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Goldman Says You’re Probably Too Obsessed With American Manufacturing

Keep it in perspective.

Although the administration hasn’t always agreed with Goldman’s analysis on how the president’s policies will affect the economy (with Kevin Hassett’s infamous “opposition research” quip being the most famous example), Trump would likely agree with the bank that “manufacturing has become a smaller and less correlated part of the economy”.

That’s quote from a Friday note that finds Goldman warning against placing too much emphasis on manufacturing data given its dwindling impact on swings in overall economic output and labor market indicators.

The bank’s analysis is short and to the point. Frankly, this particular note is as illuminating as it is timely and serves as a testament to the idea that there’s beauty in simplicity and merit in  illustrating the intuitive. That is, there’s nothing particularly novel about it, but it’s germane in the current environment.

Goldman starts by noting that “manufacturing data such as the ISM and industrial production reports account for 25% to 45% of the bond market impact of activity data surprises”, figures that are grossly disproportionate to manufacturing’s share of the real economy. Have a look at this chart:

(Goldman)

Goldman does note that this isn’t quite as out of whack as it seems. “Directionally, Wall Street’s focus on manufacturing makes sense”, the bank says, adding that “manufacturing activity is more volatile than the rest of the economy [and] the sector still accounts for 37% of the S&P 500 market cap”.

That said, the important point is that the manufacturing sector simply doesn’t play a large role in explaining the variability in GDP and non-farm payrolls. Indeed, as Goldman writes, “the contribution from manufacturing to GDP volatility has fallen from 60% in the early 70s to 20% now”. 

What accounts for that? Well, a trio of factors. For one thing, manufacturing output as a share of GDP has fallen off a cliff over the past seven decades. Additionally, better inventory management techniques have reduced volatility in the sector while the non-manufacturing economy isn’t as correlated with factory activity as it was in the past.

The takeaway is obviously that while recent weakness in manufacturing stateside is concerning (especially as it suggests the deepening global factory slump is finally coming home), it’s important to keep things in context. The read-through for the economy is straightforward. “We are not too worried about the Q2 slowing of manufacturing data”, Goldman says.

This is ironic from the perspective of the White House. While it’s good news that recent weakness in factory activity isn’t likely to deep-six the expansion, if you’re the president, it’s a cryin’ shame that the US economy doesn’t live and die by the vagaries of the manufacturing sector.


 

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6 comments on “Goldman Says You’re Probably Too Obsessed With American Manufacturing

  1. This also speaks to the effects of the trade war and the tariff policy that Goldman does not talk about…and it is possible to draw a different conclusion from that potential analysis….

  2. Cracklesnapper

    I do enjoy the likes of Goldman trying to reassure all the lemmings lest they pull their money from the casino. I look forward to future notes from GS reassuring us not to worry about trucking, shipping, retail, real estate, etc. No, just keep giving GS your money for equity trades. Don’t worry about a thing.

    • this is silly. Goldman doesn’t care whether average Joe buys or sells. these conspiracy theories are ridiculous and always have been. save it for a site where that kind of nonsense is welcome, cause it ain’t here.

      • More to the point: do you want to refute the actual analysis? does your model of how the manufacturing sector impacts the variability of GDP and NFP spit out different results? if so, please share it with everybody so we can learn for your research.

        • Not sure about that last comment H….. I think Goldman is talking about a time frame where Manufacturing was in decline and their conclusions on that basis are correct… The future under Trump could reverse some of this process if for instance trade wars and tariff issues are not resolved successfully. This would tend to reverse the manufacturing impacts on GDP to a (small degree) or more ..It’s in the future not the past and we should be learning not to discount anything in these times..

  3. Suppose manufacturing is only 10% of GDP (don’t have exact # at hand, sorry). 10% impact on mfg is roughly 1% hit on GDP.

    Suppose mfg is 30% of SP500 revenue. 10% short term impact on rev is very roughly a 40% impact on EBIT, at operating leverage and var/fixed cost of a typical mfg co. Could be about 12% hit to SP500 EBIT.

    That’s a significant enough impact to worry about. Plus the knock on effects.

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