Last week, Goldman suggested that markets were perhaps a bit too fixated on souring manufacturing sentiment in the US, given its dwindling impact on swings in overall economic output and labor market indicators.
Their analysis was relatively straightforward.
The bank wrote that while “directionally, Wall Street’s focus on manufacturing makes sense [as] the sector still accounts for 37% of the S&P 500 market cap”, it’s worth at least considering that “the contribution from manufacturing to GDP volatility has fallen from 60% in the early 70s to 20% now”.
(Goldman)
To my mind, Goldman wasn’t trying to say anything especially controversial or profound. It was a short note, and the point was simply to put some numbers on “the dwindling role of manufacturing in the business cycle”.
Read more: Goldman Says You’re Probably Too Obsessed With American Manufacturing
Well, at least one reader wasn’t amused, and neither is SocGen’s incorrigible, if always affable, bear Albert Edwards.
Albert of course doesn’t mention Goldman, or anybody else for that matter, in his Thursday missive, but he takes issue with the idea that manufacturing slumps can be safely ignored or are otherwise less important as canaries than they once were.
“Having been in the business for over 35 years, there is one thing I can guarantee I will always hear at this point in the economic cycle, namely that because manufacturing is a less important part of the economy compared to previous cycles, shouldn’t we focus instead on the more robust services sector PMIs?”, Edwards writes.
As you can probably imagine, Albert thinks the answer to that question is “no”. In fact, he says that if he had collected francs from everyone who deemed it safe to ignore plunging manufacturing gauges, he’d be rich – and not just due to exchange rates. To wit:
The lurches down in manufacturing PMIs are dismissed as irrelevant prehistoric artifacts that should be ignored. If I had a Swiss franc for every time someone told me they were ignoring the manufacturing sector slowdown, just ahead of an economy collapsing into outright recession, I would be a rich man (and not just because of sterling’s dismal performance!).
This is highly germane at the current juncture given that the presumption of ongoing resiliency in the European services sector is one of the only things standing between the optimists and an admission that the eurozone economy may be headed for a downturn. Indeed, Phil Smith, Principal Economist at IHS Markit, warned on Wednesday that although “still solid growth in the service sector means that the German economy is just about keeping its head above water for now, even here there are signs of increased worries among companies as optimism hit a three-and-a-half year low”.
In the US context, Edwards says all you have to do is look at history.
“The US PMIs give us an object lesson in how we should have zero confidence that a robust Services PMI will not swoon if the manufacturing PMI remains in the doldrums”, he chides, on the way to warning that while “services may be a far larger and less volatile part of GDP, history suggests pain from the manufacturing sector will begin to seep into the rest of the economy quite quickly if the manufacturing data does not bounce back promptly”.
As far as Germany goes, Albert says he’ll “eat his hat” if the manufacturing PMI sticks around current levels and the services PMI “does not also fall below 50”.
Goldman would have a point if manufacturing was strictly for export. But a large portion of that manufacturing is domestic consumer goods. So weakness on that side may be signalling a slowdown in consumer demand.