But Trump and Republicans can’t be too sure either.

“On the flip side, trade is creating a lot of anxiety,” Moutray said.