If You Think Manufacturing Is Bad, Wait Until You See Services!

Freedom Financial Archive | Originally posted Jan 28, 2023
  • In the last daily, we detailed how bad the manufacturing sector looks.
  • The Philly Fed was horrendous and showed an economic contraction.
  • Now we’ll look at the services’ numbers, which are a much larger piece of the economy.

Dear Readers,

One day I’ll bring you good news, I promise!

After talking about the manufacturing meltdown in the United States, I realized that while it’s bad… it’s not apocalyptic.

The simple reason is this: though the United States is still the world’s #2 manufacturer after China, manufacturing just isn’t that big a part of the US economy.

Just to be handy, here’s a list of the world’s top manufacturing countries:

  1. China – 28.7% of Global Manufacturing Output
  2. United States – 16.8%
  3. Japan – 7.5%
  4. Germany – 5.3%
  5. India – 3.1%
  6. South Korea – 3.0%
  7. Italy – 2.1%
  8. France – 1.9%
  9. United Kingdom – 1.8%
  10. Indonesia – 1.6%

It puts things in a different perspective, doesn’t it? (No more lazy Italian jokes anymore, aye?)

Be that as is may, manufacturing within the United States just isn’t that big. Yes, feel free to fume over the offshoring of our once great manufacturing prowess.

But now, manufacturing is only 10.7% of the US economy, as measured by GDP.

We can argue the merits of measuring anything by GDP, but that’s the best we’ve got for now.

And since manufacturing is only 10.7% of our output, when it tanks, it’s bad but not dire.

Luckily for us, data in the U.S. is broken down between manufacturing and service measurements.

The manufacturing is obviously an important piece of economic output, but the US is much more dependent on service data.

Unfortunately, the data on the service side is accelerating down at a much faster pace than the manufacturing data.

Why is that important?

Services makes up nearly 70% of the U.S. economy. Yes, that’s seventy… seven zero percent.

The New York Fed’s Business Leaders Survey is a monthly survey of service firms in New York State, northern New Jersey, and southwestern Connecticut, conducted by the New York Fed.

Here’s how bad that looked this month:

What did the New York Fed say about this debacle?

Activity continued to decline significantly in the region’s service sector, according to firms responding to the Federal Reserve Bank of New York’s January 2023 Business Leaders Survey. The survey’s headline business activity index fell four points -21.4, its lowest level in nearly two years. The business climate index came in at -41.8, suggesting the business climate remains much worse than normal. Employment growth slowed to a crawl, though wage increases remained widespread. The pace of input price increases continued to trend lower, while the pace of selling price increases moved slightly higher. Looking ahead, firms do not expect conditions to be better in six months.

While it’s easy to see what a mess the Northeastern US is in, we can check out the services PMIs for our fellow advanced economies as well.

Just a reminder why PMIs are useful:

Investors use PMI surveys as leading indicators of economic health. They offer insight into sales, employment, inventory, and pricing. They are also some of the most highly watched economic indicators because they tend to be the first major surveys released each month.

Here are the services PMIs for the western advanced economies and Japan:

As you can see, the service economies of the US and UK are well below 50. That means their service economies are well into contraction territory.

By some miracle, the Euro-zone’s service economy is still growing. Japan’s leads the pack.

In the next chart, you can see the shaded periods mark a recession. We have never been this low on the Leading Index without having a recession.

It shows that GDP is going to struggle to rise and will likely fall into contraction in Q4’22 and Q1’23. More fun times ahead!

To wrap this up, the manufacturing numbers are awful. But because manufacturing is only around 11% of our economy, it’s not the end of the world.

The services survey from the NY Fed and the services PMIs from our Western allies and Japan look awful as well.

That’s much more insidious because services make up about 70% of our economy, as measured by GDP.

The leading economic indicators corroborate this story. When year-on-year GDP growth is mapped over the leading indicators, it looks like GDP growth will nosedive into negative territory soon.

To echo my earlier sentiment, I hope I can bring you better news soon.

Have a wonderful weekend.

Kind regards,

Freedom Financial News