EC Way Beyond The ‘12%’

It’s becoming fashionable again to dismiss manufacturing. In 2015, we heard repeatedly how it represented only 12% of overall economic output. Any minor problems affecting such a small slice would surely be nothing much for the other seven-eights of the economy to overcome. There was no way Yellen’s rate hikes and the booming recovery they would anticipate would be derailed by such a trivial segment.

The idea has been given new life now that one rate cut has been undertaken. Last year, the downplaying had been more straightforward; there’s absolutely nothing wrong and nothing to stop a hawkish Powell. This year, maybe there is something wrong, but it’s only manufacturing. One-and-done rate cut should be sufficient.

IHS Markit reported yesterday its flash PMI numbers for the US economy in August. Sure enough, right off the top the manufacturing PMI dropped below 50 confirming continued weakness in the sector.

While it might be easy to dismiss this as just one problem, ever if you do you have to acknowledge that it’s becoming a very big one even if it is only 12% of the economy. According to Markit, US manufacturing hasn’t been this bad off (below 50) since September 2009. We keep comparing the latest figure to that one month because each successive update drops a little more than the last one.

So, even if you don’t believe manufacturing accounts for much on its own you have to at least consider what must be going on in the other 88% which might leave the sector in such bad shape – without sight of a turnaround.

And it’s not the below 50 that should concern you. It’s more so that the trend keeps going after having confirmed (with other similar indications) that at least the goods economy smashed into a landmine back during the last quarter of 2018 absolutely must have suffered some substantial damage from doing so.

So, manufacturing is in really rough shape, but what about the larger maybe more pivotal service sector? That’s where the real bad news comes in. Markit’s Services PMI dropped from 53.0 in July to 50.9 August. It had rebounded last month which many believed would continue since it was, purportedly, the US economy finally showing its employment-based strength.

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Moon Kil Woong 1 year ago Contributor's comment

That is because manufacturing affects transportation, distribution, and all the services that go around selling manufactured goods. Sadly the trade war has hurt manufacturing as their imported raw material costs get disrupted and prices rise. Sadly even US steel makers are getting hurt. Thus the trade war is having an obvious negative impact on manufacturing, steel, transportation, oil (because of the economic slowdown as well as losing overseas markets like farming), and farming. Only slightly is China directly responsible for the negative effects of this.

The real issue is that tariffs are a hugely destructive force on the country using them. It is arguable that it is in the long run more destructive on the country using them than the country which is the target of such tariffs. This is especially true if they can manufacture and sell their wares elsewhere which China has been doing.

Craig Newman 1 year ago Member's comment

Not everyone agrees tariffs are bad.