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Slower manufacturing may be reason behind dip in small business optimism

Written on Apr 2, 2019

Current reports from the government and an industry group point to a drop in manufacturing activity. While the manufacturing sector is a relatively small part of the gross domestic product — the government has estimated it at 11.4% in the third quarter of last year — most manufacturers are small businesses as are the service companies that do business with them.

The Commerce Department said factory orders rose 0.1% in January, a tiny increase that matched December's reading but fell short of many economists' forecasts. Shipments of manufactured goods fell 0.4%, marking the fourth straight month of declines.

The factory orders report came several days after the Federal Reserve said production at the nation's factories fell 0.4% in February following a 0.5% drop in January. Meanwhile, wholesale inventories, the goods manufacturers have produced but not yet sold, rose 1.2%, a sign that production may weaken in the coming months; factories won't manufacture products if it has unsold inventories in their warehouses.

The slowing activity was also reflected in the survey of manufacturers taken by the Institute for Supply Management in February and the index tied to the survey; the index fell 2.4 percentage points to 54.2 from January's 56.6.

The National Association of Manufacturers has estimated that over 98% of U.S. manufacturing companies are small businesses with fewer than 500 workers, so the slowdown affects them.

Surveys by the U.S. Chamber of Commerce and MetLife, by researchers at Pepperdine University's Graziadio Business School and Dun & Bradstreet Corp., and by Wells Fargo and Gallup have all shown weakening confidence in the economy among small business owners since the start of 2019.

Owners tend to have more faith in their own companies than the economy. However, some owners say they expect their own revenue to decline in the year ahead — a common prediction when there are signs of an economic slowdown. Many private economists as well as the Congressional Budget Office are forecasting slower growth this year.

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