When ominously dark clouds roll in on a hot afternoon driven by a stiff wind, it doesn’t take a crystal ball to know a storm is coming. Yet the economic equivalent is already overhead, and no one seems to notice.
Many people are worried about the economy, and rightly so. Investors looking to the stock market have no sense of direction as major indices and commodity prices fluctuate violently. Potential homebuyers and existing homeowners alike are seeing the housing market in freefall. Workers can find jobs, but it is difficult to find work where the pay keeps up with inflation.
While all the above are troubling, they are not the scariest harbinger today for a worsening recession. (RELATED: SHEFFIELD: While Biden Blames Others For His Failures, America’s Economy Continues To Nosedive)
It’s not the fact that the economy has already contracted for two consecutive quarters. Debating whether that should be considered a recession is, at this point, an academic exercise which ignores the reality of key factors that are already baked into the cake and whose impact will be felt in the coming months.
The biggest recessionary factor that should have alarm bells ringing is new orders for business, especially manufacturing, which are plummeting.
Manufacturing surveys from Federal Reserve Banks in New York, Dallas, Philadelphia, and Richmond show new orders for business falling fast, in some cases at the fastest pace on record. The corresponding service sector surveys show similar trends with deteriorating business conditions and declining new orders.
In the New York survey, current business conditions are rated worse than any time besides the depths of the 2009 crash and the pandemic. In July, future business conditions were worse than at any point besides September 2001, when the survey was taken right after 9/11. In other words, the coming economic storm is more worrisome to manufacturers than anything besides a terrorist attack.
And in case anyone thinks these may all just be regional phenomena happening in the respective Federal Reserve Bank districts, the Census Bureau’s most recent reports on new orders for durable goods and retail sales showed all growth vanished in July.
S&P’s Purchasing Manager’s Index (PMI) initial report for August shows new orders for the private sector falling at the fastest pace in over two years. The Institute for Supply Management’s PMI for both manufacturing and the hospital sector also showed new orders declining in the most recent reports.
Falling new orders are particularly troubling because it means businesses cannot sustain current output levels nor current employment levels.
Why is this not front-page news? Probably because it is being hidden. There is no conspiracy here; it is largely a numerical fluke left over from the pandemic. Government-imposed lockdowns severely curtailed production throughout the economy and created countless supply chain disruptions. That caused new orders at businesses to pile up, creating a record backlog of unfilled orders.
Today, those businesses are rapidly working through their unfilled orders, hiring additional employees to do so. Even though new orders coming in are declining fast, current output is still increasing, and the hiring spree continues. With nearly all the kinks worked out of the supply chain, the only missing ingredient for many businesses is labor.
But that raises a question as ominous as those storm clouds on a hot afternoon: what happens when the backlog of unfilled orders is gone?
At that point, businesses will have to scale back, output will decline and employees will be let go. Fewer people working and earning an income will mean reduced production and consumption, which means recession. Higher interest rates exacerbate the situation.
It’s no wonder that the Conference Board’s leading economic indicators have trended down for the last six months and show new orders slowing; new orders are the canary in the coalmine for this economy. Business leaders would do well to notice the bird is suffocating.
E.J. Antoni is a research fellow for regional economics at the Heritage Foundation’s Center for Data Analysis and a Senior Fellow at Committee to Unleash Prosperity.
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