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February 25th, 2016 
Awake Goy 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 will later be official called 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.
But the “contraction” in October 2013 was a one-month affair. The index plunged from 58 in September to 49 in October and then jumped back to 57 the next month. It was triggered by the government shutdown. And after the brief scare, the service sector expansion continued.
Beyond the one-month Congress-induced scare, the index for the service sector has not been below 50, and therefore in a contraction, since the Great Recession. So this is a significant event. Markit:
Reports from survey respondents suggested that softer underlying new order growth and uncertainty about the economic outlook had weighed on business activity in February.
The report also blamed the weather. Snowfalls on the East Coast caused some “disruptions.” But during the harsh polar vortexes of prior years, which covered a big part of the US, the index didn’t dip into contraction mode. And so the report cautioned that “the weather can only explain part of the slowdown.”
The upturn in new work was “one of the slowest since the survey began in late-2009.” Service firms complained that “some clients were more reluctant to commit to new projects, in part reflecting uncertainty about the economic outlook.” And “the degree of confidence” fell to “the lowest recorded for five-and-a-half years.” The report doesn’t let up:
Optimism about the outlook has been on a downward trend over the past two years, with worries about the global economic outlook, financial market volatility, and presidential election, and interest rate policy all taking a further toll on business morale in February.
Any bounce-back from the weather may therefore prove to be only a temporary improvement in a steady downward trend of business conditions”
So the US economy faced “a significant risk” of “falling into contraction in the first quarter,” while “slumping business confidence” and the further deterioration “in order book backlogs suggest there is worse to come.”
Yet, service firms were still hiring, and hiring levels remained above “the average seen since the jobs recovery began six years ago.” So this is the good news.
This pattern explains the relatively strong employment figures and low weekly unemployment claims despite the weakness in manufacturing and services. This too was the case during the Great Recession: the recession officially began in December 2007, but the unemployment rate didn’t begin to jump until six months later! So the fact that the numbers for the job market haven’t cratered yet is not a propitious consolation.
Plunges like this only occur when something big is going on. Read… Restaurant Industry Suddenly Tanks, Worst Plunge since the Beginning of the Financial Crisis
Source Article from http://feedproxy.google.com/~r/blacklistednews/hKxa/~3/hYxep-FRY8Q/M.html
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