Jan 8, 2020 - Economy

Why U.S. manufacturing and services are moving further apart

Data: Institute for Supply Management; Chart: Axios Visuals
Data: Institute for Supply Management; Chart: Axios Visuals

While U.S. manufacturing has fallen into its deepest hole in a decade, the all-important services sector keeps chugging along.

What's happening: The Institute for Supply Management's gauge of the U.S. services sector yesterday produced a reading solidly in expansionary territory and above expectations. That was a far cry from the company's manufacturing index, which last week hit its weakest level since June 2009.

  • The gap between the two indexes in December was the largest since November 2015 and the third largest differential in a decade, ISM data show.

Why it matters: The manufacturing industry is typically thought of as a leading economic indicator, and a sustained downturn in the sector has historically presaged turmoil and even recession.

  • However, that does not look to be the case right now, ISM CEO Tom Derry tells Axios.

What they're saying: "If we were having this conversation in 1965, it would’ve been a much more serious concern," Derry says of the low manufacturing numbers.

  • The U.S. manufacturing industry has been hurt by the strong dollar and global consumer demand that has been weakened significantly by the trade war and tariffs, he adds.

"The services sector is a little more impervious to those factors," Derry says.

  • For example, demand for health care, financial services and higher education is not as dictated by price.
  • And, while the trade war has led to sustained weakness in countries as diverse as Germany, Lebanon and the Czech Republic, the U.S. derives little of its GDP from selling goods overseas.

State of play: Manufacturing represents just about 11% of the U.S. economy, while the services sector has become the dominant means of employment and earnings for the vast majority of Americans.

  • The U.S. has been able to see sustained job gains and wage increases even as sectors like manufacturing, mining, transportation and trade have suffered.

Between the lines: The Fed's three rate cuts and bond buying in 2019 also have played a role in allowing the services sector to continue its strong performance, largely unabated by manufacturing's slowdown, Julia Coronado, president of MacroPolicy Perspectives, tells me.

  • "That kept financial conditions pretty buoyant, that keeps confidence high and is a buffer for consumers ... so you keep that virtuous cycle going between hiring and consumer spending that centers on the service industry."
  • "Certain industries in certain regions are feeling the pain of the manufacturing slowdown but it’s not dominating the economy overall."

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