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By Bilal Hafeez 18-07-2019

Is Manufacturing’s Potency Fading For US Business Cycle Analysis? (The capital spectator, 3 min read)

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(You can read the article by clicking here)

The article makes the good point that today, manufacturing is just 11% of GDP and each dollar of output requires 25% less energy than in 1999. Meanwhile services have become even more vital, at 70% of output, and are less volatile, smoothing out the business cycle. Continuing to rely on the manufacturing cycle for predicting recessions, therefore, may be misguided. Indeed, since 2008, it has given several false signals, notably in 2015-6, when manufacturing growth went into negative territory but wasn’t associated with an economy-wide recession. Similarly, the yield curve inversion is an overly used predictor, which the recent extraordinary monetary policy might have degraded. This suggests we should use a wider range of indicators instead.

Why does this matter? This year in particular, many have signalled an upcoming recession based upon the collapse of manufacturing measures. This analysis cautions against relying too heavily on the sector, and consequently is more sanguine about the outlook.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)