The National Association of Purchasing Management Thursday released its Purchasing Managers' Index for January. Like so much economic data lately, it was worse than expected.
At 41.2, the Purchasing Managers' Index came in at its lowest level since March 1991 -- the trough of the last recession. The index, based on a survey of purchasing executives at roughly 300 industrial companies, signals a contraction in the manufacturing economy when it comes in below 50. If the index stays below 42.7, according to NAPM, it will signal that the overall economy has, in fact, entered recession.
Undoubtedly, the manufacturing sector is taking some heavy hits, but it is unclear whether, in the current environment, that has led to an outright economic decline. At odds with recent declines in the Purchasing Managers' Index, personal consumption grew by 6.3% in December from last year's levels, according to figures released by the
Commerce Department this morning. Though consumers are clearly feeling the heat from a slowing economy, it is not as if they have hunkered down. It may be, says
Bank One deputy chief economist Diane Swonk, that part of the problem for the manufacturing sector is that, after a long economic boom, we're seeing something of a full-closet syndrome. Now that we've got enough stuff, we're directing our spending elsewhere.
"People are buying services instead of goods," says Swonk. "We've got a real dichotomy there."
Glass Half-Full
Swonk also notes that the knock-on effects of a contraction in manufacturing on the real economy are less than they might have been in the past. The manufacturing workforce has shrunk appreciably over the past few decades. In 1970, 28% of workers were employed in manufacturing; today, only 14% are. As a result, the economic effect of the recent bout of layoffs we've seen in the manufacturing sector is muted. Moreover, because manufacturing jobs have steadily declined, much of the manufacturing workforce is aging, enabling companies to trim payrolls by simple attrition.
The
Manufacturing Employment Index, a subindex of the Purchasing Managers' Index, dropped to 43 in January from 44.1, its lowest level since 1998. That is not good news, but neither is it horrible, given that many of the other subindices are at their lowest levels in a decade. It also may suggest, says
Miller Tabak chief bond market strategist Tony Crescenzi, that the manufacturing sector may not be burdened with as much excess capacity as feared.
That's important, because much of the softness in the economy is inventory-related. Demand has slowed, and companies have been left with much more stock on their shelves than they would like. The typical response is to slow production until the inventories are worked off. (The NAPM report itself shows that this is happening.) This forces manufacturers to reduce capacity -- by idling plants and laying off workers -- which in turn can slow demand even further. Because jobs aren't being cut as quickly as in past declines (the Manufacturing Employment Index was at 32.7 in March of 1991, for instance), it may be that manufacturing is already running relatively lean. That increases the chances of recovery.
Yet while the manufacturing slowdown may not have as pronounced an effect on the economy as past slowdowns, it will have a major effect nonetheless. Manufacturing still makes up about 16% of gross domestic product, not much below its level 10 years ago.
"Historically," notes Crescenzi, "the NAPM has run a very tight and reliable correlation with the economy."
It may be dangerous to start thinking that that is no longer the case.
Justin Lahart
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