Production is slowing but the economy remains resilient

In addition to the productivity numbers released on Thursday, we received the latest information on the state of US manufacturing. And you can choose your term for it: contraction, softening, weakening.

The Institute for Supply Management, which surveys manufacturers for its Purchasing Managers’ Index (PMI), said we are in for the ninth straight month of decline. Here’s what that means for the rest of the economy.

Of the 18 manufacturing sectors highlighted in July’s PMI report, all but two slowed.

“The sectors that actually grew were both petroleum and furniture. Demand there continues to be very strong,” said Darrell West, senior fellow at the Brookings Institution.

People are still upgrading their homes, and the oil industry has benefited from the hot weather, which increased demand for electricity – and increased travel in the summer.

“But in virtually every other area — apparel, plastics, electronics, food and transportation — manufacturing activity was actually down,” West said.

This is partly because manufacturers continue to struggle to predict demand. Consumers are still spending, but who knows for how long?

According to Tom Derry, CEO of the Institute for Supply Management, the high level of caution in manufacturing does not necessarily portend a broader economic downturn.

He said that’s because manufacturing accounts for only about 11% to 12% of US gross domestic product. The majority of the country’s economic output is in the service sector.

“And its relatively strong performance seems to have kept us out of the recessionary phase that we would otherwise have expected based on production numbers alone,” said Derry.

Despite all the weakening, slowdown, contraction, etc., if manufacturers see demand, they are ready to ramp it up, he said.

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