OPINION: Hold Off On Recession Talk

Well, The New York Times has spoken, and it seems the U.S. manufacturing sector is in a recession.

Luckily for manufacturers - and like so many other opinions the Times offers these days - it's wrong.

Now, this isn't to say that the industry is going gangbusters, or that a manufacturing, or U.S., recession down the road is out of the question. But for each of the arguments presented, there's an equally compelling side that suggests things aren't as bleak as "the paper of record" would have us believe.

Perhaps the biggest flaw in the story is basing anything on a durable goods reading. Yes, the latest report showed the orders for big-ticket items – typically products that are supposed to be around for at least three years – fell by 7.8 percent in January. (It was trumpeted in the media as the largest decline in … hope you're sitting down now … THREE whole months.)

More importantly, as anyone who has based their economic predictions on the durable goods report will tell you, it's the most volatile piece of economic data out there, to the point of almost making it a second-tier reading. An 8-percent drop one month can be more than made up for the next month. Indeed, an 8.3-percent decline last October was preceded by an 8.7-percent surge in September. What's more, the headline number is skewed terribly by aircraft orders, which move in dramatic fashion from one month to the next.

The story also notes that, in two of the last three months, the key reading on the health of the manufacturing sector from the Institute for Supply Management showed the industry was not expanding. Alas, it would have been inconvenient, to say the least, to mention that the pullback came after 41 consecutive months of growth. (Note: the ISM is coming out with its report on manufacturing tomorrow; forget you ever read this story if it looks bad.)

Likewise, there was no mention of yesterday's other economic report that home sales, soft of late and another argument used against manufacturing, rose by 3 percent in January.

We're also told via the Times that the Federal Reserve's decision to bump up interest rates is weighing on the manufacturing sector. Forgetting for now that that campaign started three years ago - and stopped back in June of last year - the relative level of interest rates is not much of an impediment to doing business. Uncomfortably high energy prices are a different matter, however. The Times makes no mention of that issue, but it's safe to say that manufacturers would welcome a pullback in oil and gas prices as much if not more than a cut in the Fed Funds rate.

As we were reminded yesterday, there's another major, pressing issue to U.S. manufacturers: the health of the Chinese economy. As stock markets around the world were selling off sharply in sympathy with the 9-percent plunge in Chinese stocks, there was no shortage of naysayers calling the beginning of the end of China's growth. As someone who used to cover the stock market for a well-known business publication, I can say without hesitation that a big selloff in stock markets has a tendency to bring out unwarranted panic in otherwise rational people.

Could China's economy be headed for a cool-down? Let's hope so, because 10-percent growth every year is eventually going to do more harm than good. The Chinese government has, supposedly, been trying to slow the rampant growth for months now, with little effect. The stock-market selling Tuesday may get the ball rolling there, but is not likely the start of a global recession. The demand from emerging markets - and even a recovering Europe - isn't going to dry up over night.

UBS Securities analyst Larry Hathaway may have summed things up best:

“Following a long correction-free rally in equity markets, the move lower, though large, appears more technical than fundamental,” he said. “The weakness in China has little impact on global fundamentals or valuations. Despite the soft U.S. durable goods report, the recent economic data flow is mixed, not weak.”

The bottom line is this: the U.S. manufacturing industry is far from red-hot, but it's not heading off a cliff, either. In the last week or so, readers of Manufacturing.net have learned that manufacturers are expecting to increase their hiring at a brisk pace in coming weeks, some of the biggest industrial states are feeling good about business prospects, and manufacturing growth in the midwest is seen growing healthily. Clearly, the industry as a whole suffers from a lack of self confidence, and the mainstream media in general seems to go out of its way to misrepresent what's actually going within manufacturing. Why, one can be forgiven for thinking the U.S. doesn't produce anything here anymore.

Of course, that's wrong – just like saying U.S. manufacturing is in a recession.