Friday, January 2, 2009

Is manufacturing heading into a depression?

The ISM Manufacturing report today was quite gloomy, with an article in The New York Times by Bettina Wassener entitled "Manufacturing Reports Show Depth of Global Downturn" telling us that "manufacturing continued to slump amid the worst slowdown since the Great Depression" and that the ISM Manufacturing index "fell to the lowest level in 28 years in December." 28 years points back to 1980. The Times quotes ISM as saying that "New orders have contracted for 13 consecutive months, and are at the lowest level on record going back to January 1948." 1948 was 60 years ago. Awfully gloomy stuff.

While it is true that manufacturing is an important sector of the U.S. economy it is worth noting that the U.S. economy is now primarily a service economy, so that weakness in the manufacturing sector is not necessarily an indicator of weakness ahead for the overall U.S. economy. Next week we will get the ISM non-manufacturing (services) report, which will also likely show weakness in the services sector of the U.S. economy for the month of December. The ISM Manufacturing report notes that "if the PMI for December (32.4 percent) is annualized, it corresponds to a 2.7 percent decrease in real GDP annually." That is bad, -2.7% real GDP, but that is only if manufacturing does not improve in the months ahead.

The real bottom line here is that everybody knew that December was a bad month for the economy. Detroit had slammed on the brakes and remains near a dead stop, but later in the month the bailout funds should enable the car companies to get started again and we may have a near-$1 trillion fiscal stimulus package on the way as well, so I would not use December as a leading indicator of whether manufacturing or the overall U.S. economy is headed in the months ahead.

Yes, the economic reports for December are truly dismal, but still not so bad as to indicate that a true depression is a likely scenario.

-- Jack Krupansky


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