Areas of concern

Parts of America may already be facing recession

Slowdowns in housing construction and manufacturing are
ominous

It can be hard to know when isolated announcements

become something more. Since last November General
Motors has cut several thousand factory jobs at plants
across the Midwest. In early August us Steel said it would
lay off 200 workers in Michigan. Sales of camper vans
dropped by 23% in the 12 months ending in July,
threatening the livelihoods of thousands of workers in
Indiana, where many are made. Factory workers are not the
only ones on edge. Lowes, a retailer, recently said it would
slash thousands of jobs. Halliburton, an oil-services firm, is
cutting too.

In any given month, even at the height of a boom, more

than 5m Americans leave a job; nearly 2m are laid off. Most
of the time, however, overall employment grows. But not
all the time. America may or may not be lurching towards a
recession now. For the time being employment and output
continue to grow. But in the corners of the economy where
trouble often rears its head earliest, there are disconcerting
portents.
Recessions are synchronised declines in economic activity;
weak demand typically shows up in nearly every sector in
an economy. But some parts of the economic landscape are
more cyclical than others—that is, they have bigger booms
and deeper slumps. Certain bits tend to crash in the earliest
stages of a downturn whereas others weaken later. Every
downturn is different. Those caused by a spike in oil prices,
for example, progress through an economy in a different
way from those precipitated by financial crises or tax
increases.

But most recessions follow a cycle of tightening monetary

policy, during which the Federal Reserve raises interest
rates in order to prevent inflation from running too high.
The first rumblings of downturns usually appear in areas in
which growth depends heavily on the availability of
affordable credit. Housing is often among the first sectors
to wobble; as rates on mortgages go up, this chokes off new
housing demand. In a paper published in 2007 Edward
Leamer, an economist at the University of California, Los
Angeles, declared simply that “housing is the business
cycle”. Recent history agrees.

Residential investment in America began to drop two years

before the start of the Great Recession, and employment in
the industry peaked in April 2006. Conditions in housing
markets were rather exceptional at the time. But in the
downturn before that, typically associated with the
implosion of the dotcom boom, housing also sounded an
early alarm. Employment in residential construction peaked
precisely a year before the start of the downturn. And now?
Residential investment has been shrinking since the
beginning of 2018. Employment in the housing sector has
fallen since March.

Things may yet turn around. The Fed reduced its main
interest rate in July and could cut again in September. If
buyers respond quickly it could give builders and the
economy a lift. But housing is not the only warning sign.
Manufacturing activity also tends to falter before other
parts of an economy. When interest-rate increases push up
the value of the dollar, exporters’ competitiveness in
foreign markets suffers. Durable goods like cars or
appliances pile up when credit is costlier.

In the previous cycle, employment in durable-goods

manufacturing peaked in June 2006, about a year and a half
before the onset of recession. This year has been another
brutal one for industry. An index of purchasing managers’
activity registered a decline in August. Since last December
manufacturing output has fallen by 1.5%. Rather
ominously, hours worked—considered to be a leading
economic indicator—are declining. Some of this is linked to
President Donald Trump’s trade wars, which have hurt
manufacturers worldwide. But not all. Domestic vehicle
sales have fallen in recent months, suggesting that
Americans are getting more nervous about making big
purchases.

In some sectors, technological change makes it difficult to

interpret the data. Soaring employment in oil industries
used to be a bad sign for the American economy, since
hiring in the sector tended to accompany consumer-
crushing spikes in oil prices. But America now produces
almost as much oil as it consumes, thanks to the shale-oil
revolution. A recent fall in employment and hours in oil
extraction may be a bad omen rather than a good one. By
contrast, a fall in retail employment was once
unambiguously bad news. But retail work in America has
been in decline for two and a half years; ongoing shrinkage
may not signal recession, but the structural economic shift
towards e-commerce.

Other signals are less ambiguous. In recent decades

employment in “temporary help services”—mostly staffing
agencies—has reliably peaked about a year before the
onset of recession. The turnaround in temporary
employment in 2009 was among the “green shoots” taken
to augur a long-awaited labour-market recovery. Since
December it has fallen by 30,000 jobs.

Even if America avoids a recession, the present slowdown

may prove politically consequential. Weakness in some
sectors, like retail, is spread fairly evenly across the country.
But in others, like construction or, especially,
manufacturing, the nagging pain of the moment is more
concentrated (see map). Indiana lost over 100,000
manufacturing jobs in the last downturn, equal to nearly 4%
of statewide employment. It is now among a modest but
growing number of states experiencing falling employment:
a list which also includes Ohio, Pennsylvania and Michigan.

Those four states, part of America’s manufacturing

heartland, suffered both early and deeply during the Great
Recession. In 2016 all delivered their electoral-college votes
to Mr Trump, handing him the presidency. The president’s
trade war might have been expected to play well in such
places. But if the economic woe continues, voters’ faith in
Mr Trump is anything but assured. Choked states might well
turn Democrat-blue.