Economists are stressing that the manufacturing recession is not bad news for the entire US economy.
On Tuesday, the two headline data points on American manufacturing showed that the sector is still in recession.
The Institute of Supply Management’s manufacturing index for November slipped into contraction for the first time since mid-2009. At 48.6, it fell short of the expectation for 50.5.
And, Markit’s manufacturing purchasing manager’s index was 52.8, the lowest level in two years.
Manufacturers said new business growth slowed down, as the strong dollar, a decline in energy-industry investment, and weak global demand continued to hammer their industries.
But following this ugly data, economists were quick to highlight that manufacturing makes up a small part of the economy.
In a note to clients, Capital Economics’ Steve Murphy wrote, “While the decline in the ISM manufacturing index to 48.6 in November, from 50.1, left it at the lowest level since the recession ended in mid-2009, it doesn’t mean that the economy is headed for another collapse.“
He pointed out that manufacturing accounts for only 12% of the US economy, and the other 88% is performing well. And when the FOMC meets later this month to decide whether to raise rates, it would weight what’s happening in manufacturing accordingly.
“This is beginning to look very much like a repeat of the second half of the 1990s,” Murphy recalled, “when a sharp rise in the dollar also pushed the ISM manufacturing index well below the 50 mark on more than one occasion, yet headline GDP growth remained unusually strong.”
Then, the manufacturing index fell to as low as 46, while GDP growth surpassed 4%.
Amid a barrage of client inquiries about the data, Deutsche Bank’s Torsten Sløk sent a note stressing that the much larger service sector should withstand the weakness in manufacturing, and is in fact, doing just fine.
But the real test for the Fed, Sløk wrote, comes later this week, when the jobs report and nonmanufacturing ISM data are released.
Here’s Sløk’s chart showing the divergence between manufacturing and services:
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