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About The Weakness In Manufacturing

After the manufacturing sector numbers for August were published on Tuesday, September 3rd, the financial press erupted with grim headlines. Largely absent from the coverage was proper context: The manufacturing purchasing managers index has predicted six of the last three recessions, and manufacturing accounts for about 12% of U.S. economic activity. Here are the facts.

From a record-high level in September 2018 of 61.3%, manufacturing activity has plunged, and the latest monthly data for August showed further deterioration.

From 51.2% in July, the manufacturing economy dropped to 49.1%.

This data series from the Institute of Supply Management, which certifies purchasing management professionals employed across the U.S. and globally, is designed to signal a recession when it falls to less than 50%. But in the last three decades, it has predicted six of the last three recessions.

Over the last three economic cycles, the ISM Manufacturing Index dipped below 50% six times and was not followed by a recession; rather, it soared again and after it dropped to less than the 50% recession signal.

The drop in manufacturing is not good news, but manufacturing represents only 12% of the U.S. economy, and the track record of the index at forecasting recessions is very mixed.

The 88% of the economy outside of manufacturing — the much more important part of the economy — is growing slower than the tax-cut fueled peak of September 2018, but it's doing okay.

"The past relationship between the PMI® and the overall economy indicates that the PMI® for August (49.1%) corresponds to a 1.8% increase in real gross domestic product (GDP) on an annualized basis," according to Timothy R. Fiore, CPSM, C.P.M., chair of the ISM® Manufacturing Business Survey Committee.


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This article was written by a professional financial journalist for Falcon Financial Planning Inc. and is not intended as legal or investment advice.

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