US Manufacturing is in Recession

By Dean Barber

November 8, 2019

US Manufacturing is in Recession

Today I’m going to cover the good and the bad in what’s going on with the economy. We’re going to cover the US manufacturing industry and how it’s heading toward recession, the non-manufacturing industry, and a more normalized yield curve compared to what we’ve been talking about in previous Monthly Economic Updates. We’ll also be covering the stock market and earnings as it pertains to forward-looking earnings in the markets.

Check out this article: Boeing 737 Max: Why Quality Control Matters

US Manufacturing and Recession Trends

US Manufacturing is in Recession - MFG Share of Real Employment

Figure 1 Source:

All right, let’s begin with manufacturing. Historically, manufacturing in the United States is a big deal. In Figure 1, we’re going back to 1947. Take a look at the left side; 1947 manufacturing was responsible for over 30% of our employment in the United States. Over the decades, we’ve seen a steady decline and, looking at today, manufacturing making up less than 10% of our total employment in the US. So, what caused the drop? It’s automation, automation at the factory level, and the manufacturing level.

US Manufacturing and GDP

Figure 2 Source:

Now, let’s talk about manufacturing as a percentage of our total GDP. In Figure 2, you can see through the same timeframe manufacturing as a percentage of our total GDP hasn’t changed a whole lot. There were a couple of times like back in the early ’80s, and where we are today that it’s accounting for less than 12%. So, somewhere between 11 and 12% of our total GDP is our manufacturing sector.

US Manufacturing Going into Recession

Something that’s been in the news here this month, October marked the third consecutive month of contraction, which means that the manufacturing sector is shrinking for three consecutive months. That’s the manufacturing sector recession. Alright, so the question is, should we care too much about that manufacturing going negative?

US Manufacturing versus Non-Manufacturing

Figure 3 Source:

In Figure 3, we’re looking at the manufacturing index versus the non-manufacturing index, which is our service sector. By the way, the service sector now makes up two-thirds of our total GDP. Take a look at Figure 3, when we look at manufacturing versus non-manufacturing, manufacturing continues to slide down gradually. And the non-manufacturing was a surprise reading in October at 54.7. So, what’s going on here?

What’s Causing the US Manufacturing Recession

Well, what we have in the left-most circle in Figure 3 is the Boeing 737 Max was grounded, and then somewhere about the middle of 2019 (the second circle) was the GM strike. Looking at August, September, and October, all are below the 50 level. Anything below the 50 level denotes contraction. So, even though we’ve seen the manufacturing sector go below expansion to the contraction area, the non-manufacturing sector continues to expand.

I believe we can credit the contraction in the manufacturing sector to three things:

  1. The grounding of the Boeing 737 Max
  2. The General Motors strike
  3. The trade negotiations that are currently going on with China

It could be easy for us to expect the manufacturing sector could come back and get stronger again. But there are some caveats here. We have some good news in the non-manufacturing sector, and some not so good news in the manufacturing sector. I also want to mention to you that we have a blog post out called Boeing 737 Max: Why Quality Control Matters. Make sure and check that out.

Stock Market Performance

Figure 4 Source:

Let’s see what the stock markets did over the last month. The stock markets seem to be ignoring everything that’s going on. And, looking at Figure 4, the small-cap stocks are outperforming everything right now. Figure 4 is a one month look and just about every sector that you look at, markets are up, and it feels excellent. Well, why is that?

Unemployment in the US

We had unemployment tick up to 3.6%. Imagine that, up to 3.6% from 3.5%. That’s still virtually full employment here in the United States. So that’s a very positive thing. And the markets like what’s going on. They like the non-manufacturing numbers, and I think that they’re taking the manufacturing numbers with a grain of salt at this point.

Yield Curve Normalized

Also, I talked to you earlier and said the yield curve normalized. For the first time, almost this entire year, you have the 10-Year Treasury yielding higher than the Three-Month, Six-Month, One-Year, Three-Year, Five-Year, Seven-Year, etc. So, we’ve got a more normalized yield curve today.

Still, interest rates are super low, the 10-Year yield is still down in the high 1.7% range, which is way below where it began the year at close to 3%. Therefore, there are still many remaining questions as far as what’s going on with interest rates.

Earnings Outlook

There was an article released by CNBC out last week that it titled Stocks may be rallying to records, but the earnings outlook is darkening. The article goes on to say that 14 months ago, the forward-looking earnings by our S&P 500 companies were expected to grow by 24%. Right now, those prospective earnings are expected to grow by just 1%. We did see some good things happen in third-quarter earnings reports. The majority of companies that reported third-quarter earnings beat the estimates. As a result, it’s another thing that’s driven the markets higher so far here in the fourth quarter.

Keeping an Eye Out

Now, we’re going to keep a close eye, especially on what’s going on in the manufacturing sector and these forward-looking earnings reports. Those things are going to be crucial to what the stock market is going to do in the coming months. So with that, I hope you’ve enjoyed what I’ve presented to you here today. I hope it’s helped you get a little better understanding of what you read and see, and as always, we’re here to answer your questions at Modern Wealth Management. If you have any questions, do hesitate to schedule a complimentary consultation below or call our office at 913-393-1000.

Dean Barber
Founder & CEO

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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.