In an August 1997 article, economist Rudiger Dornbusch famously quipped that “No postwar recovery has died in bed of old age – the Federal Reserve has murdered every one of them.” At the time of Dornbusch’s article, the U.S. economy was in the 58th month of what would become a 120-month run of economic growth that eventually ended in November 2001. What differentiated the summer of 1997 from so many other postwar expansions is it was 29 months after the end of a Federal Reserve tightening cycle. In previous expansions, the Fed would overshoot their target and tip the economy in recession, or exogenous events would interfere with the Fed’s path and cause the economic expansion to end. Today, we find our economy at the doorstep of a similar situation.
In a September 2024 press conference following the announcement of a 50 basis point reduction in the target federal funds rate, Federal Reserve Chair Jerome Powell said, “This recalibration of our policy stance will help maintain the strength of the economy and the labor market and will continue to enable further progress on inflation as we begin the process of moving toward a more neutral stance.”
In much the same way that the Fed was able to reduce interest rates in 1995 to allow the economy to continue expanding for the remainder of the decade, today’s Fed may be engineering a so-called “soft landing,” in which inflationary pressures are squeezed out of the economy, but the monetary policy path is not restrictive enough to tip the economy into recession. While numerous examples exist to predict what happens to manufacturing technology orders during a recession, soft landings are such a rarity that predicting and understanding the path of orders is less clear – but worth exploring nonetheless.
Capturing a Wider Angle
In a previous edition, this column attempted to explain the curious relationship between manufacturing technology orders and interest rates. That article was only able to take into consideration the results of the three previous interest-hiking cycles that occurred during the time period covered by the U.S. Manufacturing Technology Orders Report published by AMT – The Association For Manufacturing Technology. All three of these cycles ended in recession within a year of the first interest rate cut. Prior to USMTO, the National Machine Tool Builders’ Association (NMTBA), the predecessor to AMT, published data on manufacturing technology orders collected under a program called Industry Estimates.
Utilizing this NMTBA data, we can picture what was happening to manufacturing technology orders from March 1991, when the economy exited a brief eight-month recession, through April 1995, when the Fed ended their tightening cycle and the economy began a soft landing. A major limitation to this approach is the gap in data between January 1996 and December 1997, during the transition between the calculation of Industry Estimates and the compiling of USMTO data. To accommodate for this gap, we can look at other industry statistics to infer what was happening.
Developing a Picture
As the Fed began raising rates at the beginning of 1994, manufacturing technology orders likewise increased as they did in the subsequent hiking cycles that have been studied. Rates began to decline in April 1995, and, interestingly, orders declined with them. From the beginning of the rate cuts in April through the end of 1995, orders of manufacturing technology began a downward trend; however, monthly order totals never dipped below the average observed during the period of expansion from March 1991 to that first rate cut in April 1995.
January 1996 is where our picture becomes blurry. From USMTO data, we know orders reached historic levels in the first quarter of 1998 and then entered a steady decline that would find bottom in February 1999. After reaching this trough, orders rebounded, peaking in March 2000 before beginning a steady decline through the 2001 recession.
During the missing period in the data from January 1996 to December 1997, capacity utilization averaged 81.7%, exceeding the 80% level where manufacturing technology orders have historically expanded, and durable goods industrial production increased 26.7%.
Seeing Through the Blur
Only time will tell if the Fed has managed to engineer a soft landing of the U.S. economy or if it has killed yet another expansion. Orders of manufacturing technology have declined since peaking in late 2021, but the extreme supply and demand disruptions of the time may have distorted what would have otherwise been typical trends in manufacturing technology orders. With barely one month of data since the Fed ended its current hiking cycle, it is not possible to tell if orders are responding as expected, given the last experience with a soft landing. As time goes on and more data is collected, the trends may not develop exactly as they did in the past, but we may be able to find a vague resemblance to what happened before.
