GUNDLACH: If manufacturing isn't a good indicator of the US economy, then explain this chart

The US manufacturing industry is recession.

The ISM manufacturing index tumbled to 48.2 in December. This was the lowest reading since December 2009. Importantly, it’s well below the 50, which means the industry is contracting.

But does this mean the overall US economy is doomed for a recession?

Most economists have found comfort in that manufacturing represents a little over 10% of the economy.

That’s small compared to services, which continues to grow thanks to the relatively healthy US consumer.

But DoubleLine Fund’s Jeff Gundlach isn’t quite so optimistic.

In a webcast on Tuesday, Gundlach charted the ISM manufacturing index over the year-over-year change in nominal GDP. As you can see below, the relationship is very tight.

If manufacturing isn’t a good indicator of the US economy, then you need to explain this relationship, he said.

On the matter of the services economy, Gundlach observed that even it is seeing deterioration. Indeed, the ISM services index recently fell to 55.3.

If services falls more, the odds of a US recession beginning would quickly jump to around 50%, Gundlach said.

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