Trade War Nightmare Shocks Firms, Two-Thirds Think Recession Nearing, Survey Warns
According to a new survey by Chicago-based advisory firm Sikich LLP, approximately two-thirds of manufacturers are preparing for a recession, with 27% of firms expecting a shock to the economy in the next 12 months.
The Federal Reserve has communicated a rate cut cycle could be imminent, and rate traders are pricing in three, 25bps cuts by January 2020. The Fed is more than nine months too late in cutting – so any cut today would be less pre-emptive than most of Wall Street believes. That is why 63% of the companies surveyed are taking immediate action to weather an imminent downturn in the economy.
The survey was conducted in April, had online responses from 310 companies spanning many industries, including wholesale and distribution; industrial equipment; metal fabrication; apparel, footwear and textiles; chemicals and petroleum; aerospace and defense; and food and beverage.
About 27% of respondents said a recession is very likely in the next 12 months, and the study noted that “there was a significant gap in the outlook between small and large firms.”
Just 21% of firms with less than $500 million in annual revenue expected a recession, but much larger firms had about 49% of them expecting an imminent downturn.
Jerry Murphy, partner-in-charge of Sikich’s manufacturing and distribution practice, said larger multinationals typically prepare more in advance than smaller firms.
“They don’t often share that kind of visibility with their smaller suppliers, so the small and medium-sized businesses may not be learning of this slowdown or this pipeline as quickly,” Murphy told BizTimes Media. “It’s not uncommon for them to learn about it rather quickly or abruptly.”
Murphy said preparations for a recession are likely the result of a maturing expansion, one that is in later innings, which could become the longest on record next month. Executives feel that the economy could be vulnerable to shocks as growth rates in the US slump.
“The pain of 2008 and the Great Recession is still pretty vivid in most business owners and management teams and they learned a great deal from that experience,” Murphy said. “Preparation for an eventual slowdown, they know how to do (that) effectively and they’re taking steps so they don’t get caught off guard.”
Recently, JPMorgan Global Manufacturing PMI fell into contraction with a sub-50 print, the weakest reading in data since mid-2016.
The Milwaukee-area PMI, part of the Marquette-ISM Report on Manufacturing, printed 47.83, which is the first time the southeastern Wisconsin manufacturing sector contracted since October 2016. The PMI has trended down since 1H18 as manufacturers deal with supply chain uncertainty, surging prices, and tariffs when exporting their products.
“Despite a long run of impressive economic growth, manufacturers face challenges related to rapid changes in the industry, geopolitical uncertainty and the prospect of an eventual economic downturn,” Murphy said.
Executives in the survey were undecided on the impact of tariffs and retaliatory tariffs between the US, China, Canada, Mexico, and Europe. About 38% of them said tariffs would have a positive impact on their business, while 35% expected a negative effect.
Murphy said companies importing from China have seen a significant deterioration in their profit margin and will make substantial changes to their supply chains in the coming quarters.
“They did a lot of buying prior to some of the more drastic tariffs,” Murphy said. “I know clients were doing everything they could to get as much product into the United States or at least on the water to avoid the tariffs or the higher tariffs.”
At some point, with enough companies preparing for a recession, it could become a self-fulfilling prophecy by the next presidential election – but, in the meantime, economic shocks could develop in the back half of the year, due to trade disputes and faltering global growth.
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