03|03|2016

Manufacturing vs Services

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Manufacturing and Services make up 90% of GDP, but which should we focus more of our attention on?

Manufacturing

Current Manufacturing data for the US came in at 53.1 on 10/1/15. Through-out 2015 Manufacturing peaked at 55.7 in March and has declined to its current level[1].

What do these numbers mean? These indices measure the growth or contraction of manufacturing month over month. When the reading comes in below 50 it reflects that manufacturing contracted. When it is at 50 or over it reflects an expansion of the manufacturing sector month over month.

While the Manufacturing index has fallen over the last 6 months, it continues to be over 50. This means that the manufacturing sector has expanded the entire time, but just at a decreasing pace.

The strength of the manufacturing sector is its stability. The manufacturing sector tends to lend itself to month over month stability, which increases certainty around economic activity.

Services

Current Services data for the US came in at 55.1 on 10/5/15. Through-out 2015 Services peaked at 59.2 in March and has declined to its current level[2].

While the Services index has fallen over the last 6 months, it continues to be over 50. This means that the services sector has expanded the entire time, but just at a decreasing pace, deja vu?

The strength of the services sector is its ability to rebound a weak economy into expansionary territory quickly. The drawback is that Services numbers can be more volatile. So while it can save weaknesses in an economy it can also perpetuate weakness quickly.

So which of these indices warrant attention? Manufacturing and Services make up a large percentage of US GDP, but the weighting of that percentage is wildly disproportionate. Manufacturing represents approximately 12% while Services represents about 78%[3]. So, while both indices warrant attention for indications of economic activity, it is actually Services that provide us greater insight into US economic activity.

Last Week

While much of the data last week pointed to a slowing economic environment the market trended north, ending the week up 3.30%[4]. Services PMI fell from 55.6 to 55.1, the trade deficit extended to 48.33B, export prices fell -0.7% and import prices fell -0.1%[5]. While none of this data spells doom, it does not correlate with a large cap market that grew by 3.30%. The major catalyst was optimism about short term oil supplies being reduced, which buoyed prices… for now.

 

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[1] www.investing.com – economic calendar

[2] www.investing.com – economic calendar

[3] www.research.stlouisfed.org

[4] www.troweprice.com – weekly market wrap ups

[5] www.investing.com – economic calendar