Benny A. from Youngstown, OH asks: Hello Mitch, I saw in the news that the U.S. manufacturing sector has been experiencing some major struggles lately. Is this a cause for concern?
Mitch’s Response:
Thanks for your email. You’re correct to point out that factory activity in the U.S. has been in a prolonged slump. According to the Institute for Supply Management’s (ISM) manufacturing gauge, factory activity in the U.S. dropped to a reading of 46, which is the weakest it’s been since May 2020.1
Anything under 50 signals a contraction, and we’re now in the longest period of contraction for manufacturing since 2008-2009, which readers will recognize as years during the Global Financial Crisis.
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When you look across the subset of indicators within the manufacturing gauge, you find weakness throughout. Order backlogs are falling, employment growth has been sputtering, and the index of new orders – which is a leading indicator – fell for the 10th straight month (chart below).
Source: Federal Reserve Bank of St. Louis3
Overall, it’s not great. But there are a few bright spots worth mentioning that also help explain why economic alarm bells are not going off. The first is that an index measuring producer prices, which are the prices paid by manufacturers for inputs, has fallen substantially – a good sign that price pressures could continue abating in the future. Easing price pressures factor as a positive for inflation and interest rates, and also signal improved supply chain conditions.
Another point to make is that new orders are falling from historically high levels (see chart below), so the total output is still relatively strong even as activity is weakening.
Source: Federal Reserve Bank of St. Louis4
A final point to make is that the manufacturing sector in the U.S., while important, only comprises about 12% of the economy in terms of output. Weak factory activity, in other words, is not likely to sink the economy by itself.
The other side of the ISM ledger is services, which is the crucial driver of U.S. economic activity. There we still see positive momentum – the U.S. services sector remained in expansion mode for the sixth consecutive month, with Services PMI registering at 53.9. Among the strong contributors to services sector activity was the Business Activity Index, which rose 7.7% from May, and the New Orders Index, which increased by 2.6%. Strong services activity and spending are the reasons the U.S. economy continues to expand, which makes it important to view manufacturing weakness in a broader context.
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Although it’s impossible to avoid volatility, there are ways you can minimize the worst impacts of a volatile market. In our newest guide, ‘The Do’s and Don’ts of Stock Market Volatility’ we provide recommendations for investors, based on 30 years of expertise. We also explore:
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Disclosure
2 Zacks Investment Management reserves the right to amend the terms or rescind our free The Do’s and Don’ts of Stock Market Volatility offer at any time and for any reason at its discretion.
3 Fred Economic Data. July 5, 2023. https://fred.stlouisfed.org/series/AMTMNO
4 Fred Economic Data. July 5, 2023. https://fred.stlouisfed.org/series/AMTMNO
5 Zacks Investment Management reserves the right to amend the terms or rescind our free The Do’s and Don’ts of Stock Market Volatility offer at any time and for any reason at its discretion.
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