Manufacturing and Services: Two Divergent Economies?

By SBE Council at 8 July, 2023, 8:28 am

by Raymond J. Keating – 

According to the latest purchasing managers indices from the Institute for Supply Management, we’re experiencing a deeply split economy, with manufacturing contracting and services growing.

The ISM’s Manufacturing PMI registered 46 percent in June, which was the eighth consecutive month indicating a shrinking manufacturing sector in our economy.

Source: Institute for Supply Management

Timothy R. Fiore, chair of the Institute for Supply Management Manufacturing Business Survey Committee, said, “The U.S. manufacturing sector shrank again, with the Manufacturing PMI losing ground compared to the previous month, indicating a faster rate of contraction. The June composite index reading reflects companies continuing to manage outputs down as softness continues and optimism about the second half of 2023 weakens.”

It also was noted by the ISM that four manufacturing industries experienced growth in June, while 11 industries declined.

Meanwhile, the ISM’s Services PMI registered 53.9 percent in June. That was the sixth straight month of growth on the services front.

Source: Institute for Supply Management

Anthony Nieves, chair of the Institute for Supply Management Services Business Survey Committee, noted, “There has been an uptick in the rate of growth for the services sector. This is due mostly to the increase in business activity, new orders and employment. Increased capacity, backlog reduction and continued improvements in logistics have impacted delivery times… The majority of respondents indicate that business conditions remain stable; however, they are cautious relative to inflation and the future economic outlook.”

In June, 15 services sectors experienced growth, with three contracting.

Indeed, the differences between the ISM’s manufacturing and services reports are quite striking.

Keep in mind that whether talking about the services sector or manufacturing, the U.S. overwhelmingly is a small business economy:

● According to the latest Census Bureau data (2020), 74.4 percent of employer firms in manufacturing have fewer than 20 employees, and 93.1 percent fewer than 100 workers.

● Among employer firms in retail trade, for example, 90.9 percent have fewer than 20 employees, and 98.4 percent fewer than 100 workers.

The story of America’s economy always is a small business story, and that’s the case with this dramatic divergence.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest books on the economy are The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist and The Weekly Economist II: 52 More Quick Reads to Help You Think Like an Economist.