Output at U.S. factories decreased 0.4% in February after falling 0.5% in January, according to Federal Reserve data released Friday. The decline was spread across multiple sectors, with output of machinery, electronics and apparel all dropping.
Friday’s Fed report showed the headline 0.1% rise in industrial production in February was driven by a rebound in utilities output, which tends to be weather related. The question now is how sharp and long-lasting the slowdown will be. Many economists see U.S. growth picking up later this year, but not to the rates experienced last year in the immediate wake of federal tax cuts and spending increases.
The U.S. is a services-oriented economy, meaning manufacturing accounts for a small share of gross domestic product. Still, the sector is highly sensitive to swings in global demand, making it an important indicator of broader economic shifts. With the latest decline, the Fed’s index of manufacturing activity fell to its lowest level since July.
Yields on 10-year Treasury notes fell Friday to near 2.5%, a sign of growing investor anxiety in bond markets about the outlook for growth. Bond yields, which were near 3.25% in November, tend to fall when investors see less growth and less inflation.
Manufacturing is getting squeezed globally. The Bank of Japan Friday cited falling production in its gloomier view of the economy. It also pointed to a slowdown in some overseas economies. Germany’s statistics office recently reported industrial output there contracted 0.8% in January. Industrial output in China slowed in the January-to-February period, though it was still up 5.3% from a year earlier.
Trade tensions between the world’s two largest economies—the U.S. and China—are blamed by many economists for igniting the global slowdown. Other worries, such as the U.K.’s exit from the European Union, are adding to business anxieties in Europe.
The U.S. isn’t immune. The growth rate of gross domestic output—a broad measure of production—has been slowing since the second quarter of last year, and economists have sharply marked down their estimates for first quarter growth.
Analysts surveyed by The Wall Street Journal last week on average said the economy would grow at a 1.3% annual rate in the first quarter. That was well below the average near 2% for the expansion and below last year’s growth of near 3%. For this year, a 2.1% growth rate is expected. When asked about the biggest risks to the outlook, nearly half of respondents, 46.8%, mentioned trade policy or China.
Weak manufacturing data reflect headwinds including slower global growth, a relatively strong U.S. dollar, which makes exports more expensive, and fading fiscal stimulus, said Greg Daco, chief U.S. economist at Oxford Economics.
“The combination of these factors is really constraining manufacturing output,” Mr. Daco said. “These headwinds are more likely to more severely affect the industrial side of the economy. That may not pull the rest of the economy into the doldrums.”
While production and employment in the manufacturing sector were solid throughout 2018, some other measures have cooled recently. The Institute for Supply Management said its measure of factory-sector activity weakened in February, and hiring in the sector has slowed, according to the Labor Department’s jobs report.
Mr. Daco doesn’t see recession. Underlying domestic demand in the U.S. economy remains solid, he said. Income growth is steady, business confidence remains elevated and the Federal Reserve has signaled it is responding to the shifting economic outlook by keeping short-term interest rates steady rather than raising them. In a sign of steady undercurrents, the University of Michigan said Friday that household sentiment improved in early March.
Meantime, another government report this week showed business investment is holding up. New orders for nondefense capital goods excluding aircraft, a proxy for business investment, climbed 0.8% in January from December, the Commerce Department report said. George Cruz, project manager at K.D.K. Forging Co. outside Chicago, said on Friday that he expected business in the months ahead to match recent demand for the company’s fasteners and torsion bars.
“We don’t see any traps,” he said. “Orders are coming.” Executives at home-improvement chain Lowe’s Co s. are monitoring the health of the U.S. economy to determine how to balance investments in its businesses with returning cash to shareholders.
“We want to make sure that we don’t lever up to just run into somewhat of a bump in the economy,” said Chief Financial Officer David Denton at a conference on Wednesday. “We don’t see a slowdown in macro to be very clear, but by the same token, we want to watch that carefully.”