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From the 1950s through the 1970s, the manufacturing sector was the ship propelling the U.S. economy, but that ship has sailed which means the recent slowdown in factory activity is unlikely by itself to trigger a recession.
The past year has undoubtedly been a difficult one for manufacturers. Tit-for-tat import tariffs between the U.S. and China, a slowing global economy, and a strong U.S. dollar have all conspired to disrupt supply chains, reduce demand and curb exports.
The closely followed Institute of Supply Management’s gauge of factory activity fell in August to 48.1% from 51.2%, marking the weakest reading in three and a half years. Any reading below 50 indicates a contraction.
Early in the post-war era, cracks like that in the manufacturing sector usually would have widened to encompass the broader U.S. economy.
At the time, manufacturing accounted for one-third of non-farm jobs, Bureau of Labor Statistics figure show. Towards the end of the 1970s, the share of manufacturing jobs still topped 20%, when some 19.5 million Americans were employed in auto plants, steel factories and the like.
Now manufacturing employment is at an all-time low — representing just 8.5% of all U.S. jobs. The vast majority of Americans now work in service-oriented companies in fields such as health care, technology, advertising, retail, food services and personal care.
There’s no question the U.S. would be better positioned if business spending in the manufacturing sector was still expanding rather than contracting, but the sector is not what’s spearheading the economy anymore. Instead the role has been taken up by consumer spending, which accounts for nearly 70% of economic activity.
Related: Consumers are far from spent — and that’s a lifesaver for a wobbly economy
While the slowdown in manufacturing may not translate into a recession, it signifies that the economy is not in a healthy position, said Joel Naroff, chief economist at Naroff Economic Advisors, Inc.
“In a healthy economy manufacturing wouldn’t be falling,” he said, “and every time another sector falls by the wayside it becomes more important for the consumer to spend.”
The good news is, consumers have been doing exactly that. Rising incomes and the lowest unemployment rate in 50 years — the byproducts of millions of new jobs created in the past decade in the service sector — have given Americans the confidence to spend.
Consumer outlays in the second quarter, for example, surged by 4.6% — the biggest increase in almost two years.
“The consumer is the 800-pound gorilla and has been behaving accordingly,” Naroff noted.
What’s less clear is whether consumers can continue to carry the load.
Jim Glass, head economist for JPMorgan Chase commercial banking said he expects the trend to continue. “Monthly car sales have surprised me for the upside,” he said. The latest figures on auto sales indicate a 2% annualized increase of 17 million vehicles. “I think it tells you a bit about the position of the consumer.”
“Manufacturing is important but it’s not the economy,” he added, noting that current levels of consumer spending are likely to continue to make up for the strain the manufacturing slowdown has place on the broader economy.
But there is also reason to believe that this trend will fizzle out.
Businesses are not hiring as rapidly as they were earlier in the year and some companies appear to be cutting jobs for the first time in a decade, a recent survey showed.
The tense trade dispute with China appears to have had the biggest dampening effect, directly on companies that manufacture and export and indirectly on other U.S. firms. The trade spat has also put a dent in consumer confidence and generated unsettling ups and downs in the stock market.
