Cycles Cycle - Manufacturing vs. Non-Manufacturing

November 27th, 2019


It is normal for economies to accelerate and decelerate – this is known as the business cycle. The funny thing about cycles? They cycle!


Economic growth and corporate profits have decelerated throughout 2019 in the face of tough comparisons from a very strong 2018. Look no further than the most recent monthly report from the Institute for Supply Management (ISM), the first and largest notfor-profit professional supply management organization worldwide.

Each month, ISM surveys purchasing and supply executives from several hundred industrial companies. These executives are asked about new orders, inventory levels, employment, prices, and other factors impacting their businesses. The combination of these factors results in the Manufacturing Purchasing Manager’s Index (PMI) – a measure of manufacturing activity in the U.S.

graph showing manufacturing, purchasing managers index in the US

In August, the ISM Manufacturing PMI (bottom of previous column) decelerated to a reading of 49.10. Values north of 50 show expansion in the manufacturing sector, while figures south of 50 demonstrate contraction. By this measure, manufacturing is the weakest it has been in over three years and is contracting for the second time since the Global Financial Crisis.

Notice this recent weakness is following the early 2016 low reading of 47.80 and the August 2018 high reading of 60.80. This is the business cycle in action.

graph showing ISM non-manufacturing in the US

Luckily, our domestic economy is not solely dependent on manufacturing activity. The ISM Non-Manufacturing PMI (above) complements its manufacturing counterpart.

Each month, ISM surveys executives from several hundred service-related companies about new business, price changes, and employment levels. Together, the manufacturing and non-manufacturing surveys account for about 90% of U.S. economic activity and serve as leading indicators.

The ISM Non-Manufacturing PMI currently sits in expansionary territory at a value of 53.70. However, note this metric has decelerated in 2019 after reaching a peak of 60.80 in September 2018.

One of the most important economic questions right now is whether the weakness in manufacturing activity will spread to consumer spending.

graph showing consumer confidence in the US

Consumer confidence (above) is currently near cycle highs. That should be expected given the strength of the labor market and the fact wages are growing north of 3% annually – the fastest during this expansion.

However, with the 2020 Presidential Election activity beginning to ramp up and the trade issues between China and the United States continuing to simmer, it is not hard to imagine consumer confidence being dented. This could lead to further deceleration, and perhaps outright contraction, in the ISM NonManufacturing PMI.

Overall, a change from expansion to contraction in manufacturing and a deceleration in non-manufacturing warrant relatively defensive positioning in investment portfolios for the time being.


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Patrick V. Masso, CFA
Vice President, Investments Team Leader
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