Why U.S. Economy Shrugs Off Stalling Manufacturing

Investors Busniness Daily ^ | 10/01/2015 | JED GRAHAM

[expat_panama]

The manufacturing sector continued to cool in September, registering the slowest growth in more than two years as economic weakness around the globe and a stronger dollar hit exports.

But the lack of momentum, outside the auto sector, hasn't kept the rest of the economy from chugging along. Autos zipped out of showrooms last month at the fastest rate since July 2005.

The Institute for Supply Management's U.S. factory gauge slid 0.9 point last month to 50.2 — just above the 50 neutral level. Exports were the weakest link in a sluggish report, contracting at a rate that matches the worst level in three years. The export index hasn't been any lower than this since April 2009.

Yet the lackluster pace of the globally exposed factory sector stands out in contrast to solid domestic consumer spending and rebounding construction.

Who Needs Factories?

Unless the global economy and financial markets look especially fragile, it won't keep the Federal Reserve from starting to normalize interest rates later this year.

The economy is likely to grow 2.5%-3% in the second half of the year, propelled by the consumer, with an assist from construction and business investment, said Harm Bandholz, chief U.S. economist at UniCredit Research.

"In this environment, the Fed will likely begin to raise interest rates (by 25bp) at the December FOMC meeting," Bandholz said.

Because manufacturing represents only about 12% of economic activity, he said that the ISM would have to fall to about 43 before a recession is in the cards.

ADP's jobs report on Wednesday underscored that the economy can grow respectably ...

[expat_panama]

Two things that this article made me wonder about with regard to our colleagues here that like import taxes. One is whether they would care if the U.S. economy as a whole grew while manufacturing merely held its own. The other is what they'd be willing to do to correct the problem our manufacturing sector's been having w/ exports.

[griswold3]

We bought a new truck last month due to the spectacular incentives. Got a great price for our trade in, too.
Usually purchase used but couldn’t pass up a great deal at zero percent interest.

[1rudeboy]

Word on the street is that auto/truck sales are up, regardless of incentives. Meaning that a whole lot of profit-sharing checks will be boosted this year.

That being said, it's the auto industry . . . feast or famine. It's a feast for the moment.

[jjotto]

The web site

http://www.goodcarbadcar.net/p/sales-stats.html

covers auto sales in the US and Canada in great detail.

Land Rover, Jeep and Mitsubishi are up over 20% from YTD last year.

[citizen]

I thought increased manufacturing weakness would yield more to the downside. Instead it's turned big losses into big gains. Go figure.

I think sell/buy algorithms rule the intraday/day-to-day trading now. I mean ya can't tell me these markets moves largely on reports, earnings, dividends anymore.

[TheTimeOfMan]

The only real economy is manufacturing - using the term in a broader sense that what is common today.

It all comes down to this. People make stuff. If they get efficient at making stuff then they trade with other people for the stuff they make. People, and people groups that become very efficient can make a lot of stuff per person hour expended. They then have more to trade with and accumulate lots of other peoples stuff (become wealthy).

Everything thing else, including currencies, is fluff at best and smoke and mirrors at worst.

If a country continually buys more stuff than they sell - they become poor over time. They export their wealth until they run out of it.

In principle I am all for free markets and free trade.

That said there are people on this forum who are so hung up on the theory they refuse to acknowledge any complexities. There is the façade of free trade among nations but that trade is never fair. Other governments, including many of our best allies, constantly screw us by any means necessary. Such as the French constantly stealing our industrial secrets, countries that pay no heed to the pirating of our intellectual property, or countries that pull stunts like declaring all US products to be ‘unsafe’. We have stupidly tolerated this since WWII.

So screw free trade. There is no such animal in the real world. We need fair trade - and as much as possible would be good for everyone.

Fair trade can only be obtained by each country putting up tariffs on partners who they run trade deficits with until the trade balances out.

When there is little cheating going on - then lots of trade can take place. If governments try to cheat under this system then they end up losing out to other countries who do not cheat, and therefore, do not have tariffs placed on their goods.

Final point. The US is a huge market and we would be much better off (in the long run) with no international trade at all than what is happening now. We are exporting our wealth, and creating a two class society. The solution is absolutely free markets - but we cannot be naïve or simple about it.

[MortMan]

“Atlas shrugs off Obama economy...”

[ZOOKER]

I would want to know if inventories are being replenished by the same amount sales are depleting them.

Perhaps they see a long drought ahead, and are reducing inventories before buyers disappear.

Isn't that one of the signs of a depression, a period of deflation as too many goods chase too few buyers?

[mrsmith]

” if the U.S. economy as a whole grew while manufacturing merely held its own”

Without government-subsidized (by the taxpayers eventually) consumer spending where would the wealth come from for the economy to grow without manufacturing?

[JediJones]

Manufacturing is only 12% of the labor force.

Labor force by occupation
Farming, Forestry, and Fishing: 0.7%
Manufacturing, Extraction, Transportation, and Crafts: 12%
Managerial, Professional, and Technical: 38%
Sales and Office: 23%
Installation and Maintenance: 3.3%
Other Services: 23%
(June 2014)
[note: figures exclude the unemployed][12]

[1rudeboy]

Industrial espionage happens. It simply exists, like water flowing downhill. You don’t think GM, or Ford, don’t have a dedicated department to disassemble Japanese and German cars to see what makes them tick?

[mrsmith]

But it actually creates new wealth which service ‘industries’ mostly do not.

[riverdawg]

“Fair trade can only be obtained by each country putting up tariffs on partners who they run trade deficits with until the trade balances out.”

So, do you define “fair trade” as a situation in which there are zero trade deficits or surpluses with every trading partner? I thought you meant that “fair trade” had to do with the absence of non-tariff barriers (declaring our products unsafe, etc.), government subsidies of export industries, and so forth.

Do you subscribe to the theory of comparative advantage? Do you have a trade balance with every one of your personal trading partners?

[Mase]

So screw free trade. There is no such animal in the real world. We need fair trade - and as much as possible would be good for everyone.

Actually, the only way fair trade exists is with free trade. Maybe you believe we should start growing bananas and coffee in the U.S. Cutting off oil imports might cause a few problems too, don't you think?

You should just admit that you're not for free markets or free trade.

[expat_panama]

The only real economy is manufacturing...   ...all comes down to this. People make stuff.

So services don't count. 

In the late 1800's folks used to scoff at manufacturing saying that the only thing we really need is food and you can't eat a machine.  So my grandfather bought a farm in Indiana and my dad's family starved.  Folks found out that while a farm can only produce so much food, a farm plus a tractor could produce a hundred times as much food, and farm workers went from half the U.S. workforce to half of one percent --and we now produce more food than ever.

It's been the same ways w/ manufacturing, that a factory can only make so much stuff but a factory with a better layout can produce a hundred times as much, and manufacturing workers just don't need to be as big a chunk of the labor force anymore.  Things change.

[expat_panama]

...manufacturing weakness...   ... big losses...

That's what we're being led to believe but I'm not at all impressed w/ those secret proprietary formulas that the ISM folks use to measure industrial output.  Two more transparent measures are industrial production and gross output:

They don't exactly agree but neither shows a decline over the past year.

[expat_panama]

But it actually creates new wealth which service ‘industries’ mostly do not.

Factories create wealth and services don't?  Reminds me of the story about the visiting preacher's telling the man what a nice garden that him and God made.  The guy replied that the garden looked a lot better now than back when God was doing by Himself. 

I need to tell you quick (before I get hit by lightning) that factories do a lot better when they first get the right patents, efficiency studies, good transportation, a top notch sales force, and oh yes --investors.

[mrsmith]

And what wealth is created by “the right patents, efficiency studies, good transportation, a top notch sales force, and oh yes —investors. “ without manufacturers?

I did say ‘mostly’.

[expat_panama]

I did say ‘mostly’.

Yeah, I know, the services couldn't exist w/o the factories, and next we'll hear from the farmers that the factories couldn't exist w/o food, and then we'll hear from all the mothers--  we know that.  What also got to know is that if a factory that does not have “the right patents, efficiency studies, good transportation, a top notch sales force, and oh yes —investors“ then it may or may not produce more than a few machines and it definitely won't stay in business for more than a month or two; but some other factory that does have those things will thrive.

We like to think that when we buy a car that the car is mostly made of steel, rubber, and plastic.  Most folks don't realize that GM's largest single supplier isn't steel or rubber, it's insurance.

[citizen]

I can’t argue with FRED!