From Wolf Richter at wolfstreet.com:
“Significant risk” of “falling into contraction” with “worse to come.”
The US economy is largely service based. So when the “manufacturing renaissance” and “on-shoring” that everyone had been waiting for turned into no-shows, and when instead manufacturing started slowing in early 2015, it was no big deal, according to the meme.
OK, it was terrible for the folks who lost their jobs. But manufacturing accounts for only 12% of the US economy and employs only about 9% of the workforce. So overall, it’s not the end of the world, we heard constantly. And besides, we could always make it up with fast food.
Manufacturing alone can’t drag the US into a recession, we were assured. And the service economy would continue to be strong. That was the meme.
Then, a few days ago, Evan Koenig, Senior Vice President at the Dallas Fed, gave a presentation that showed that manufacturing contractions preceded service contractions in the run-up of the past two recessions. When service sector growth begins to dwindle – so still growth, but slower growth – after the manufacturing sector has already begun to shrink, that’s the point he called “prelude to recession.” And when the service sector begins to actually shrink, that event marks what officials will later call the beginning of the recession [read… “Prelude to Recession”: the Dallas Fed’s Unsettling Charts].
That “prelude to a recession” happened a few months ago. At the time, manufacturing was already shrinking; and the services index had just started heading south. But now the services index entered a contraction as well. So this could mark the beginning of what will much later be officially called a recession.
Different indices differ, depending on who does the counting, and they can be volatile, but over time, they agree on the trends. Koenig was using the ISM indices for manufacturing and services. Today we got Markit’s national Flash Services PMI, and it was a doozie.
The survey’s respondents – companies in the service sector – said that business activity in February fell, pushing the index to 49.8 (below 50 = contraction). The index has now plunged three months in a row, from 56 in November to 49.8 now. During the heyday in 2014, the index was above 60. This was the first time since October 2013 that the services index was in contraction mode.
To continue reading: Is This the Beginning of the Next Recession?
