Manufacturing Recessions vs Real Recessions: How Much Lead Time Do You Expect?


Manufacturing matters more than most think. A very reliable recession indicator is flashing rapidly.

Caroline Baum, one of my favorite economic writers and author of "Just What I Said" penned an excellent column yesterday: Manufacturing isn’t the whole economy, but it’s important enough to get the Fed’s attention.

Manufacturing output contracted in both the first and second quarters of this year, according to the Federal Reserve’s report on industrial production. That was the first back-to-back decline since the soft patch in 2015 and 2016 — and one of the key factors, along with trade frictions and slowing global growth, driving the Federal Reserve to lower interest rates next week.

Manufacturing isn’t the economy, as Goldman Sachs economists pointed out in a report last week. Its share of gross domestic product has fallen to 10%, according to Goldman’s calculations.

Baum Disputes Goldman Claim

Baum disagrees with Goldman Sachs, and so do I, for even more reasons.

Here are some of Baum's reasons.

  1. Unlike the services sector, manufacturing tends to be cyclical. Manufacturers can choose to postpone capital investment projects when the future doesn’t look bright, but the public still needs teachers, nurses and firefighters, even in recession.
  2. “In real terms, growth in manufacturing has kept up with growth in the rest of the economy over the last 70 years,” according to a 2017 study by economists at the St. Louis Fed. Its “share of real GDP has been fairly constant since the 1940s, ranging from 11.3% to 13.6%.” So the often touted “shrinking share” is really a function of the change in the price level.
  3. Four of the 10 components in the Conference Board’s index of leading economic indicators are manufacturing-related. Ranked in order of importance, they are: average weekly hours in manufacturing; the ISM new orders index, which was added in 2012, replacing the ISM vendor deliveries index; manufacturers’ new orders for consumer goods and materials; and manufacturers’ new orders for non-defense capital goods excluding aircraft.
  4. Things can always change, but it seems safe to say that as manufacturing goes, so goes the nation. Judging from a century of data, it seems safe to say that what happens in manufacturing doesn’t stay in manufacturing. Instead, it has spilled over to the economy at large. So ignore the small yet significant manufacturing sector at your own peril.

GDP Illusion

In Is the US Economy Close to a Bust, Pater Tenebrarum at the Acting Man Blog points out:

One thing that we cannot stress often enough is that the manufacturing sector is far more important to the economy than its contribution to GDP would suggest. Since GDP fails to count all business spending on intermediate goods, it simply ignores the bulk of the economy’s production structure. However, this is precisely the part of the economy where the most activity actually takes place. The reality becomes clear when looking at gross output per industry: consumer spending at most amounts to 35-40% of economic activity. Manufacturing is in fact the largest sector of the economy in terms of output.

In The GDP Illusion Tenebrarum writes …

Sure enough, in GDP accounting, consumption is the largest component. However, this is (luckily) far from the economic reality. Naturally, it is not possible to consume oneself to prosperity. The ability to consume more is the result of growing prosperity, not its cause. But this is the kind of deranged economic reasoning that is par for the course for today: let’s put the cart before the horse!

In addition to what Tenebrarum states, please note that government transfer payments including Medicaid, Medicare, disability payments, and SNAP (previously called food stamps), all contribute to GDP.

Nothing is “produced” by those transfer payments. They are not even funded. As a result, national debt rises every year. And that debt adds to GDP.

Manufacturing's Share of GDP is Hugely Underestimated

Thus, in addition to Baum's excellent comments on the the cyclical nature of manufacturing, manufacturing's share of GDP as attributed by economists is simply wrong.

For further discussion, please see Debunking the Myth “Consumer Spending is 67% of GDP”.

Mike "Mish" Shedlock

Comments (14)
No. 1-9

The real issue is we live in a global economy now. GDP by country has become less valuable when you have export driven countries and consumer driven countries. Specific industries like "manufacturing" become even less valuable when in the aggregate most of the manufacturing is distributed across the global.


Also manufacturing is just looking in the wrong place too. If you want to gauge what the economy is going to do, you also need to look at metrics like disposable income, income and wage gains similar drivers of demand, in the United States which is the big consumer driving global manufacturing. While a slowdown in manufacturing may portend things, it looks like the line is going back to the norm from about 2012-2016. So basically 1-2% GDP and muddling through.

Tony Bennett
Tony Bennett

"That was the first back-to-back decline since the soft patch in 2015 and 2016"


That was my last guess that a recession might happen. Close. Initial GDP estimate for Q42015 ...+0.7% and Q12016 ... +0.5%.

Might well have led to a recession, but China panicked and unleashed an onslaught of credit - $3 trillion for the year to right the wobbly weeble.

Who panics THIS time? And will it be enough/matter?

Debt exhaustion* getting ever closer.

*for those hoo don't have a central bank backstop ... like my household.


Try to imagine a country or a (pulp&paper) town where you have services, grocery stores, theaters, police, hospitals, finance, banks, real estate, retail, shopping, shoe repair, day care, schools, doctors, vacations, etc. Now take away the pulp&paper plant, what happens? Try to imagine this for a whole country without manufacturing. Just a thought experiment.


I watched this very thing happen in the detroit area several times. You knew by the number of train cars parked and you didn't need an economist to see that we were in for a rough stretch in the economy. We'd see them cars stacking up and sitting and somebody in the crowd would say, "Start saving your money".


Who needs manufacturing when you have big govt,sit home all day smoke/sell dope,watch the price is right,play the lotto,only go outside when that check from big govt comes in the mail!90% (99) of the economy is in some way govt,so as long as big gov can tax, borrow (print) all the cash it needs…...relax...….until you can't!


Mike, in addition to your work on trying to figure out how the GDP is really calculated, I think even more importantly we are going to have to start looking at economic numbers that are obviously being massaged to make things look just ducky. Theres a story in Zero Hedge about how RV sales were one of the highest increasing numbers in the GDP calc, at a time when almost everyone agrees the RV industry has been falling out of bed. Trump would make his agency heads suppress bad news -- we all know he would.


Do any of the previous manufacturing downturns coincide with tariffs?


"Manufacturing isn’t the economy, as Goldman Sachs economists pointed out in a report last week. Its share of gross domestic product has fallen to 10%, according to Goldman’s calculations."

Subprime wasn't the housing market either, but we know what followed subprime down the toilet.

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