There has been a bit of chatter going on lately about the divergence of the services sector from the manufacturing sector of the economy. This note from David Rosenberg took note of that divergence.
"We are seeing questions come up as to whether a manufacturing recession means that the broader economy is destined to follow suit?"
His answer is that such an outcome is likely not the case. His belief is that manufacturing is no longer a good bellwether for the overall economy. Currently, manufacturing makes up just 12% of total economic output, down from about 30% in the 1950s.

However, is this really the case?
There are a couple of problems with discounting the importance of manufacturing from the economic debate.
First, is the impact on jobs. As Sam Ro wrote this morning:
"With the unemployment rate having tumbled to a 7-year low of 5.0%, the employment factor is not the concern."
While the unemployment rate, as measured by the BLS, has fallen to a 7-year low, there is vast difference between now and when it has previously achieved such levels. In order to sidestep all of the arguments about retiring "baby boomers" and "students," let's focus on the 25-54 age groups which are in their prime working years. As shown in the chart below, when the unemployment rate had previously achieved "full employment" levels, more than 80% of the prime working age group was employed. Today, that number is 77%.

The problem is not only the current employment level remaining well below levels normally associated with previous "full employment," but wages also remain suppressed. While the recent uptick in wages was certainly welcome by those receiving it, the problem is that the long-term trend of wages remains in a downward slide.
The problem, of course, is that service related jobs are primarily lower-skilled and therefore lower wage paying jobs than those found in manufacturing. Secondly, service-related jobs have a very low multiplier effect throughout the economy as opposed to manufacturing jobs which leads to lower rates of employment growth, hence the stubbornly slow rate of job growth witnessed since the end of the last recession.
Since personal consumption expenditures drives roughly 70% of economic growth, a look at where consumers are spending money gives a bit of different picture as opposed to the breakdown of the ISM surveys above. The chart below shows the annual rate of change in total personal consumption expenditures, manufacturing and services.

As you will note, there are many times historically when service related spending has diverged from manufacturing. However, such divergences have tended not to last long and ultimately it has been spending on manufactured goods that have ultimately dictated economic cycles.
Again, this makes sense when you think about the effect of each dollar spent by consumers. As noted, a dollar spent on services tends to have a relatively small multiplier effect within the economy as opposed to the impact created by spending on manufactured goods and services.
As David correctly noted, the economy has changed from a manufacturing-based economy to a service related one. However, as service related spending continues to absorb more of every dollar spent by households, it continues to weigh on wage growth.

This is particularly the case with more service spending heading toward surging healthcare costs. The impact of the Affordable Care Act is now taking root. Unfortunately, for many, that impact is not a positive one as surging premiums absorb more of the discretionary budget of households.

While it is hoped that the economy can continue to expand on the back of the "service" sector alone, history suggests that "manufacturing" continues to play a much more important dynamic that it is given credit for.
The decline in imports, surging inventories, and weak durable goods all suggest the economy is weaker than headlines, or the financial markets, currently suggest.
For now, however, that detachment can last a while longer as global Central Banks continue to suppress interest rates and flood the financial system with liquidity. With levels of subprime loans for autos and houses, debt issuance and share buybacks once again sharply on the rise, the "party" rages on. However, it is worth remembering what happened when the bartender previously shouted "last call."
Manufacturing.. LOL!
Back in 2006' i was in Manufacturing..
it was in Decline back then..
China does the Bulk of the Manufacturing now.
Here in the u.s. everyone wants to work in Health care
or
Government.. weird how closely related they are now Huh?
in the United States is on its last legs, helped in large part by the over valued dollar. The high price of electricity thanks to Obama shutting down clean coal-fired power plants shares part of the blame.
Waiters don't go out to eat at the other guy's restaurant - the manufacturing guys do.
Do my nails bitch.
Service economy = how about you service this dick for $10.
Lack of fiscal policy, drives recessions. [excess capacity]
I'm thinking about starting up a new service business. I'm going to hire out little short people that don't weigh very much who will place saddles on customer's backs, with a bridle and a bit in customers mouths in order to guide the customers around so they can piddle with their I-Phones without having to concern themselves with where they are going.
I am assuming you meant " fiddle". If not, the labor cost may be steeper if you require them to perform such a function. Then again, we import labor from other countries to " do what Americans won't do" so it just may work out for you.
Of course after such a business is created, Apple will come up with an app that prevents a normal Darwinian outcome due to the stupidity of their customers.
Miffed;-)
Speaking of recession... Here are some signs of a coming recession.
1. Business loans for M&A not CAPEX.
http://www.zerohedge.com/news/2015-10-15/there-goes-final-pillar-us-recovery-loan-growth-paradox-explained
2. Factory orders continue to drop
http://www.zerohedge.com/news/2015-10-02/us-factory-orders-flash-recession-warning-drop-yoy-10th-month-row
3. Default risk spikes
http://www.zerohedge.com/news/2015-10-02/us-financials-default-risk-spikes-2-year-high
4. M&A set record
http://michaelekelley.com/2015/05/29/mergers-and-acquisitions-set-record/
5. Fed sees 2 bubbles
http://michaelekelley.com/2015/02/20/fed-warns-of-two-bubbles/
o Commercial Property higher than pre-2007 level.
http://nreionline.com/finance-investment/cre-prices-are-now-officially-above-pre-recession-peak
o Global Corporate Debt Market hits $5 trillion.
http://fn.dealogic.com/fn/DCMRank.htm
Here is how to prepare.
http://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens/
Here is how to get your mind off this stuff.
http://michaelekelley.com/category/humor/
Good luck!
It seems to me that financialization of an economy causes recessions. Prices are driven up by free money created out of thin air for the elitists and trade stops.
Free money goes to the wrong hands. Those who it is given to do not consume. They simply drive up price preventing others from consuming, dropping money velocity to approach zero.
If you want an economy to flourish, put meaningful earned money in the hands of the people. To create meaningful money, value adding work must be created and it must be compensated at a higher level than financialization and non-value adding work.
But I am certain the Fed and government know this.
it is not "just" manufacturing...
A society is rich as long as it creates/build something it needs and/or has the means to import what it needs.
Services are part of the constructive economy only as long as they add something (build value) into something tangible (it could be a logistic added value, like gasoline being available where is needed via transportation services).
Yet service (just like finance) is mostly just a moltiplicator acting on money supply, unless you can sell those services in exchange for goods to other countries.
Unfortunately for Americans this concept is very difficult to grasp, because we sell debt in exchange for goods... but I can assure you this is not "normal", nor sustainable...
:-D
Are you really" THAT" comfortable with your description of global deflation?
You sound like a nice unellected intern.
Fill in the gap with some trade asshole!
You Socialist farcical wanabe, fake theoretical marrons, make me laugh.
BTW, The Chinese eat anything with flippers or wings.
How's that for demand driven bullshit?
Are you going to hand over your wealth to be managed by this Wealth Management guy ? Try his experiment that manufacturing is all that matters to increase and preserve wealth. Tangible goods have to be priced and their prices have to be paid out of debts where debts have peaked. Drug makers are reaping their bounties not from dependence on the consumption of their impoverished preys but from the largesse of "affordable health care" that they engineered into existence. You just need smart trading services to preserve your wealth by directing it to the fund flows out of Central Banks's spigots. Of course, there are plenty of charlatans in Service Sector and the same goes for Manufacturing. Contamination flows through the whole economy be it manufacturing or services now exacerbated by the debt deadweights in the real economies.
the government employees and health care employees paid thru our taxes and/or printed money, need us to make them dinner, do their nails, give their kids tattoos, check them into a motel etc... Its all fine until the money runs out.
Every economic miracle of the last two centuries was based on manufacturing--no exceptions, and the British Empire fell into decline almost in exact proportion to the loss of its manufacturing base. Manufacturing built the middle class owing to the fact that it is one of the few main generators of genuine wealth creation, along with agriculture, mining and intellectual property. The common people of Russia, Europe (except Germany), the Middle East and much of Latin America, along with North America, have been economically savaged and hurt very, very badly by the outsourcing of their manufacturing industries to the slave labor zones of Asia, It is a phenomenon that represents an unprecedented in human history disaster, which has beneffited no one except a very thin layer of insatiably avaricious, evil elites.
Manufacturing is the largest sector of the US economy by far in terms of gross output. GDP leaves out the bulk of the economy's production structure by only counting durable investment and final goods. Moreover, manufacturing is the foundation on which everything else rests. To argue that it doesn't matter is like saying "the foundation of the house has rotted away, but the house will keep standing anyway". No, it won't.