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.
This article was written by a professional financial journalist for McCarthy Asset Management, Inc and is not intended as legal or investment advice.