The bullish story for the US economy never changed

While the manufacturing sector was buckling the fundamental story of the US economy never changed: it was all about consumers.

The consumer economy and the industrial economy are experiencing diverging fortunes right now.

Consumer spending is the engine propelling the US economic growth, while industry is under strain.

A Boeing announcement Thursday announcing cutbacks on a line of jets used for cargo shipments had two stats that explained this divide succinctly: global passenger demand is above the 10-year average while air-freight volumes are dropping.

In essence, consumers have been resilient in the face of the manufacturing downturn and continue to keep the economy afloat.

On Friday morning, we got data that indicated this resilience is, in fact, starting to help manufacturing.

Markit’s preliminary US purchasing manufacturer’s index for January climbed to a reading of 52.7 from December’s 38-month low. This report showed that in the early parts of this year there was increase in production volumes and new work.

Here are the portions of the release that grabbed our attention.

On rising production volumes:

“The pace of expansion was comfortably above the 26-month low recorded in December. Survey respondents mainly commented on higher output levels in response to positive new business trends and expectations of improving domestic demand over the months ahead.

And on new-export-sales growth:

“New export sales continued to rise at only a marginal pace, which manufacturers generally linked to the strong dollar. Companies that reported an overall upturn in new work mostly cited improving domestic economic conditions. The main exception to the wider trend was among manufacturers facing cutbacks in new orders from clients in the oil and gas sector.”

Fredgraph (8)FREDConsumer spending accounts for about two-thirds of GDP.

And so while it is too soon to declare that the worst is over for manufacturing, it’s clear that strong domestic demand — led by consumer spending — is offsetting some of the exogenous challenges that manufacturing has faced, including the strong dollar, crashing commodity prices, and weak foreign demand.

The ~7% decline in the S&P 500 this year has quickly revived fears that the US economy is approaching a recession (though we’d remind you that sell-offs often happen without a following recession).

“Unsurprisingly, consumer sentiment surveys show that stock market moves exert a strong influence on how upbeat Americans feel,” Deutsche Bank’s Stuart Kirk wrote in a weekend note. “Thankfully, however, that does not translate into a direct effect on consumer spending.”

That’s partly because less than 20% of the bottom-third of American households own stocks, Kirk wrote. And at the end of the day, the stock market is not the economy.

And as Chris Hyzy, chief investment officer for Bank of America Global Wealth and Investment Management, wrote in a note to clients, “Although there is large-scale weakness in the manufacturing, energy, commodities and heavy industry parts of the economy, the 80 month-long economic expansion (led by the consumer) is still alive.”

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