The escalation of U.S.-China trade tensions has pushed the American manufacturing sector to the brink of a recession and there’s little to stop it from falling over the edge. A preliminary IHS Markit gauge of factory activity released this week came in at 49.9 for August, just below the dividing line that separates an expansion from a contraction. A regional index from the Federal Reserve Bank of Kansas City showed manufacturing order volume slumped to the weakest level since 2016, with more than half of firms surveyed expecting negative impacts from the 10% tariffs the U.S. will levy on $300 billion of Chinese goods in two stages. China retaliated on Friday with its own one-two punch of tariffs on $75 billion of American products including soybeans, automobiles and oil. President Donald Trump vowed to respond … again. So it would seem to be a better use of time to move beyond debating whether there will be a slowdown and instead think about how industrial companies are going to respond to a slowdown that’s already here and will likely get worse.
The most obvious move is to cut expenses, which will inevitably translate into layoffs. Deere & Co., Emerson Electric Co., 3M Co. and DuPont de Nemours Inc. are among those that have said they’ve stepped up cost-cutting efforts. This is tricky for several reasons. First, many big manufacturers have already aggressively cut costs after slumping oil prices brought about the so-called industrial recession in 2015 and 2016. Perhaps this prepared them to more profitably weather the next downturn; perhaps it left them with less fat to cut if margins are pressured by price cuts to spur sales. But the bigger issue is that layoffs, particularly in the manufacturing sector, are going to be political dynamite. President Donald Trump built his campaign on revitalizing hiring at U.S. factories, and manufacturing employment is up by about a half million since he took office. He’ll be wont to relinquish those gains as he seeks re-election, especially if job losses start to affect the strong consumer demand that’s kept U.S. growth afloat. It’s much harder to issue puffball press releases about firings than it is to expound on hiring commitments, exaggerated or not.
So what about share buybacks? Some companies may already be too loaded up on debt after years of low-interest-rate borrowings. Honeywell International Inc. and Eaton Corp. are among those that have alluded to the ability to unleash billions of purchasing power to prop up earnings per share in a recession. Democratic presidential candidates including Senators Elizabeth Warren, Kirsten Gillibrand and Bernie Sanders have all criticized buybacks and proposed ways to incentivize companies to share their wealth more directly with employees. Some of these proposals have clear holes and obviously not all buybacks are evil, but public opinion is negative on this issue and any manufacturer that announces a big repurchasing push should expect backlash. The Business Roundtable sees the writing on the wall, at least as far as optics are concerned. Member CEOs including 3M’s Michael Roman, Honeywell’s Darius Adamczyk and Stanley Black & Decker Inc.’s Jim Loree signed their names this week to an updated statement of purpose that said companies have a commitment to serve all stakeholders, not just shareholders. It was mostly fluff and there were no hard commitmentsbehind the nice-sounding words. Still, it’s the latest sign that capitalism in its most unbridled, bloodthirsty form is being rethought. 1 And maybe that’s a good thing for investors, too: Bloomberg News’s Cameron Crise took a look at the GS Total Cash Return index, a collection of 50 stocks that return a well-above-average amount of cash to shareholders. He found that while those stocks have historically been winners, they’ve barely outperformed the S&P 500 in the aggregate over the past five years, with the lag over the past four months one of the most extreme since the index started in 2010. The political climate is arguably causing this industrial slowdown; it may also kneecap companies’ ability to protect their earnings from the associated damage.