Photo: miskan on flickr
There have been a few signs of life in manufacturing this year. ISI recently wrote a report called Investing in the U.S. Manufacturing Renaissance, and we highlighted several companies that are bringing jobs and production lines back to the U.S. from overseas.Although the data has been soft recently, the recovery in manufacturing has far outpaced the recovery in services, making manufacturing a bigger and more important part of the economy now than before.
A team of BofA economists led by Ethan Harris say that a bigger manufacturing sector now “leaves the economy particularly vulnerable to an uncertainty shock.”
In a note to clients, BofA writes that there are reasons to expect manufacturing to slow down:
The uncertainty shock will likely prompt corporations to postpone investment in capital and software. The long string of false dawns has undercut corporate confidence, making them more sensitive to uncertainty shocks.
Consumers typically reduce spending on durable goods in the face of a confidence shock. These are big-ticket items which can be postponed and require financing. For example, auto sales and housing.
The synchronised global slowdown, spurred by the crisis in Europe, restrains demand for US exports. The weakness has not been isolated to Europe; developing economies have started to slow. The strengthening US dollar further undercuts export growth.
The bottom line for the BofA economists: “The economy does not have much cushion to absorb a shock to the goods sector – the most productive side of the economy…the slowdown has just begun, in our view.”