US Manufacturing Output Down 0.4% – Don’t Worry, Manufacturing Isn’t Important

 

I have opinions about economics, finance and public policy.

We’ve just had the numbers for the United States’ manufacturing and industrial output for August and they’re both down 0.4%. Much will be said about this, there will be agonising and insistences that we must do something, anything. And yet the truth is that manufacturing simply isn’t important as a part of the economy these days. The attention we all pay to it is simply an historical overhang from when it was more important. Give it long enough and we’ll start to give this number the attention it properly deserves – perhaps a little more than the near nothing we devote to the agricultural production numbers but no more than that.

The news itself:

Output at American manufacturers fell more than economists forecast in August, a sign the industry is having trouble finding its footing.
The 0.4 percent decline at factories was the biggest drop since March and followed a 0.4 percent increase the prior month, a Federal Reserve report showed Thursday in Washington.

We’re all the way back to output at the level of June. Obviously a disaster, eh?

Industrial production, a measure of output at factories, mines and utilities, fell a seasonally adjusted 0.4% in August, the Federal Reserve said Thursday. Economists surveyed by The Wall Street Journal had forecast a 0.2% decrease.

The difference between the two measures is that manufacturing is manufacturing and industrial production is manufacturing plus mines and utilities. They’re both down by the same amount but that they are both down the same amount is just happenstance.

 

Last month, there were some positive signs for the hard-hit energy sector, with mining output rising 1.0 percent, it’s fourth consecutive monthly increase. However, the index for utilities fell 1.4 percent.

Having utilities in there is a bit of an oddity. As that’s an intermediate good, an input into other things. For example, if electricity prices halved because solar power was so wondrously cheap then we’d all think that a pretty good idea. And yet we would show that utility output had fallen – not the same thing at all.

Still, the reason not to worry is because this is a measurement of a part of the economy which just isn’t important. Yes, yes, we all get told, interminably, that manufacturing is vital, that there’s some magical multiplier of making stuff to drop on feet and it’s all nonsense.Much of it simply being special pleading from people who own or work in the sector.

The truth is that manufacturing is only 15% of the entire global economy. And it’s some 12% of the US economy. So here we have a 0.4% drop, all the way back to June’s levels, in something that is 12% of the US economy. Or a fall of, potentially, 0.048% in GDP. And the thing is we don’t actually measure GDP to that level of accuracy. We only report it to the first digit after the decimal point. This is, quite literally, a change we won’t even see in our more general estimation of the US economy.

That is, it’s unimportant.

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