Manufacturing Recession And Gold

September marked the worst month for the U.S. manufacturing since the Great Recession. But is manufacturing still as important for the American economy in the 21st century as it used to be? Will the downturn in the industrial sector spill over to the overall economy, making gold shine?

In September, the Institute for Supply Management's PMI manufacturing index dropped to 47.8 from 49.1 in August, marking the second month in a row below 50, which indicates that - despite Trump's promises of a manufacturing renaissance - the industrial sector is contracting.

Some people disregard this data, pointing out that the manufacturing sector forms now only about 11 percent of U.S. GDP, compared to 28.1 percent in 1953, while the whole industrial production, which includes also mining, utilities and construction, amounts to mere 18.5 percent of GDP. For comparison, services generate 69 percent of GDP (or 81 percent with government services included). So, it should be clear that manufacturing is irrelevant in the modern economy, right?

Not so fast! You see, there are three kinds of lies: lies, damned lies, and statistics. The decline in manufacturing's contribution to the added value produced is justified by the economy's advancement into the post-industrial society. However, in part it is just a statistical mirage.

There are two reasons why the above numbers exaggerate manufacturing's decline and underestimate its role in the economy. First, nominal GDP has outgrown the manufacturing output largely because the overall price level has increased faster than the manufacturing price level. In other words, the share of manufacturing declined because the prices of manufactured products declined faster than other prices. It means that the statistical demise of manufacturing sector results from its... high productivity. What a tragedy! When we adjust for the price effects and calculate the manufacturing's share of real GDP, we see that this ratio has been fairly constant since the 1940s.

1 2 3
View single page >> |

If you enjoyed the above analysis and would you like to know more about the most important macroeconomic factors influencing the U.S. dollar value and the price of gold, we invite you to read the ...

more
How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.