Some people were taken aback by last week’s diverging August ISM reports. The non-manufacturing, or services, index jumped to 53.7. However, the manufacturing report was ugly, falling to 49.6.As Joe Weisenthal explained, this divergence occured because U.S. manufacturing is much more exposed to the weak overseas economies. Services, on the other hand, has been driven by the U.S. consumer which has been buoyed by the rebounding housing market.
Because this isn’t exactly common knowledge, we thought we’d visit the topic again today. This time with the help of Deutsche Bank’s David Bianco. From Bianco’s note to clients:
Stronger US consumption likely goes more to services and better jobs
US Mfg ISM and private payrolls have diverged this year. This highlights the difference between the drivers of manufacturing from services activity in the US. Services account for about two-thirds of US household consumption and four-fifths of US private sector jobs. Since the recovery started in 2009, services consumption growth has been most below trend and has been the main reason behind lackluster US GDP growth. Now, better service spending and US residential construction should help improve US jobs and GDP; but we see little benefit to China, commodity or capital goods demand, and S&P EPS which is more sensitive to manufacturing than service activity.
Bianco also illustrates that U.S. manufacturing is much more sensitive to the slowing Chinese economy than even the recovering U.S. housing market.
US manufacturing activity is very sensitive to China growth. Most of US manufacturing is high tech and heavy industry – aeroplanes, industrial tech and healthcare equipment – and not apparel or toys. Two-thirds of US exports are capital goods and industrial materials, which is closely linked to EM growth and commodity demand. In 2012, US Mfg ISM has softened with slowdown in China investment/construction activity, while US residential construction activity and job growth has improved.
Here are the charts that came with Bianco’s commentary.
Photo: Deutsche Bank
Photo: Deutsche Bank
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