Through the fall, manufacturing purchasing managers’ indexes (PMIs) globally looked downtrodden. Now, despite the fact November’s JPMorgan’s Global Manufacturing PMI flipped above 50 — indicating expansion — many remain focused on slack in Europe, fearing the uptick is a false dawn.[i] In Fisher Investments’ view, regardless of whether manufacturing continues to grow from here, global economic expansion can easily persist. Manufacturing just isn’t as big a driver as many suggest. Services gauges — those covering the vast majority of world GDP — have been expansionary all along. If data covering a huge swath of the global economy show growth, you likely have little to fear.
While services dominate output, most everyone seemingly focuses on manufacturing. That is perhaps understandable, in that it is tangible and has a long, revered history. Some of the earliest economic data were industrial gauges designed to measure a country’s ability to produce war materiel. Getting an accurate picture of America’s aggregate output helped military planners win WWII. Full-scale war required bringing the combined might of the nation’s resources to bear. You needed to grasp your production capability to know what actual options you had. You needed to take inventory — on a massive scale — to see what was capable for mobilization. From there you could develop the logistics and supply chains for best serving the war effort. Later, the development of these techniques would spawn entirely new industries! Think mainframes and databases.
This institutional legacy forged in war — impressive as it is — is hard to shake. It is embedded in America’s statistical agencies. US industrial production figures go back to 1919, when it accounted for the bulk of the economy. The US Institute for Supply Management’s manufacturing PMI begins in 1948. These are among the most watched — and influential — economic indicators. Beyond the history, equipment and goods production is easier to tally than squishy services. It is literally measured by volume — far harder with services or newfangled (often free) digital items.
But in Fisher Investments’ view, the services sector has become a much bigger influence on economic direction. Today, 70% of the US economy is services.[ii] In the UK, it is close to 80%.[iii] Even mighty manufacturer Germany is more than two-thirds services.[iv] For the eurozone as a whole, it is 73%.[v] The transition to a services-dominant economy is a long-standing development trend as countries advance. Even China — the world’s second largest economy by GDP — which some still consider a “newly industrialized country,” is majority services-based now. It crossed the 50% threshold in 2015.[vi] For the world as a whole, about 65% of GDP is services.[vii]
Services PMIs globally are nearly all above 50. The global services PMI was 51.6 in November.[viii] Including manufacturing, the composite global PMI hit 51.5.[ix] These have declined over the last year, indicating modestly fewer services firms seeing business activity expansion, but current levels aren’t too different from lows seen in late 2012 and early 2016. The global economy has weathered mid-cycle slowdowns before without growth ending. Industrial headwinds may chill, but if the biggest sector in the world’s countries is expanding, the overall economy can still grow.
Manufacturing receives heaps of attention, but it is the minority of the economy. The time to worry is when services slump, but the evidence so far shows most output growing — underlying economic growth is more resilient than many realize. That disconnect, in Fisher Investments’ view, should be bullish for US and global stocks.
Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return. This document constitutes the general views of Fisher Investments and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.
[i] Source: IHS Markit, as of 12/4/2019. JP Morgan Global Composite PMI, November 2019.
[ii] Source: US Bureau of Economic Analysis, as of 4/18/2019.
[iii] Source: UK Office for National Statistics, as of 4/18/2019.
[iv] Source: German Federal Statistics Office, as of 4/18/2019.
[v] Source: European Central Bank, as of 4/18/2019. Eurozone manufacturing share of GDP includes construction.
[vi] Source: National Bureau of Statistics of China, as of 10/10/2019. Tertiary industry percent of GDP, 2015.
[vii] Source: The World Bank, as of 10/10/2019. Services value added percent of GDP, 2017.
[viii] See endnote i.