At the beginning of each month the Institute of Supply Management comes out with a report on manufacturing activity for the prior month. The report that came out on Dec. 1 reported activity for the month of November. This most recent report showed that manufacturing activity was beginning to slow.
The report comes out with a specific number, where 50 is the neutral point. Readings over 50 indicate expansion, and under 50 signify contraction.
The number reported for November was 48.6, which was actually the weakest number since 2009.
I have frequently mentioned that we should not place too much weight on one month’s results, since sometimes it can just be an aberration. However, the trend in recent months had been one of slowing, as the report for October had a reading of 50.1. Since the economy had bottomed in 2009, there had been only one other month where the manufacturing index had dropped below 50.
The concern becomes whether this slowing in manufacturing is temporary, or is more indicative of an underlying trend. Most likely this slowing will continue for a period of time, but will likely not be too significant.
There are several factors going on that are currently hurting manufacturing. The export side of the economy is fairly weak currently because of a strong U.S. dollar and fairly weak economic activity in much of the world. In addition the oil and gas sector has seen a significant reduction in activity due to lower prices.
There are some offsets to this weakness, however. Other than the mining industry, which includes oil and gas, most other manufacturing industries are doing reasonably well, since domestic demand has been stable. In addition the auto industry, which is very important to manufacturing overall, is currently doing extremely well.
While the direction of manufacturing tends to correlate strongly with the overall economy, manufacturing is less important to the overall economy than it was in years past.
According to one estimate, manufacturing only comprises 12% of the U.S. economy, with an even smaller percentage working in that area.
The decline in manufacturing has certainly occurred in the Los Angeles area. We previously had several auto plants, plus aerospace activity is significantly less than it was in previous decades. However, jobs have been created in other industries and new technologies are constantly occurring.
There are two main reasons for the long-term decline in manufacturing. One is globalization, as producing goods in certain countries throughout the world can be done at a lower cost versus in the United States. The other is that productivity gains have been substantial in manufacturing, which lessens the need for workers.
The decline in manufacturing employment is not unique to our nation. Other countries, both advanced and developing, have seen manufacturing employment decline, as a share of total employment.
There are some people who consider the loss of manufacturing jobs to be a bad thing, and for those who do lose employment it is a temporary negative. However, society benefits overall with lower prices from productivity improvements, and jobs in the service sector continue to expand.
While this column has been discussing a slowdown in manufacturing, it should be noted that the service sector, which is much larger, continues to expand. The number reported for November was a healthy 55.9, though that was somewhat lower than the very strong October reading.
The slowdown we are seeing in manufacturing activity is certainly a cautionary sign. However, for now it does not appear that this slowdown will get much worse, as there are still areas of strength in certain areas of manufacturing. The overall economy appears to be reasonably stable, and new jobs are being created, as the recent employment report indicates.
