U.S. Manufacturing Plunge Threatening Corporate Debt Bubble

The Federal Reserve’s zero interest rate policy continues to build in a debt crash. The ZIRP policy has fostered massive lending to inefficient industries (shale), overleveraged people (auto buyers), and overindebted companies (buybacks, mergers, etc.). The bubble in U.S. corporate debt, used overwhelmingly to feed the stock market, is growing at a record rate. Just under $1 trillion in investment grade bonds have been issued through September, a 13% jump from 2014 which was a record year. High-yield, or junk bond issuance has been an additional $224.3 billion for the first three quarters, continuing the record pace of 2014, according to SIFMA, the Securities Industry and Financial Markets Association. The junk bond bubble has reached $1.8 trillion, and now $400 billion of it is in the oil sector, plus $350 billion in high-yield, so-called “leveraged loans” to overindebted oil-related companies.

But the earnings of U.S. companies, at the same time, are down about 5% so far this year, compared to 2014; led, again, by energy, where earnings are down by two-thirds. The Wall Street Journal reported Oct. 25: “Quarterly profits and revenue at big American companies are poised to decline for the first time since the recession, as industrial firms warn of a pullback…. From railroads to manufacturers to energy producers, businesses say they are facing a protracted slowdown in production, sales and employment that will spill into next year.” The Journal estimated the S&P 500’s sales revenues would drop 4% in 2015, along with the 5% in earnings.

Manufacturing industry has been going into collapse. In addition to the drumbeat of Federal Reserve district bank reports of shrinking industrial activity and wages (the Dallas Fed just issued its 10th straight such monthly report), large manufacturers with very large numbers of business customers are reporting “recession is underway.” Caterpillar’s three years of continuous and increasing revenue losses have become infamous. Fastenal Co. — literally nuts and bolts, the largest industrial fastener distributor in North America, lost sales this year for the first time since 2009. On an investor call reported in the Wall Street Journal, Fastenal CFO Dan Florness said,  “The industrial environment’s in a recession—I don’t care what anybody says, because nobody knows that market better than we do. You know, we touch 250,000 active customers a month.”

3M Co. said it will lay off 1,500 employees, or 1.7% of its total, as sales growth sagged for a wide range of wares.

ZeroHedge.com cites Fredrik Eliasson, chief sales and marketing officer at railroad operator CSX Corp.: “If you look at …. the broad industrial-production index, you see industrial production sequentially coming down.” It reports that truckload carriers are not seeing any holiday uptick in retailer demand, because business inventories are already so large. Alex Vecchio, a transportation analyst at Morgan Stanley, is quoted: “Transportation companies are typically a leading indicator, and our data is not good.”