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Supply Chain News: US Economy Stays Strong even as Manufacturing Weakens

 

As Share of GDP and Jobs Decline, US Economy can Shine even in Manufacturing Recession

Oct. 30, 2019
SCDigest Editorial Staff

Manufacturing has historically been the key indicator of the current health of the US economy.

For example, the Institute for Supply Management has periodically evaluated its monthly Purchasing Managers Index – which measures the health of the manufacturing sector - and found it is highly correlated, with a slight lag, to US overall GDP growth.

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The US economy is now almost 20% larger after adjusting for inflation than it was at the start of the downturn in 2008, ev en though manufacturing output has grown by less than 3% since then

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In 2016, the Federal Reserve Bank of St. Louis did an analysis of the PMI and GDP numbers, and found that there was strong positive correlation (0.75 correlation coefficient) between PMI and GDP growth

But as manufacturing''s share of the US economy continues a slow descent, especially in terms of employment, now when manufacturing gets a cold, the overall economy might not get pneumonia.

In short, while some have suggested US manufacturing is in recession, the overall economy keeps chugging along.

For example, the US PMI has been trending down since April, and has been under the 50 mark that ISM says separates manufacturing expansion from contraction the past two months, and likely will again be below 50 when the index for October is released on Friday.

The monthly measure of US manufacturing output from the Federal Reserve has basically been flat since the beginning of the year.

Now, the Wall Street Journal says, “it means the US economy may be big enough and diverse enough to keep expanding even if manufacturing suffers a downturn.”

And Gus Faucher, chief economist at PNC Financial Services, told the Journal that “Being less exposed to manufacturing and the global manufacturing cycle is providing some stability to the US economy.”

The chart below shows the decline in the share of manufacturing as a part of total GDP and employment.

 

Source: Wall Street Journal

As can be seen, manufacturing now represents about 11% of GDP, down from 16% in 1995, while the share of employment has fallen from about 13% to 8% over the same period. There are now more local government employees than manufacturing workers.


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The disconnect between manufacturing health and the larger economy was seen in 2015and 2016. Then factory output declined year-over-year basis for 18 consecutive months.

But the overall economy, then as now, stayed strong. Total output grew 2.9% in 2015 and 1.6% in 2016, while the economy produced more than five million new jobs over those two years.

As one more piece of evidence on the disconnect: the US economy is now almost 20% larger after adjusting for inflation than it was at the start of the downturn in 2008, even though manufacturing output has grown by less than 3% since then, according to Commerce Department data.

Of course, manufacturing activity is far from irrelevant from the overall health of the economy. Each factory job is said to result in the creation of 6 or so additional jobs.

"Obviously if it becomes a more severe [manufacturing] contraction, that creates a more severe problem for the economy," PNC''s Faucher also said, adding that "Risks are amplified now because of trade tensions, because of slower economic growth, because of business uncertainty."

Still, Faucher doesn''t see a US recession coming this year or in the first half of next year, despite the weak manufacturing numbers, in a mixed bag of economic news.

Any reaction to this story on the disconnect now between manufacturing and the economy? Let us know your thoughts at the Feedback section below.

 

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