Tuesday, March 3, 2009

Service sector holding up well; stabilization in durables is key

Yesterday, the Institute for Supply Management released its February report of business conditions (PMI) in manufacturing. The PMI increased 0.2 in February to 35.8, which is the second monthly increase. Overall, business conditions in manufacturing continue to deteriorate - an index below 50 indicates industry-wide contraction. However, the bounce was unexpected, and suggests that the rate of contraction in manufacturing may be slowing.

The ISM report offers a dim, but still present, light at the end of the economic tunnel. From the consumer side of the GDP picture, a stabilization in the manufacturing sector is important; it would halt the huge drag on durable goods consumption, which has been one of the big catalysts to the sharp drop in real personal consumption expenditures.

The chart illustrates annualized growth of real personal consumption and its components from Q1 1991 through Q4 2008. PCE growth in Q4 2008, -4.3% annualized, is the sharpest drop in consumer spending since 1980 (not shown, but you can see the chart here).

But what I find interesting, is how much of a drag is durable consumption on total PCE. In Q4 2008, durable consumption dragged overall GDP growth 1.67%, while nondurables consumption took another 1.95%. Services is holding up well, adding 0.61% to growth in Q4 2008 (the contributions to growth are listed in Table 2 of the BEA's GDP release).

Durables are dropping fast

Nondurables are also a big drag

But services are holding up quite well, in spite of the severe economic weakness

From the consumption side of GDP, a stabilization in durable goods (manufacturing) and nondurable goods demand seems to be the necessary condition toward stabilization in consumer spending. In that light, yesterday's ISM report is good news - at least manufacturing may be contracting less quickly.

Rebecca Wilder

No comments:

Post a Comment