October starts with serious swoons on Wall Street and Main Street

The 4th quarter of 2019 has gotten off to a rough start on Wall Street, with stocks diving both Tuesday and Wednesday. And the reason why is even more concerning – renewed worries that the real economy is sputtering toward recession.

The first item that led to our recent downturn was a bad report from ISM on manufacturing, which said the sector continued to decline in September, and was at its lowest levels since the Great Recession a decade ago.

The news was certainly worrisome. Several executives told the Institute for Supply Management, publisher of the report, that the U.S. trade war with China has raised the cost of supplies and disrupted business.

“Economy seems to be softening,” one executive told ISM.

“We have seen a reduction in sales orders and, therefore, a lower demand for products we order. We have also reduced our workforce by 10%,” said an executive at a plastics and rubber manufacturer.

However, Jeffrey Bartash at CBS Marketwatch indicated that this wouldn’t necessarily mean that the entire US economy would tip over into our first recession in 10 years, because manufacturing isn’t that important to the overall economy these days.

Service-oriented companies generate most of their sales in the U.S. and are less exposed to the global economy. Most Americans also work in service-oriented companies such as banks, retailers and hospitals. Only 8.5% of the U.S. labor force now works in manufacturing — a record low.

The ISM surveys reflects this divergence between manufacturing and services sectors. The firm’s services index stood much higher in August at 56.4%, with economists predicting just a slight decline in September. The latest report will be published Thursday.

The country as a whole may be insulated from a lot of the damage of a manufacturing decline, but that's not the case for industrial Midwest states like Wisconsin, where nearly 16% of the state's workers have jobs in manufacturing.

It's not like things were going great in Wisconsin before September, as the Philadelphia Federal Reserve Bank noted recently.

And it's not just manufacturing where the warning lights have been going off in the last week. First, it was a weak reading on consumer spending for July that hit the news on Friday (as I detailed in this post). Then, it was a report from the Census Bureau on Monday showing that construction was also slumping.

Construction spending during August 2019 was estimated at a seasonally adjusted annual rate of $1,287.3 billion, 0.1 percent (±1.2 percent)* above the revised July estimate of $1,285.6 billion. The August figure is 1.9 percent (±1.8 percent) below the August 2018 estimate of $1,312.2 billion. During the first eight months of this year, construction spending amounted to $851.3 billion, 2.3 percent (±1.2 percent) below the $871.3 billion for the same period in 2018.

Private Construction
Spending on private construction was at a seasonally adjusted annual rate of $955.0 billion, nearly the same as (±0.8 percent)* the revised July estimate of $954.8 billion. Residential construction was at a seasonally adjusted annual rate of $507.2 billion in August, 0.9 percent (±1.3 percent)* above the revised July estimate of $502.5 billion. Nonresidential construction was at a seasonally adjusted annual rate of $447.9 billion in August, 1.0 percent (±0.8 percent) below the revised July estimate of $452.3 billion.

Year-over-year declines in total construction, and private construction (down 4.0% year-over-year) doing even worse? Bad signs there.

Then ADP reported this morning that job growth slowed down in September, and August not being as good as first reported.

The nation’s businesses added a modest 135,000 private-sector jobs in September, ADP said, in another sign that hiring is slowing along with the broader U.S. economy.

Economists polled by Econoday had forecast a gain of 152,000.

ADP also reduced its estimate of new jobs created in August to 157,000 from an original 195,000.

The mediocre increase in hiring added to a negative vibe on Wall Street, one day after a closely followed manufacturing barometer fell to the lowest level since the last recession. Stocks opened sharply lower.

And the stocks stayed sharply lower, with the DOW Jones falling nearly 700 points at one point before ending the day down 494. That's a combined drop of nearly 840 points in the DOW for the first 2 days of Q4 2019, putting us no better off than we were 6 months ago.

And no Donnie, the fall in the markets are not because you're going to get impeached. It’s because of an economic Trump Slump that is becoming harder to ignore by the day. And that slump is starting hit in areas beyond manufacturing and sectors that have been hurt by trade disruptions, without much ammunition left from a federal government that is running a $1 trillion deficit, or a Fed that has already reduced rates to a low level.

We're two days away from the main US jobs report for September. If that thing comes in low, look out.