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Business News/ Economy / Services come with a smile, but the economy could still be frowning

Services come with a smile, but the economy could still be frowning


Weak manufacturing alone could be enough to tip the US into recession

Weakness overseas and a strong dollar are hurting manufacturing more than services (Photo: Reuters)Premium
Weakness overseas and a strong dollar are hurting manufacturing more than services (Photo: Reuters)

The manufacturing sector has fallen into a funk. Services business are in anything but that.

The Institute for Supply Management on Monday said that its index of service-sector activity rose to 56.5 for November from October’s 54.4, keeping it comfortably above 50, the break line between expansion and contraction. The details of the report were good, showing employment picking up and supply-chain problems easing.

The ISM’s November manufacturing index last Friday wasn’t nearly so cheery. It slipped to 49 from 50.2 a month earlier, marking the first drop below 50 since May 2020. That isn’t quite a recession signal—according to the ISM, the manufacturing index has in the past generally needed to spend some time below 48.7 to signal that the economy is contracting—but it hardly counts as good news.

The different directions the services and manufacturing indexes have taken aren’t hard to explain. The heady appetite for goods set off by the pandemic has begun to ease, and more Americans are re-engaging with services such as travel—in part because high goods inflation pushes the trade-off between spending money on goods and spending money on services in services’ direction. Moreover, U.S. manufacturers are far more exposed to the global economy than services businesses are, so the combination of weakness overseas and a strong dollar is hurting them more.

The hope is that services will be able to take up manufacturing’s slack. That might not be so easy to accomplish.

Services have lately accounted for about 60% of gross domestic product, according to the Commerce Department, compared with about 32% for goods production (with the remainder going toward structures, such as buildings and bridges). But historically, it is goods production that swings the economy between expansion and contraction, with services exhibiting far less volatility and only rarely slipping into contraction. There have been plenty of recessions where services production didn’t slip at all, including the downturn that began in March 2001, for example, and the one that started in July 1990.

Of course, the pandemic thrust the economy into unprecedented territory, dealing much more damage to services businesses than to manufacturing, and services obviously still have ground to make up. But the labor-intensive nature of many services businesses probably puts harder limits on how quickly the service sector can grow in any given quarter. If manufacturing stumbles hard, the economy could stumble, too.

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