Goldman Sachs says we’re relying too much on manufacturing to measure the US economy

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Reuters/Carlos Barria

  • An analyst at Goldman Sachs has questioned how much emphasis we should be using to measure the economy.
  • “We warn against putting excessive weight on ups and downs in manufacturing data,” because the sector only accounts for 20% of volatility in overall output growth.
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Markets and economists have traditionally been focused on manufacturing when measuring the economy and its overall health.

But, Daan Struyven an analyst at Goldman Sachs, says manufacturing is over emphasized in the economic statistics because it only makes up 10% of GDP.

“The over representation of manufacturing in the official statistics reflects its previous dominant role in the economy, combined with the tendency for statistical systems and methods to change only slowly,” he wrote in a note dated July 19. “We warn against putting excessive weight on ups and downs in manufacturing data.”

Struyven highlighted that currently: “manufacturing data such as the ISM and industrial production reports account for 25% to 45% of the bond market impact of activity data surprises,” adding that the sector still accounts for 37% of the S&P 500 market cap.

Struyven warned against putting “excessive weight on manufacturing data” as the sector accounts for a small share of “volatility growth output and job growth” given its fall from 60% to 20% where it is now.

The Contribution of Manufacturing to GDP Volatility Has Fallen From 60% to 20%

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The Contribution of Manufacturing to GDP Volatility Has Fallen From 60% to 20%
source
Department of Commerce, Department of Labor, Goldman Sachs Global Investment Research

The dwindling role of manufacturing reflects three factors, he wrote:

    • “First, the manufacturing output and employment shares have declined over the past 70 years.
    • Second, the volatility of manufacturing output has declined due to better inventory management.
    • Third, non-manufacturing activity has become less correlated with manufacturing activity.”

Struyven says we don’t need to give it as much attention as we have previously, as even negative spillovers from manufacturing had little effect.

“The upshot is that it is important not to get too obsessed with ups and downs in manufacturing data to assess the overall pace of economic growth,” he wrote.